Summary: We initiate coverage on CIMC Vehicles with BUY rating and a TP of HK$6.9, based on 5x EV/EBITDA ratio. The current valuation of 3.5x 2019E EV/EBITDA should have reflected the low earnings growth expectation. With global presence and solid balance sheet after IPO, we see room for CIMC Vehicles to expand market share through capacity expansion and acquisitions.
- Company background. CIMC Vehicles primarily engages in the manufacture and sale of semi-trailers and truck bodies for specialty vehicles in China, North America, Europe and other regions covering >40 other countries. The Company has been the world’s largest semi-trailer manufacturer for the 5th consecutive year in terms of total sales volume since 2013. According to Frost & Sullivan, by sales volume of semi-trailers, CIMC Vehicles ranked first in the semi-trailer industry in China, with a market share of 15.7% in 2017. In North America, the Company ranked among the top five semi-trailer manufacturers in 2017. CIMC Vehicles has been listed on the HKEx since Jul 2019.
- Global presence after series of acquisitions. Since 2002, CIMC Vehicles has strategically expanded its geographic coverage in China, North America and Europe through series of acquisitions. These acquisitions have helped CIMC Vehicles strengthen its global presence as well as maintaining a multi-brand strategy.
- Growth strategy. CIMC Vehicles plans to expand and upgrade its manufacturing and assembly capabilities in the developed regions. In the US, the Company plans to increase production capability for refrigerated trailers and chassis trailers. In Europe, CIMC Vehicles plans to increase assembly capability for curtain-side trailers, swap bodies and refrigerated trailers. In China, following the upgrade of two new manufacturing plants, the Company plans to upgrade two other plants for chassis, flatbed trailers and tank trailers in order to achieve production automation. We forecast all these will help raise capacity by 10%/6%/9% in 2019E/20E/21E.
- Earnings projection. We forecast CIMC Vehicles to deliver earnings growth of 23%/8%/3% to RMB1,411mn/1,519mn/1,566mn in 2019E/20E/21E. In terms of core profit, we calculated that the Company’s core earnings in 2018 to be RMB1.06bn after deducting the one-off and non-operational items. In 2019E/20E/21E, we estimate the core profit to be RMB1,265mn/ 1,369mn/1,416mn after excluding RMB150mn of estimated gains from the potential disposal of land. The core earnings growth in 2019E/20E/21E will be 19%/9%/3%, based on our estimates.
- Major risk factors: (1) Slowdown of economic growth; (2) trade disputes; (3) capacity ramp-up risk.
