We expect Xingda to see earnings recovery in 2H20-2021E, driven by recovery of sales volume and unit margin improvement. Besides, Xingda has successfully introduced pre-IPO investors for its key subsidiary at a premium valuation. We believe the potential spin-off in A-share market will lift Xindga’s valuation. We reset our earnings forecast in 2020E-21E and revised our TP to HK$3.19 (based on 12x 2021E P/E). Dividend yield of 7-9% in 2020E-21E will offer certain downside protection. Maintain BUY.
- Sales volume recovery since 2H20E. Xingda’s monthly output of radial tire cords exceeded 70k tonnes in 2H20E. We estimate this implied sales volume growth of 45% HoH and 26% YoY in 2H20E. Besides, we understand that the current backlog is higher than the same period of last year, and Xingda saw strong demand in 1H21E. The growth is driven by both China and oversea demand.
- ASP hike to pass-through cost pressure. Xingda’s unit gross margin was RMB1,619/tonne in 1H20. We estimate Xingda’s unit margin to improve to >RMB1,800/tonne in 2H20E after revising up the ASP. This month, Xingda raised ASP again by ~5% in order to pass-through the rising steel wire rod cost (note: steel wire rod accounts for >60% of Xingda’s total production cost). We expect Xingda is able to maintain a stable unit margin going forward.
- Introduced pre-IPO investors for A-share listing. In mid-Dec 2020, Jiangsu Xingda (the major operating subsidiary of Xingda which is planning for spin-off in the A-share market) entered into capital increase agreement with Chengshan Group, Linglong Tire (601966 CH), Sailun Group (601058 CH), Tringle Tyre (601163 CH) and Jiaxing Jianxin Chenyue (an investment company). These parties will make an aggregate capital contribution of RMB230mn in return for 3.35% of interest in Jiangsu Xingda, representing a valuation of RMB6.87bn (0.95x P/B of Jiangsu Xingda). Given that Xingda owns 70.3% interest in Jiangsu Xingda after the capital increase agreement, such valuation implies RMB4.83bn of value attributable to Xingda (1.5x of the current market cap). We believe a successful spin-off will lift Xingda’s valuation. Xingda expects the spin-off to be completed by year-end or early 2022.
