China Lesso [2128.HK]

Transcription

1 China Lesso [2128.HK] Although PVC prices have surged 21% in the past two months, we understand that China Lesso has lifted its ASP a few times since September, which should largely offset the impact of higher raw material costs. Meanwhile, thanks to the government s support for infrastructure projects and PPP (public-private partnership) projects, the Company feels comfortable in achieving >10% volume growth in Through cooperation with Shanghai Safbon Water Service ( CH), China Lesso is well positioned to win more PPP projects in the future. We raised our 2016E/2017E EPS by 3.6%/4.5%, as we revised upwards our 2016E/2017E gross profit per tonne for 2016E/2017E by about 2% each year to reflect stronger demand. After rolling forward the base year from 2016 to 2017, we lifted our target price from HK$5.90 to HK$6.60, based on 8x 2017E PER (6-year average, methodology unchanged). Reiterate BUY. Investment Highlights Demand Remains Solid in 2H16; Cost Hikes Offset by Higher ASP Sharp increase in PVC costs manageable. PVC prices have risen 21% since early September. China Lesso believes the impact is manageable, as it has lifted its ASP a few times in the past two months; there may be a short-term impact on the gross margin, however, because of the time lag between cost hikes and ASP increases. Meanwhile, we found that the China Plastic Pipe Industry Association has raised its guidance prices for PVC pipes by 17%-19% in the past two months. Infrastructure and PPP projects to support demand. The Company said that visibility for demand from the property sector is limited at the moment but that demand from infrastructure and PPP projects, including sponge city projects, remains strong. Therefore, management expects volume growth of >10% to be achievable. Unlikely to repeat a negative earnings surprise in 2H16. China Lesso reported a recurring net profit decline of 5% for 2H15, which led to a de-rating early this year. However, we believe the risk of disappointment is much smaller in 2H16. On the back of stronger demand this year, the sales rebates offered by the Company are likely to be smaller, so margin pressure will be lower. We are projecting a gross margin of 26% for 2H16E, up from 24.7% in 2H15. In addition, some A-share listed plastic pipe companies have released encouraging Q3 results or positive profit alerts, including Weixing New Building Materials ( CH; 36% net profit growth in Q3) and Fujian Superpipe ( CH; issued a positive profit alert for Q3). Gradually moving to offering a full range of services. Early this month, China Lesso subscribed for 6.8% of the new shares of Shanghai Safbon Water Service for a consideration of RMB500m. China Lesso will appoint a representative to the board of directors of Safbon Water. Through overseas acquisitions in Europe, Safbon Water has expertise in desalination and sewage treatment. In the future, by working with Safbon Water, China Lesso will be not only a plastic pipe supplier but also a full service provider of water/sewage treatment related infrastructure and PPP projects. This will increase China Lesso s chances of winning new projects. Management expects the benefits to be more visible starting in China Construction Sector BUY Close: HK$5.67 (Oct 25, 2015) Target Price: HK$6.60 (+16.4%) Price Performance (HK$) Market Cap US$2,268m Shares Outstanding 3,102m Auditor Ernst & Young Free Float 31.45% 52W range 3M average daily T/O Major Shareholding October 26, Oct15 Dec15 Feb16 Apr16 Jun16 Aug16 Oct16 Turnover (RHS) Price (LHS) Sources: Company, Bloomberg HK$ US$3.03m Wong Luen Hei (68.36%) Wong Chi Man Head of Research (852) (HK$ million) Source: Bloomberg Y/E Dec E 2017E Turnover (RMB m) 10,891 13,071 14,823 15,264 17,121 19,958 Recurring net profit (RMB m) 1,219 1,405 1,653 1,736 2,047 2,242 Net margin (%) Recurring EPS (RMB) % Change PER (x) PBR (x) EV/EBITDA (x) Sources: Company, CGIS Research cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) livylyu@chinastock.com.hk 1

2 Key financials China Lesso (02128.HK) Income Statement (RMB'000, except for per share amount) E Year ended 31 Dec 1H 2H 1H 2H 1H (A) 2H E 2017E PVC pipes 3,997,803 4,821,458 4,206,892 4,618,389 4,379,253 5,960,891 8,048,970 8,819,261 8,825,281 10,340,145 12,190,139 Non-PVC pipes 2,128,008 2,785,958 2,150,031 2,627,094 2,225,967 2,991,646 4,166,130 4,913,966 4,777,125 5,217,614 5,997,273 Others 455, , , , , , ,447 1,089,545 1,661,995 1,563,741 1,770,338 Revenue 6,581,051 8,241,721 7,043,182 8,221,219 7,325,116 9,796,384 13,070,547 14,822,772 15,264,401 17,121,500 19,957,751 COGS (4,938,032) (6,084,006) (5,135,575) (6,191,255) (5,141,630) (7,252,846) (9,804,979) (11,022,038) (11,326,830) (12,394,476) (14,691,188) Gross profit 1,643,019 2,157,715 1,907,607 2,029,964 2,183,486 2,543,538 3,265,568 3,800,734 3,937,571 4,727,024 5,266,563 Operating expenses (784,503) (1,046,303) (868,798) (923,291) (984,534) (1,155,973) (1,502,919) (1,830,806) (1,792,089) (2,140,507) (2,478,259) Operating profit 858,516 1,111,412 1,038,809 1,106,673 1,198,952 1,387,565 1,762,649 1,969,928 2,145,482 2,586,517 2,788,304 Other income and gains 31,754 47,984 22,727 24,779 17,941 19,593 88,399 79,738 47,506 37,534 39,916 EBIT 890,270 1,159,396 1,061,536 1,131,452 1,216,893 1,407,158 1,851,048 2,049,666 2,192,988 2,624,051 2,828,219 Net finance costs (67,885) (36,038) (12,813) (2,089) (16,614) (10,836) (127,936) (103,923) (14,902) (27,450) (27,079) Profits from associates and JCEs , ,000 Non-recurrent items (61,365) (37,983) (14,087) (100,429) (17,044) - 44,009 (99,348) (114,516) (17,044) - Income before tax 761,222 1,085,571 1,035,248 1,029,423 1,183,620 1,396,671 1,767,511 1,846,793 2,064,671 2,580,291 2,802,141 Income tax expense (139,556) (166,879) (232,919) (213,302) (275,185) (279,334) (329,895) (306,435) (446,221) (554,519) (560,428) Minority interests 5,869 7,797 3,616 (949) 3,945-11,645 13,666 2,667 3,945 - Net income 627, , , , ,380 1,117,337 1,449,261 1,554,024 1,621,117 2,029,717 2,241,712 Recurring net income 688, , , , ,424 1,117,337 1,405,252 1,653,372 1,735,633 2,046,761 2,241,712 EPS (RMB) Recurring EPS (RMB) DPS (HK$) Depreciation and amortization 203, , , , , , , , , , ,048 EBITDA 1,094,464 1,395,380 1,304,155 1,391,049 1,503,536 1,714,341 2,211,776 2,489,844 2,695,204 3,217,877 3,530,268 Sales volume (tonnes) 643, , , , , ,989 1,272,631 1,431,639 1,541,954 1,695,600 1,864,800 PVC 508, , , , , ,591 1,003,362 1,125,911 1,240,900 1,368,004 1,500,325 Non-PVC 134, , , , , , , , , , ,475 ASP per tonne (RMB) 9,527 9,647 9,183 8,526 8,593 9,658 9,598 9,593 8,821 9,175 9,753 PVC 7,859 7,812 7,510 6,784 6,991 8,038 8,022 7,833 7,112 7,559 8,125 Non-PVC 15,842 16,254 16,278 15,548 15,654 16,136 15,472 16,073 15,868 15,927 16,455 Cost per tonne (RMB) 7,049 7,002 6,521 6,245 5,902 7,050 7,124 7,023 6,369 6,530 7,071 Gross profit per tonne (RMB) 2,478 2,645 2,662 2,281 2,691 2,607 2,474 2,570 2,452 2,645 2,682 Growth Rates: Revenue 16% 12% 7% 0% 4% 19% 20% 13% 3% 12% 17% EBIT 1% 19% 19% -2% 15% 24% 18% 11% 7% 20% 8% EBITDA 4% 20% 19% 0% 15% 23% 21% 13% 8% 19% 10% Core net income 5% 29% 19% -5% 13% 22% 15% 18% 5% 18% 10% Recurring EPS 3% 28% 19% -5% 14% 22% 14% 16% 5% 18% 10% Margins and Ratios: Gross margin 25.0% 26.2% 27.1% 24.7% 29.8% 26.0% 25.0% 25.6% 25.8% 27.6% 26.4% Net margin 10.4% 11.6% 11.6% 11.1% 12.6% 11.4% 10.7% 11.1% 11.4% 11.9% 11.2% EBIT margin 13.5% 14.1% 15.1% 13.8% 16.6% 14.4% 14.2% 13.8% 14.4% 15.3% 14.2% EBITDA margin 16.6% 16.9% 18.5% 16.9% 20.5% 17.5% 16.9% 16.8% 17.7% 18.8% 17.7% Effective tax rate 17% 15% 22% 19% 23% 20% 19% 16% 20% 21% 20% Sources: Company data, CGIS Research estimates 2

3 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Key financials China Lesso (02128.HK) Balance Sheet (RMB'000, except for per share amount) Statement of Cash Flow As at 31 Dec E 2017E Year ended 31 Dec E 2017E Inventories 2,434,049 2,210,038 2,206,543 2,200,000 2,400,000 Profit before tax 1,767,511 1,846,793 2,064,671 2,580,291 2,802,141 Trade receivables 854,518 1,127,901 1,186,226 1,200,000 1,350,000 Depreciation & Amortization 360, , , , ,548 Bills receivable 218, , , , ,000 Change in w orking capital (480,951) 393, ,615 (66,486) (489,000) Others 702, , , , ,750 Others / adjustments (143,436) (43,590) (154,870) (400,974) (447,911) Bank balances and cash 2,189,242 3,198,902 3,893,544 3,838,809 4,478,784 Net operating cash flow 1,503,462 2,636,446 2,876,984 2,668,626 2,527,778 Total current assets 6,398,623 7,314,832 8,232,292 8,353,559 9,512,534 Capex (1,161,586) (1,285,113) (1,013,679) (1,400,000) (1,200,000) PPE, net 4,452,109 5,263,614 6,011,812 6,845,474 7,378,041 Others (558,605) (296,182) (479,340) (730,524) (50,000) Prepaid lease payments 996,690 1,087,126 1,157,926 1,207,926 1,257,926 Net investing cash flow (1,720,191) (1,581,295) (1,493,019) (2,130,524) (1,250,000) Others 450, ,956 1,247,093 1,928,352 1,929,352 Total non-current assets 5,899,084 7,204,696 8,416,831 9,981,752 10,565,319 Change in debt 504, ,088 60,906 (165,502) (100,000) Dividends (291,809) (295,460) (318,373) (334,160) (448,342) Total assets 12,297,707 14,519,528 16,649,123 18,335,311 20,077,853 Others (72,555) (98,654) (416,916) (93,175) (89,461) Net financing cash flow 140,385 (16,026) (674,383) (592,837) (637,803) Trade payables 861, ,387 1,681,582 1,700,000 1,700,000 Other payables 1,252,674 1,564,290 1,525,902 1,600,000 1,600,000 Increase / Decrease in cash 266,917 1,009, ,642 (54,735) 639,975 Bank and other borrowings 1,080,092 1,158,729 1,065, , ,000 Net cash/(debt) (497,874) 19, , ,571 1,503,546 Others 103, , , , ,128 Total current liabilities 3,297,820 3,809,846 4,377,548 4,366,356 4,268,128 Finance Ratios Bank and other borrowings 1,607,024 2,021,105 2,175,238 2,175,238 2,175, E 2017E Others 136, , , , ,653 Valuation Total non-current liabilities 1,743,944 2,159,959 2,406,123 2,411,891 2,416,891 PE(x) EPS grow th (%) Total liabilities 5,041,764 5,969,805 6,783,671 6,778,247 6,685,019 Yield (%) PEG (x) Shareholders' equity 7,239,738 8,545,459 9,770,885 11,466,442 13,302,211 EV/EBITDA (x) Minority interests 16,205 4,264 94,567 90,622 90,622 PB(x) Sources: Company data, CGIS Research estimates Operational Revenue grow th (%) Gross margin (%) Net profit margin (%) Days receivables Days payables Days inventories Current ratio (x) Quick ratio (x) Asset/Equity (x) Net debt/equity (%) 7 Net cash Net cash Net cash Net cash EBITDA interest coverage (x) Core ROE (%) Figure 1: Rolling Forward PER Figure 2: Rolling Forward PBR Rolling forward PER (x) Average +1 Standard deviation -1 Standard deviation Sources: Bloomberg, CGIS Research Rolling forward PBR (x) Average +1 Standard deviation -1 Standard deviation Sources: Bloomberg, CGIS Research 3

4 Figure 3: Brent crude prices (US$/barrel) USD/barrel USD/barrel Figure 4: PVC prices (RMB/tonne) 7600 yuan/ton yuan/ton SpotPrice:Crude Oil:UK BrentDTD D ata Source: W ind Info M arketprice (M id):pvc (Calcium Carbide Process):National M arketprice (M id):pvc (Ethylene Process):National D ata Source:W ind Info Figure 5: HDPE prices (RMB/tonne) Figure 6: PP prices (RMB/tonne) yuan/ton M arket Price: HDPE (PetroChina Daqing Petrochem ical 5000S): Guangdong Shunde yuan/ton D ata Source:W ind Info yuan/ton yuan/ton Closing Price:SpotG oods:pp Resin (SpotPP) D ata S ource: W ind Info 4

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). 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One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. 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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: