Author

章晶小姐 (Zhang Jing)
高級分析師

本科畢業於同濟大學工科，碩士畢業於華東師範大學金融貿系。現為輝立証券持牌高級分析師，主要負責汽車及航空板塊的研究，曾獲得《華爾街日報》亞洲區2012年度汽車及零部件最佳分析師第二名，擅長將行業前景與上市公司結合分析。

Bachelor Degree in Tongji University of Engineering; Master Degree in East China Normal University of finance. Currently cover automobile and air sectors. Having worked in research for years and is good at combining analysis for the companies with industry prospects.

Phone:	86 21 51699400-103	Email:	zhangjing@phillip.com.cn
For Research Report and Business enquiry

Sinotruk (3808.HK) - Sales remain stable growth amid market transition

Thursday, February 19, 2009

5357

Sinotruk(3808)

Recommendation on 19 February 2009
Recommendation	HOLD
Price on Recommendation Date	$4.580
Target Price	$4.910

Weekly Special - 425 Minth Group

Investment summary

Sinotruk is the leading company in domestic heavy-duty truck industry. In 2008 while the industry's technical standard was upgraded and the market went down, Sinotruk, relying on its own unique EGR technology, remained stable sales growth; its sales of heavy-duty truck recorded a yoy growth of 12%. For impacts from external environment in recent years, the company will be less impacted compared to its counter parts. Nearly 5% shares buy-back reflected the management's confidence towards the company's future development.

Anyway, the market risk and technical risk still exist. Thus, we cut down the company's 2008 and 2009 operating income forecast by 1.4% and 21.1%, EPS lowered to RMB 0.55 and 0.54 respectively. Overall, we give 8xP/E on base of EPS of 2009, 12-month target price at HKD4.91, namely 0.7xP/B on base of 2009 NAVPS, and recommend to a “Hold” rating.

Company Fundamentals

Sinotruk specialized in the development and production of heavy-duty trucks and their key parts and components, including cargo trucks and related chassis, semi-tractor trucks, tipper and special truck chassis and so on. It has a wide range of customers covering infrastructure, container transportation, road logistics, mining, steel and chemical industries.

Sinotruk is the largest domestic heavy-duty truck manufacturer and also is top 5 worldwide. Its domestic market share is at No. 1, with an outstanding competitive market position.

In June 2008, it launched EGR National III engine (electronically controlled engine) which is cooperated with Japan's Denso. This engine has advantages of good oil suitability, convenience in repair and maintenance, low costs and high suitability to combine with Emission II trucks. Though it has shortcomings such as difficult to upgrade to higher emission standard and bad engine stability, with its cost to be around RMB15,000 lower than competitors` “high pressure common rail” National III engines, the company distinguish itself with competitive cost advantage in domestic market in the short and medium term.

Sales still remain stable growth amid market transition

In 2008 with National Emission III standard to be implemented, the domestic heavy-duty truck industry is at a transitional period. The industry's whole year sales grew by 11% and monthly sales rushed to high at beginning and then dropped back. Some macro and incidental factors had assisted in forming such price trend more apparently. These factors include:

1) Stimulated by factors such as reconstruction after Sichuan earthquake and the regulation of charging on weight, the domestic heavy-duty truck industry jumped into a booming era, recorded 48.6% yoy sales growth in first half year;

2) the financial crisis worsened in second half year. Macro economy went down, cargo transportation market such as coal became recessed, the demand for heavy trucks slip down. As a result, the industry's sales in second half year plunged 31% compared to same period of 2007.

With such impact, the company sold 67,694 units of heavy-duty trucks in 2008 first half year, representing a yoy growth of 57.2% according to its interim report, highly above market average level, and driving its operating income and profits attributable to shareholders up by 50.1% and 39.9% yoy respectively. However in second half year, the company's sales dropped 22.5% yoy to 43,730 units, dragging its whole year sales achieving a yoy growth of 12%.

Compared to the market's average level, Sinotruk's whole year sales is relatively better and more stable. In Aug, Sep and Oct of 2008, it even recorded yoy positive growth, which is hardly seen in the industry at that time. The company's market occupied ratio in 2008 was 20.62%, slightly higher than 2007, which is 20.43%. This means during the period of implementing emission III standard and upgrading technical standard, the company relying on its own EGR technical advantage was still able to remain its strong position, and had its market share expanded.

Chances may occur in 2009 but uncertainty still exists in future

The impacts from recessed macro economy to commercial vehicles esp. heavy-duty trucks are significantly larger than passenger vehicles. We estimate in 2009 beginning, as the trend of macro economy is not obvious, the wait-and-see attitude by heavy truck users will become stronger, and plus the high base effect in 2008 same period, the heavy-duty truck industry will continue getting worsened in 2009 first half year.

However, with government's infrastructure-focused RMB 4-trillion bailout package be carried out one by one, significant positive impacts will be extended to the recovery of heavy-duty truck industry. We estimate the heavy-duty truck industry will stop worsening from Q2 2009, and may regain its positive growth in second half year. At that time, trucks with cost effective EGR engines of Sinotruk will undoubtedly receive large welcome by users.

On the other hand, we think the market situation is still uncertain. The heavy-duty truck industry is a remarkable cyclical industry. It is still an issue whether the positive impacts by government's active fiscal policy could offset the negative impacts from recessed economy. The industry's turning point won`t appear until this round of economy adjustment ended. The uncertainty Sinotruk faced with are: National Emission IV Standard will be implemented after 2010 according to China government's plan and the EGR trucks which now accounts for a high proportion in the company's total sales will meet large difficulty in upgrading emission standard.

Large buyback reflects management's confidence

The company's management had undergone 24 times share buyback In past 5 months, totaling 113,268,500 shares, by the amount of HKD577,335,865, with weighted buying price at HKD5.097. The accumulated number of shares buying back accounting for 4.98% of the company's total shares, which is the biggest number among the red chips. Considering the market's large fluctuation, the buyback price cannot form the short-term supporting line, but at least it shows the management's view of its share value underestimated, and sending the message that the management is confident of the company's future development. We think this shall be considered as positive impact to its share price.

Risks

Economy deteriorating could go above expectation, sales growth of heavy-duty industry may go down unexpectedly

Emission standard will be upgraded but the company's major products cannot combine with upper standard.

Raw material price may go up, risk in overseas business.

Evaluation

Considering the growth of domestic heavy-duty truck industry in 2008 is slightly lower than our expectation of 12-16%, and in 2009 the market is faced with severe challenge, we cut down the company's forecast of operating income in 2008 and 2009 by 1.4% and 21.1% respectively. In condition that shares bought back are not be written off, the forecast of EPS is revised downward to RMB 0.55 and 0.54 in 2008 and 2009 respectively.

With raw material cost going down and sales of EGR trucks going up, the company though faced with industry slipping down is receiving smaller impacts than counter parts, but risk of future uncertainty still exists; in the long term, the development of China's heavy-duty truck industry compared to developed countries is far at low level, which means there is huge space for further development. Currently P/E of major heavy-duty truck manufacturers in Europe and America is around 7x and P/B around 1.0-1.4x. We think it is reasonable to give 8xP/E on base of EPS of 2009, 12month target price at HKD4.91, namely 0.7xP/B on base of 2009 NAVPS, and maintain our “Hold” rating. Meanwhile, we want to point out that if the company writes off its shares bought back in order to increase EPS value, the company's target price will be HKD 5.12.

Earnings Forecast

More...

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