Sectors:

Air & Automobiles (Zhang Jing),

TMT, Semiconductors, Consumer, Healthcare (Eric Li)

Automobile & Air (ZhangJing)

This month I released 2 updated reports of Sinotruk (3808.HK), and Cathay Pacific (293.HK).

According to Sinotruk's positive profit alert which, the Company expect its NP will grow by 200-240% from RMB1.67 billion in 2022 to approximately RMB5.01 billion - RMB5,678 million in 2023, exceeding the market expectation. This growth was mainly attributed by the management to demand recovery in the heavy duty truck industry along with considerable momentum of exports. Meanwhile, by seizing opportunities on the market, and continuously adjusting the product and business structures, the Company achieved a massive growth in product sales, with the proportion of high-end products continuously growing and the profitability significantly enhanced. Our analysis shows that the massive growth in sales drove an increase in the capacity utilization rate, and the growth in net profit was tremendously higher than the growth in sales.

The heavy duty truck market generally showed a slowly upward trend in 2023, as the sales began to rise slowly in the second quarter, and ten YoY positive increases were recorded in monthly sales from February on. According to CAAM's statistics, the total sales for China's heavy duty truck industry reported 910 thousand in 2023, representing an YoY increase of 36% or 239 thousand. Specifically, the cumulative sales of new energy heavy duty trucks grew by 31.5% to 33 thousand, the cumulative sales of exported heavy duty trucks grew by 60% to 275 thousand, and the cumulative sales of LNG heavy duty trucks grew by 310.8% to 152 thousand. Obviously, the market increase was mainly attributed to the export market and the booming sales of LNG heavy duty trucks.

Sinotruk sold 234 thousand heavy duty trucks in 2023, a number that was better than the industry's average. Meanwhile, the YoY increase reached 47.5%, which was significantly higher than the industry's average (36%). Furthermore, Sinotruk's share in the domestic heavy duty truck market was 25.74%, up 2.2 ppts over the same period last year and remaining to rank first. Sinotruk also delivered an impressive performance in both the export market and the sub-market of LNG heavy duty trucks: On the one hand, relying on Sinotruk International's network layout, the Company's exported sales exceeded 130 thousand, accounting for more than half of the total sales; on the other hand, in the sub-market of LNG heavy duty trucks, the Company ranked second among industry peers in terms of sales and had a market share of 17.7%. As the ASP of LNG heavy duty trucks was RMB80 thousand - RMB100 thousand higher than that of normal heavy duty trucks, the Company's sale structure and profitability significantly improved. For 2024, we expect that continuous recovery will remain to be the main trend of the heavy duty truck market, and the total sales will reach one million - 1.1 million.

At the same time, Sinotruk released its share incentive scheme, according to which, the Company intends to grant approximately 1% of the total share capital in the form of restricted shares to no more than 194 employees at the price of RMB6.896 per share.

As for the granting criteria, 30%/30%/40% of the restricted shares will be granted for 2024/2025/2026, respectively, if the income is no less than RMB94.8 billion/RMB109.1 billion/RMB125.5 billion and the return on sales ratio is no less than 7.5%/8%/8.5% (namely, the profit from sales is no less than RMB7.11 billion/RMB8.73 billion/RMB106.7 billion), respectively. Sufficient incentives have further improved the Company's mechanism for income distribution, and conduce to the enthusiasm of key employees and the continuous growths in Sinotruk 's future business performance. Additionally, an average annual profit growth rate of approximately 20% also reflects the management's strong confidence in the future business development of the Company.

In terms of the domestic economic situation, China needs to boost its economy after the pandemic. With the further implementation of the government's policies to stabilize the economy, infrastructure investment and logistics demand will maintain the momentum of rally, which will provide a foundation for the recovery of the heavy truck market. Secondly, since the implementation of the National VI emission standard in July 2021, the heavy truck industry has fallen into a downturn for one and a half year. While, the heavy trucks in the previous round of peak consumption have gradually entered the replacement period. In addition, the stricter emission regulations of the industry, the overload transportation governance, and the elimination of backward and old models will play a positive role in the recovery of the industry.

We expect Sinotruk to continue to benefit from the recovery of the domestic heavy truck industry and the growth trend of the export market.

Acoording to Cathay Pacific Airways Limited ("Cathay Pacific" or the "Company") FY2023H result: the Company recorded revenue of HK$43,593 million, up by 135% yoy, which recovered to 81.4% of that in the same period of 2019 (specifically, passenger revenue and cargo revenue recovered to 73.6% and 108% of those in the same period of 2019, respectively). Operating costs stood at HK$36,957 million, accounting for 72.4% of that in the first half of 2019. The attributable profit amounted to HK$4,268 million, which significantly made good a deficit (the loss in the same period of 2022 was HK$4,999 million), and was substantially greater than the figure of HK$1,347 million in the first half of 2019. The corresponding basic earnings per share were approximately HK61.5 cents.

Specifically, a portion of the attributable profit came from a one-off non-cash gain of HK$1.9 billion recognized in the current period: Air China completed A-share seasoned equity offering in January 2023, thus diluting the shareholding of Cathay Pacific in Air China (down from 18.13% to 16.26%), which was regarded as a sale of some shares in Air China.

The passenger load factor of Cathay Pacific in the Reporting Period jumped by 28 percentage points yoy to 87.2%, higher than the figure of 84.2% in the same period before the pandemic (i.e. the first half of 2019, the same below), as driven by the increase in transfer passengers after the resumption of normal traveler clearance between Hong Kong and the Chinese Mainland as well as the surge in demand of flights to Europe and America. Due to the growth of transport capacity, ticket rates fell from the historic high. Meanwhile, the passenger yield declined by 32% yoy to HK77.4 cents, which still greatly exceeded that of HK54.9 cents in the same period before the pandemic. However, the cargo load factor and the cargo yield decreased, as the boom in the pandemic period waned, by 12 percentage points and 51.7% yoy to 63.8% and HK$2.76, respectively, which were 0.4 ppts and HK$0.88 higher than the pre-pandemic levels.

For transport capacity, the Group's passenger flight capacity had a sharp rise of more than 11 times in the first half of the year and recovered to 46% of the pre-pandemic level. The Management plans that the figure will reach 70% and 100% of the pre-pandemic level by the ends of 2023 and 2024, respectively. The passenger flight capacity grew by 118% from the same period of last year, and recovered to 70% of the pre-pandemic figure.

Cathay Pacific has maintained positive operating cash flow since the beginning of 2023. Moreover, it has redeemed 50% of preference shares recently, and plans to redeem the rest 50% by the end of July 2024. Then, the Company will hopefully restore dividend distribution.

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