We revised down CIMC Vehicles 2019E-21E earnings forecast by 8-13% after lowering our sales volume assumptions in the overseas market. Accordingly, we trimmed our TP from HK$6.9 to HK$6.6 after rolling over the valuation base to 2020, based on unchanged 5x EV/EBITDA. On the positive side, we expect the improving construction activities in 2Q20E will drive the Company’s sales of truck bodies. Besides, higher requirement on hygiene standard following COVID-19 will likely drive the demand for dry van trailers in China in future, which is positive to CIMC Vehicles.
- Lower forecast on overseas sales. CIMC Vehicles generated 24%/11%/5% revenue in North America/Europe/other overseas regions in 1H19. CIMC Vehicles chassis sales volume in US suffered from the trade war in 2019 and we expect the sales volume to drop 50% YoY, though partially offset by an increase in refrigerated trailers. This year, the pandemic of COVID-19 will likely exert further pressure on the logistic demand in both the US and Europe, thereby reducing the demand for trailers. We forecast revenue from the US to drop 19% / 3% in 2019E/20E. For Europe, we forecast a 3% revenue decline this year.
- Higher visibility in China market. China accounted for 60% of total revenue in 1H19. China market is much more resilient compared with the overseas at present, given that COVID-19 is better contained. We expect both trailers and truck bodies (such as dump beds and mixers for construction trucks) to see recovery in 2Q20E. For trailers, CIMC Vehicles is boosting the sales of dry van trailers, which is expected to benefit from higher requirement on hygiene standard. Besides, the Company is expanding into light duty trucks (LDT) in order to capture the demand for final mile delivery. We expect all these will help improve the product mix and drive sustainable growth.
- Lower steel price to ease cost pressure. Raw materials and consumables account for 90% of the Company’s cost of sales, with steel the major component. China medium steel plate has been on a downtrend since 2Q19, with the latest price down 10% already. We believe this has helped alleviate the margin pressure.
- Solid balance sheet to withstand market turmoil. With a solid balance sheet (net cash of ~RMB630mn in Jun 2019) and capability of generating strong operating cash flow, CIMC Vehicles is able to withstand any unexpected economic downturn. We do not expect cash flow problems for the Company.
- Major risk factors: (1) Slowdown of global economic growth due to COVID-19; (2) trade disputes; (3) unexpected increase in component cost.
