Sinotruk’s net profit slightly increased by 3% YoY to RMB2.49bn. Core net profit grew 6% YoY after adjusting for the one-off items, slightly below our expectation. While the revenue growth of 0.7% was dragged by the weak LDT sales due to the anti-loading policy, overall margin increased on higher ASP and good cost reduction. Besides, operating cash flow surged 6.8x YoY to RMB4bn in 1H19. We slightly lowered our earnings forecast for 2019E by 4% mainly on lower sales assumptions. Our 2020E-21E earnings forecasts are unchanged due to higher margin assumptions. Our new TP is revised down to HK$19.4, based on 5x EV/EBITDA (down from 5.5x), equivalent to 10% discount to the historical average. We believe the potential recovery of both HDT and LDT sales will serve as catalyst in the near term. Maintain BUY.
- HDT sales volume largely in line with expectation. HDT sales volume dropped 1% YoY to 92.7k units in 1H19 (China: -2.4%; Export: +5%), slightly better than the industry average of a 2% decline. ASP of HDT increased 4.8% YoY driven by more high-end models. HDT segment revenue therefore grew 3.9% YoY. Segment margin expanded significantly by 2.7ppt YoY to 6.8%, lifting the segment profit by 73% YoY. We believe the margin expansion was driven by both ASP and procurement cost reduction.
- Sales of LDT and bus below expectation. Sinotruk restated the figures in 1H18 as the Company completed the acquisition of bus manufacturing business in 1H19. LDT and bus sales volume dropped 5.5% YoY due to the anti-overloading policy that targeted LDT. LDT segment revenue dropped 7% YoY, resulting in segment loss of RMB117mn, versus a segment profit of RMB320mn in 1H18.
- Engine sales dropped but is manageable. Sales of engine dropped 6% YoY to 97.6k units, mainly due to a 31% YoY decline in external sales. Internal engine supply only dropped 3.3% YoY. Engine segment margin narrowed by 1.58ppt to 16.6% in 1H19.
- Effective cost control. Gross margin expanded 1.4ppt to 19.5% in 1H19, despite 0.7% revenue growth. Distribution expense dropped 9% YoY. Administrative expense increased by 8% YoY but was only due to higher R&D expense. Excluding the R&D expense, the administrative expense actually reduced. We believe all these were the result of the strong management execution in cost control.
