While we took our 2019E earnings forecast down by 14% to reflect the weakness of truck sales and impairment, we believe the weakness in 2019E has largely been expected by the market. We expect Sinotruk’s earnings to improve from a low base and expect an 18% YoY earnings growth in 2020E, driven by several drivers: (1) The restructuring and management reshuffle have been largely completed. We expect more synergies between Sinotruk and Weichai Power (2338 HK / 000338 CH, BUY); (2) CNHTC, parent company of Sinotruk, reported resilient HDT sales in Feb amid the epidemic; (3) Infrastructure spending growth will boost the recovery of construction truck demand in 2Q. We fine-tuned our TP from HK$19.4 to HK$19.3, after rolling over our valuation to 2020E (based on 5x EV/EBITDA, multiple unchanged). Reiterate BUY.
- Management reshuffle largely completed. On 9 Mar, Sinotruk announced that Liu Zhengtao, the deputy general manager of CNHTC, was appointed as an executive director of Sinotruk. Besides, Ms Qu Hongkun, with ~15 years of experience in different subsidiaries under SHIG (parent company of Weichai Power and CNHTC), was appointed as an executive director and financial controller. The appointment, together with the previous changes, resulted in a change in the majority of the board members after SHIG took control of Sinotruk (figure 2). The average age of the board member reduced from 53 to 49. We believe the reshuffle is largely completed and Sinotruk will likely shift the focus from internal restructuring to business growth this year.
- Outperformed industry average in Feb. In 2019, affected by government measures on the crackdown of “understated loading for lower toll fee” (大吨小标), Sinotruk’s truck sales volume underperformed the industry average most of the time before seeing improvement in Nov. This year, according to Cvworld data, CNHTC’s HDT sales volume in Feb was down only 22% YoY, much better than the industry average of 50% amid the outbreak of COVID-19. Given that Sinotruk contributed ~90% of CNHTC’s truck sales, we believe Sinotruk achieved similar results in Feb. Going forward, we expect infrastructure spending to accelerate with the support of fast-growing local government bond issuance, which should drive HDT demand in 2Q20E.
- Major risk factors: (1) Slower-than-expected recovery of construction activities, and (2) unexpected component shortage due to COVID-19.
