We see more catalysts for CIMC Vehicles in 2021E: (1) We expect the A-share IPO to be completed in 1Q21E, which should lift the overall valuation; (2) we expect earnings recovery in 2021E driven by strong domestic demand and policy support on the elimination of illegal truck modification. Meanwhile, the anti-dumping and countervailing duties in the US should have limited impact on the Company’s earnings. We raised our TP from HK$6.6 to HK$9.2 after rolling over the valuation base to 2021E, based on 6x EV/EBITDA (up from 5x, in line with our target valuation for Weichai Power [2338 HK / 000338 CH, BUY] and Sinotruk [3808 HK, BUY]).
- Green light for A-share IPO. CIMC Vehicles received approval from the listing committee for ChiNext Market of Shenzhen Stock Exchange last week. According to the A-share IPO plan, CIMC Vehicles plans to raise a maximum of RMB2bn. The proceeds will be spent mainly on R&D on digital transformation and light tower plants construction, which we believe is a key move to strengthen the competitive edge. We expect the potential new shares will account for ~10% of the enlarged o/s shares, implying an issue price of ~RMB10 per share (14x 2021E P/E on diluted basis). We believe a successful A share IPO will lift the overall valuation.
- Growth opportunities in China market. The government policy to crackdown illegal truck modification by 2022 has entered the inspection stage. Given that semi-trailers, dump trucks and concrete mixers are the key target of inspection, we believe CIMC Vehicles is set to benefit from a new round of demand replacement cycle as the Company has high exposure to these types of vehicles and parts (67% of total revenue in 1H20). Besides, we see growth potential on the refrigerated tank trailers (1% of revenue in 1H20), which is expected to benefit from potential growth of vaccine transportation.
- Impact of US anti-dumping and countervailing duties manageable. The Coalition of American Chassis Manufacturers in July filed a petition with the ITC about the initiation of anti-dumping and countervailing duties investigation on certain chassis imported from China. That said, CIMC Vehicles can mitigate the potential impact through relocating the production to regions outside of China. Besides, given that the Company’s chassis trailer/total revenue in the North American reduced from 14% in 2018 to only 4% in 1H20, we expect the overall impact will not be significant.
- Major risk factors: (1) Slowdown of domestic demand; (2) uncertainties on anti-dumping and countervailing duties in the US; (3) further increase in component cost.
