CGS-CIMB analyst Ong Khang Chuen has maintained his “add” call for China Yuchai International with a reduced target price (TP) of US$13.60 ($18.98), down from his previous target of US$15.80.
China Yuchai is a subsidiary of SGX-listed Hong Leong Asia.
Ong’s lower TP comes off the back of China Yuchai’s 1HFY2022 net profit coming in below expectations at RMB94 million ($19.13 million), a 63% decrease year-on-year (y-o-y). China Yuchai is now trading below cash.
According to the analyst, the Singapore-headquartered company’s key drag was weaker revenue, a 32% decline y-o-y, following a “high base” in 1HFY2021 which benefited from strong pre-buying on new engine standard implementation. While its gross profit margin (GPM) expanded, China Yuchai’s operating profit margin (OPM) contracted 0.6 percentage points y-o-y to 3.4% as a result of weaker sales volume which led to operating deleverage.
Ong has lowered his FY2022 to FY2024 forecasted earnings per share (EPS) by 27% to 54% on lower sales volume assumptions. His TP of US$13.60 is based on a 40% discount to
FY2022 net cash per share with an additional 6x FY2023 P/E given his expectations of a slower
Recovery.
China Yuchai’s engine unit sales in 1HFY2022 fell 37% y-o-y to 181,000 engines but improved 6% half-on-half (h-o-h) as accumulated distributors’ inventories were better digested. “In view of China’s economic slowdown and disruptions from ongoing Covid restrictions, we think the market conditions could remain challenging in 2HFY2022. As such, we lower our revenue growth forecast to 5% y-o-y for the period,” writes Ong.
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Meanwhile, the company continues to invest heavily in R&D to develop Tier-4 compliant off-road engine units and new energy powertrains in hydrogen, fuel cell, electric and hybrid, as China transitions towards a more stringent emission standard.
Despite the decreased forecasts, Ong believes that China Yuchai’s earnings have “bottomed out” and that its valuation is “undemanding” as it is currently trading below its end-1HFY2022 net cash balance of US$488 million, or US$11.90 per share, while possessing a track record of strong profitability and operating cash flow generation.
He notes that the company’s GPM continued to show “sequential improvements” to 15.9% in 1HFY2022, or an increase of 0.5% points h-o-h and 3.0% points y-o-y, with the ramp-up of National VI (N6) engine sales enabling China Yuchai to reach volume commitments needed to negotiate further cost reductions on required parts and increase in sales mix in the off-road segment.
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Ong expects the sequential margin improvement trend to continue, projecting 16.4% for 2HFY2022, although given the weaker sales volume expectations, the pace of recovery to longer-term average GPM of 20% could take more time amid weaker operating leverage gains near-term. Off a low comparison base for 2HFY2021, he forecasts China Yuchai to post a net profit of RMB121 million in 2HFY2022, a 6x jump y-o-y, Ong says.
His potential rerating catalysts include the Chinese government’s stimulus measures catalysing diesel engine sales, while key risks include supply chain disruptions further dampening business sentiment in China.
Shares in China Yuchai closed 4 US cents or 0.47% up at US$8.50 on Aug 23 on the NYSE.
