We believe Sinotruk will continue to deliver above-industry growth driven by better product mix of both HDT and LDT, on the back of continuous R&D spending as well as rising installation of Weichai’s (2338 HK, 000338 CH, BUY) engines. That said, while Sinotruk’s expansion in pickup truck segment will help diversify the revenue stream in the long run, higher cost and spending will be incurred in the near term, in our view. We raise our 2021E/22E earnings forecast by 15%/13% (11%/6% above consensus), after revising up our sales volume assumptions. We only slightly revise up our TP to HK$28.5, based on 3.5x 2021E EV/EBITDA, 30% discount to historical average (previous TP: HK$28.3; 6x 2020E EV/EBITDA). Our lower target multiple is to reflect the potential slowdown of HDT demand after the implementation of NES VI in Jul 2021. Maintain BUY.
- 2020 earnings highlights. Net profit surged 97% YoY to RMB6.85bn, better than the >88% growth stated in the profit alert. Excluding the fair value change in financial assets, core net profit surged 99% YoY to RMB6.5bn. In 2H20, reported net profit was +3.2x YoY to RMB3.9bn, driven by 98% YoY increase in revenue.
- Good performance across the key segments in 2020. For HDT, sales volume grew 64% YoY to 278k units (market share 17%), above the industry growth of 38%, with segment margin expanded 1.86ppt to 5.8%. For LDT, sales volume grew 64% YoY to 181k units, driving the segment profit to RMB464mn (a significant turnaround compared with the RMB1.1bn segment loss in 2019 due to policy impact). For engine, segment margin expanded 1.86ppt to 15%. For auto-financing, however, segment margin was down 16ppt to 42.7%. As at end-2020, loan book surged 114% YoY to RMB20bn, a key driver for the strong sales of truck.
- Streamlining labor force and focusing on R&D. R&D spending increased 47% YoY to RMB2.6bn in 2020. Besides, it’s worth noting that Sinotruk maintained a good control of the number staff (stable at 25.5k in 2020), but improved the structure of the team (R&D staff +91% YoY).
Major risk factors: (1) Slower-than-expected sales of HDT in 2H21E, (2) further increase in component cost; (3) lower-than-expected return on new projects after the recent fund-raising.
