Besides building heavy trucks, Sinotruk’s product portfolio includes light trucks, buses and major powertrains and parts. The customers range from those in the infrastructure, construction, container service, logistics, mining, steel and chemical industries.
The overall market was down last year but Sinotruk has been able to stand out and outperform. For its FY2022 ended December 2022, the company reported earnings of RMB1.8 billion ($336.2 million), down 58.4% y-o-y.
However, the industry has likely bottomed out, says Phillip Securities analyst Zhang Jing. “With the further implementation of the government’s policies to stabilize the economy, infrastructure investment and logistics demand will maintain the momentum of the rally, which will provide a foundation for the recovery of the heavy truck market,” writes Zhang in his June 13 report. He has upgraded the stock to “buy”.
Citing data from cvworld.cn, Zhang notes that China’s heavy truck industry sold a total of 672,000 units last year, down 52% y-o-y, as the combined effect of the pandemic and slowing investment weighed on demand.
In contrast, Sinotruk’s sales were down 44% y-o-y to 158,000 in the same period. By doing so, it added another 3 percentage points to its market share, to 23.5%, overtaking rival FAW Jiefang to be the market leader.
Zhang says Sinotruk was able to outperform because it was able to maintain its share in dump trucks and mixer trucks while gaining share in other product segments namely high-horsepower tractors, trucks and special vehicles has grown significantly.
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In addition, thanks to an overseas distribution network, Sinotruk was able to increase its export volume last year by 65% over 2021 to 89,000 units, accounting for more than half, or 56%, of its total sales volume.
“We expect the company to continue to benefit from the recovery of the domestic heavy truck industry and the growth trend of the export market. In the medium to long term, there are opportunities for value enhancement in some segmentations of heavy trucks brought by innovation,” says Zhang.
What sets Sinotruk apart is that Munich-based MAN Truck & Bus is a strategic investor, with an interest of 25%. Besides MAN, via in-depth cooperation with Weichai Power, Sinotruk has constantly improved its capabilities and has become the heavy truck maker with the most complete power and drive types in China.
In a sign of its pricing power amid the rather competitive market, Sinotruk managed to increase the average selling price of its heavy trucks by RMB30,000 to RMB318,000 in the first half of 2022 over 2021. With a higher mix of higher-end products, Zhang expects the average selling prices to go up further.
Zhang’s target price of HK$16.1 implies 12x earnings and 1x PB for the current FY2023, and 8.4x earnings and 0.9x PB for the coming FY2024. Overall, sell-side analysts are overwhelmingly optimistic about Sinotruk. According to Bloomberg, there are 11 “buy” calls, with the highest target price at HK23.48, and just one “hold” call.
Based on our in-house valuation, we think Sinotruk Hong Kong’s intrinsic value is around HK$17.99, roughly 10% above its current trading price of HK$16.18.
