We expect Sinotruk’s earnings to see meaningful recovery in 2020E from a low base in 2019, driven by (1) turnaround of LDT sales; (2) fast recovery of HDT demand since Mar; (3) rising visibility of truck demand on the back of clear stimulus and environmental protection policy; (4) resilient export in 2020E after taking consideration into COVID-19 impact and lower demand from oil producing countries due to low crude price. We lift our earnings forecast in 2020E/21E by 4%/6%, making us 9%/11% above consensus. Our TP is lifted from HK$19.3 to HK$20.5, based on 5x EV/EBITDA, multiple unchanged. Net cash (as of end-2019) of RMB17bn accounted for ~50% of the current market cap. Reiterate BUY.
- Normalized earnings in 2019 look much better than reported. Revenue in 2019 was little changed at RMB62.2bn but the reported net profit dropped 23% YoY to RMB3.3bn, due to several reasons: (1) an one-off impairment on receivables of RMB831mn was made (LDT & bus segment); (2) depreciation expense increased 38% YoY to ~RMB1.5bn, due largely to a change in depreciation policy to double declining balance method in 2019. On the positive side, HDT segment profit margin expanded 2ppt to 6.6%, due mainly to effective cost reduction measures. Operating cash inflow surged 116% YoY to RMB8.6bn, much stronger than the reported net profit.
- LDT on track to recover. Currently, Weichai’s engines are installed in all Sinotruk’s LDTs. According to management, latest LDT sales has returned to the level before the crackdown of “understated loading for lower toll fee (大吨小标) activities” in May 2019. We forecast 10% YoY increase in LDT this year, with segment profit returning to ~RMB200mn, versus a segment loss of RMB1.1bn in 2019 due to impairment.
- Incorporated the latest acquisition in our estimates. Sinotruk announced on 31 Mar that it will acquire Sinotruk Ji’nan Power from CNHTC (parent company) for a consideration of RMB1,392mn. Sinotruk Ji’nan Power is a producer of gearbox and gear. Net profit in 2019 was RMB149mn and net asset as at end-2019 was RMB540mn (28% ROE). The acquisition implies 9.4x PE and 2.6x PB, which does not look excessive. We estimate this will enhance Sinotruk’s net profit by 3% per year.
- Major risk factors: (1) Slower-than-expected recovery of construction activities, and (2) failure to contain COVID-19.
