1333 HK
SWS Research Co. Ltd 99 East Nanjing Road, Shanghai | +86 21 2329 7818 www.swsresearch.com
Non-ferrous metals | Company Research
The Chinese View on China
June 3, 2011
China Zhongwang Holdings (1333 HK)
Neutral
Uncertainty lingers although export collapse priced in
Downgraded Market Data: May 9
Financial summary and valuation
Closing Price (HK$)
3.31
Price Target (HK$)
3.33
HSCEI
12977
HSCCI
4244
52-week High/Low (HK$)
6.44/3.09
Market Cap (USD Mn)
2558
Market Cap (HK$ Mn)
19895
Shares Outstanding (Mn)
5406
Exchange Rate (RMB-HK$)
1.20
Price Performance Chart:
Revenue (RMB million) YOY (%) Net income (RMB million) YOY (%) EPS (RMB) Diluted EPS (RMB) ROE (%) Debt/asset (%) Dividend Yield (%) P/E (x) P/B (x) EV/EBITDA (x)
2009 13852.71 22.98 3528.82 84.71 0.65 0.65 24.89 41.75 8.23 4.23 1.05 1.67
2010 10521.95 -24.04 2595.87 -26.44 0.48 0.48 16.67 36.59 6.96 5.75 0.96 1.08
2011E 7605.87 -27.71 726.24 -72.02 0.13 0.13 4.76 30.85 1.22 20.54 0.98 3.52
2012E 9226.96 21.31 1001.33 37.88 0.19 0.18 6.23 32.63 1.68 14.89 0.93 2.40
2013E 11236.21 22.07 1176.99 17.54 0.22 0.21 6.92 27.81 1.97 12.67 0.88 2.29
Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible debentures, stock options and warrants, were exercised. P/E is calculated as closing price divided by the respective year’s EPS.
投资要点： Source: Bloomberg
Analyst Jim Tang Didier Zheng [email protected]
Contact Daniel Huang (8621)23297818×7262
Related Reports "China Zhongwang (1333 HK)PVMC Model to demonstrate key drivers of higher marks-up as well as improved sale mixes" Jul 15,2009
双反调查严重影响了忠旺的盈利能力。由于 4 月 28 日美国国际贸易委员会作出行业损 害认定，美国商务部将据此发出反倾销令和反补贴令，公司实际已几乎失去美国市 场。澳大利亚于 2010 年 10 月 28 日确认了双反调查的结果，但税率远较美国为轻。我 们注意到公司去年四季度对澳大利亚出口似乎并未受澳大利亚双反的影响，与三季度 销售基本持平,然而一季度再次大幅下滑 76%。我们认为这固然有可能是因为公司需要 集中精力开发国内市场，但澳大利亚市场很可能也受到了双反调查的影响。我们假定 今年出口在一季度基础上有小幅回升，而国内销量则上升 30%以弥补出口市场的大幅 下滑。
我们认为去年四季度和今年一季度最适合用来预测公司未来的赢利能力，因为该期间 内，公司出口急剧下降，几乎失去美国市场，对澳大利亚出口也大幅下滑。公司对于 国内市场的依存度在这两个季度高达 87%和 95%。 平均单位加工费也跌至 2006 年以来 的最低点。我们相信除非公司能找到新的强劲出口市场（在贸易保护主义盛行的今天 殊非易事），公司将不得不更加依赖国内市场，忍受国内市场的激烈竞争和低加工 费，平均单位加工费将在去年四季度和今年一季度的低点附近徘徊，公司对国内市场 依存度也将维持在 90%左右（除非公司能找到其他大的出口市场）。在此基础上，我 们预计公司 2011 和 2012 年每股收益为人民币 0.13 和 0.19 元。
我们倾向于相信公司将大量投资于公司提到的未来发展方向：高附加值铝压延材项 The company or its affiliate may have equities of the listed corporation reviewed authorized by law. The company may also provide investment banking and consulting service to the listed corporation. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials. The clients shall have a comprehensive understanding of the disclosure in the last page.
本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。1
目。高附加值铝压延材主要包括铝中厚板、高端铝箔、高端铝带等，主要应用于航空 航天、船舶、轨道交通、汽车、机械设备、包装及电子等领域。我们估计该项目将需 要两到三年时间开始生产。我们相信，公司未来的价值将取决于这一项目的成败，因 为公司股价中有 60%价值来自于公司的净现金。但由于公司没有披露这一项目的细 节，并且我们认为该项目不确定性很大，我们暂时没有在盈利预测和估值中考虑这一 项目。
我们用现金流折现、股息折现和 EV/EBITDA 三种方法估值，得出目标价 3.33 港币， 对应 20.6 倍 2011 年每股收益和 15.0 倍 2012 年每股收益，对应公司股票最新收盘价 有 0.6%的升幅。我们使用比较谨慎的假设条件得到这一目标价。由于目前缺乏明确的 催化剂，并且公司高附加值铝压延材项目不确定性很大（我们认为公司目前正处于痛 苦的转型期），我们给予公司“中性”评级。
Building Materials | Company Research
October May 9,2011 12, 2010
Investment highlights: Antidumping and countervailing investigations will severely harm Zhongwang’s profitability The company has been barred from the US market after a recent determination by the US International Trade Commission. Exports to Australia also appear to have been negatively impacted by the investigations. We believe that 4Q10 & 1Q11 provide the most accurate basis for estimating the company’s future profitability These quarters saw a sharp decline in exports – there were almost no exports to the US – while the company’s average unit processing fee fell to its lowest level since 2006. We estimate that the company will now have to derive around 90% of its revenue from the domestic market, assuming it is unable to find other large export markets. As a result, Zhongwang will likely suffer from intense competition in the domestic market and the average unit processing fee will remain around the low levels seen in 4Q10 and 1Q11. On this basis, we forecast the company’s FY11 and FY12 EPS will be RMB0.13 and RMB0.19 respectively. We expect the company to invest heavily in high-value-added flat rolled products, consisting mainly of medium-to-high thickness plates, high-end foils and sheets. These products serve sectors such as aerospace, shipping vessels, railway transportation, automobile, machinery equipment, packaging and electronics. We estimate that it will take around 2-3 years for the project to start production. The success of these products is vital to the company’s future outlook. We believe that the company’s share price is currently fairly priced and that Zhongwang’s future value depends heavily on whether the new project creates or destroys value, as 60% of the stock’s value is derived from company’s significant net cash position. As the company has not disclosed further details about the new project and various uncertainties remain, we have not taken this project into account in our forecasts and valuation. Our DCF, DDM and EV/EBITDA valuation analysis resulted in a target price of HK$3.33 This price represents 20.6x FY11E P/E and 15.0x FY12E P/E, and implies 1% upside potential from the latest closing price. We believe our assumptions are prudent and feel that the company will experience a painful turnaround. Due to a lack of upside catalysts and ongoing uncertainty surrounding the company’s high-end rolled product projects, we have given the company a NEUTRAL rating.
本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。2
Please refer to the last page for important disclosures
Page 1
Building Materials | Company Research
October May 9,2011 12, 2010
Investment Case Valuation and Target Price China Zhongwang (1333 HK, Neutral, HK$3.33) After assessing the negative impact of antidumping and countervailing duties imposed after investigations into the firm’s practices in Australia and the US, our forecast for EPS in FY11 & 12 is RMB0.13 & 0.19 respectively. Our target price of HK$3.33 was determined using a blended valuation of DCF, DDM and EV/EBITDA analysis, and implies 20.6x FY11 earnings and 15.0x FY12 earnings. We feel that the company’s shares are fairly priced and have downgraded the company rating to Neutral due to lack of foreseeable upside catalysts and an uncertain future.
Key Assumptions We assume that the company’s sales results will continue the trend observed in 4Q10 and 1Q11, with at least 80% of company sales to remain domestic after the anti-dumping and anti-subsidy investigations in the US and Australia. Export sales will decline significantly to a negligible level while domestic sales volume will partially compensate for the loss of export markets with a 30% increase. Domestic sales are expected to then grow at 15% in 2012 and 2013, in line with the industry. Processing fees will remain at the low levels seen in the last two quarters as higher domestic dependency will inevitably result in much lower margins, in line with the domestic industry.
How we differ from consensus We believe that recent share price underperformance reflects the company’s difficulties in export markets, and that the market has now priced in the loss of these markets. However, we believe huge uncertainties still remain as we are cautious about the perspective of the new investment project as 60% of the share price comes from its net cash position. We think it is still risky to buy the share while concerns over the company’s future are always lingering.
Upside catalysts 1. Entry into other large export markets. 2. Earlier-than-expected initiation of the new project, favorable market conditions
Downside catalysts 1. Tight competition resulting in further declines in processing fees and sales volume in domestic markets. 2. Failure of the new project.
本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。3
Please refer to the last page for important disclosures
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Building Materials | Company Research
October May 9,2011 12, 2010
Table of Contents
Uncertain future ................................................5 Domestic industrial extrusion market to grow at 10~20%.................................................7 Earnings forecast ............................................11 Valuation is fair................................................13 Appendix ..........................................................16
本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。4
Please refer to the last page for important disclosures
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart & Table Chart 1: Unit industrial processing fees likely to be in-line with 4Q10 & 1Q11 ........... 6 Chart 2: ASP’s increasing due to higher ingot costs..................................................... 6 Chart 3: Domestic sales volume to compensate for sharp export decline.................. 7 Chart 4: Extrusion represents the largest share of total semis production ................ 8 Chart 5: Industrial (non-construction) market stands at 2.3 million tonnes ................ 8 Chart 6: Share of industrial applications much larger in the US .................................. 9 Chart 7: Growth of industrial segment outpaces that of construction ........................ 9 Chart 8: Demand from transportation sector will realize a CAGR of 15~25% in the next 5 years ..................................................................................................................... 10 Chart 9: Machinery & equipment will grow at around 14% in the next 5 years ......... 10 Chart 10: Consumer durable will grow at around 12% in the next 5 years................ 10 Chart 11: Zhongwang is the largest domestic producer of extrusion products........ 10 Chart 12: Zhongwang’s domestic industrial market share is 8% in 2009 .................. 11 Chart 13: Zhongwang could increase its domestic industrial market share to 9% in 2011 .................................................................................................................................. 11 Chart 14: Gross margins expected to fall abruptly ...................................................... 12 Table 1: Processing fee & sales volume assumptions of our EPS estimates ........... 11 Table 2: Cost assumptions of our EPS estimates........................................................ 12 Table 3: The company is much more sensitive to domestic market dynamics......... 13 Table 4: DCF valuation: 3-year explicit stage, 5 year semi-explicit stage & Terminal stage ................................................................................................................................ 13 Table 5: DCF valuation results in TP of HK$3.87.......................................................... 14 Table 6: DDM valuation results in TP of HK$2.99 ......................................................... 14 Table 7: 3x FY11 EBITDA results in TP of HK$3.12 ...................................................... 15
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Please refer to the last page for important disclosures
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Building Materials | Company Research
October May 9,2011 12, 2010
Uncertain future Loss of the US market appears inevitable At the end of March 2011, the US Department of Commerce imposed an antidumping duty of 33.28% and a countervailing duty of 374.15% on certain imports of aluminum extrusion products from China, including Zhongwang products. On April 28, 2011, the US International Trade Commission issued the final affirmative injury determination on imports of aluminum extrusion products from China (excluding finished heat sinks). As a result, the Department of Commerce will issue antidumping and countervailing duty orders on the relevant products. Zhongwang will therefore essentially lose access to the US market. Dalian local foreign trade authorities have also confirmed that two of Zhongwang’s export dealers ceased aluminum extrusion exports from the local bonded area, leading to an export reduction of US$474m in 1Q11 YoY (broadly in line withl the company’s entire exports in 1Q10; RMB2.7B). US sales for 4Q10 and 1Q11 were almost nonexistent as importers looked to other providers after the initiation of the trade case. Australian sales continue to drop significantly On October 28, 2010, Australia imposed an antidumping duty of 18.4% and a countervailing duty of 25.7% on certain imports of aluminum extrusion products from China, including those produced by Zhongwang. Despite 4Q10 sales remaining at the same level as 3Q10, 1Q11 revenue in the Australian market dropped significantly, most likely due to the impact of duties. We conservatively estimate that Australian revenue will increase slightly but not significantly improve over the rest of the year. Unit industrial processing fees will likely remain in-line with 4Q10 & 1Q11 levels The company uses a cost-plus pricing strategy and usually passes on the entire aluminum ingot cost to downstream customers, so processing fees are particularly relevant when forecasting the company’s profitability. After analyzing the impact of antidumping and countervailing investigations by the US and Australia, we estimate that the company’s average processing fee will be in line with the levels seen in 4Q10 & 1Q11 as sales will be largely skewed toward the domestic market, where processing fees are roughly one third of those in the export markets.
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 1: Unit industrial processing fees likely to be in-line with 4Q10 & 1Q11 RMB/tonne 25,000 20,000 15,000 10,000 5,000 0 2006
2007
Unit industrial fee
2008
2009
2010
2011E
Unit construction fee
2012E
2013E
Weight average fee
Source: Company, SWS Research
Higher ASP due to higher ingot costs. As we assume that processing fees will be relatively flat over the next few years, we believe higher aluminum ingot costs could push up the average selling price. Chart 2: ASP’s increasing due to higher ingot costs RMB/tonne 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006
2007
2008
Industrial
2009
2010
Construction
2011E
2012E
2013E
Weighted average
Source: Company, SWS Research
Sales volume growth is increasingly dependant on the domestic market. We have assumed higher export sales for 2011 than the annualized level of 1Q11. This implies that export volume will decline substantially – by 95% - to 5,600 tonnes. The domestic market will therefore have to absorb more of the company’s production. The company’s industrial products division is likely to produce 282,000 tonnes in 2011, down 12% YoY, while the company’s construction division will produce 17,000 tonnes as it gradually withdraws from the segment. We have assumed 15% growth in line with the domestic market growth rate, and forecast a sales volume rebound for the company’s industrial segment, with production at 325,000 tonnes and 373,000 tonnes in 2012 & 2013 respectively. Construction division output will gradually decline to 12,000 tonnes and 8,000 tonnes in 2012 & 2013 respectively. 本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。7
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 3: Domestic sales volume to compensate for sharp export decline '000 tonnes 600 500 400 300 200 100 0 2009
2010
Industrial domestic
2011E
2012E
Industrial export
2013E Construction
Source: Company, SWS Research
Details and future prospects of the new flat rolled project are unclear at present. The company will launch high-value-added flat rolled products in the future. We believe that the company will focus on plates and strips as there are already numerous competitors in the foil segment, while more than 400,000 tonnes of plates and strips are imported from abroad annually. We believe the company will target the importsubstitution market, and estimate that 2 or 3 years are required before the project enters the production phase. The company is expected to invest heavily in the project; we estimate it could require investment of RMB67B, assuming capacity of 500,000 tonnes. The GPM of these projects could be around 25-30%. However we are very cautious about the project’s prospects as domestic competitors (such as Southwest Aluminum, Asia Aluminum, Alcoa, Nannan Aluminum, etc) are building or planning similar projects which also target the import-substitution market.
Domestic industrial extrusion market to grow at 10~20% Aluminum is processed into different forms of semi-finished product using alternative technologies, while extrusion represents the largest share of total semis production. Extrusion production accounted for 47% of total Chinese aluminum semis production in 2009 (16.9M tonnes).
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 4: Extrusion represents the largest share of total semis production Foil 9%
Others 1%
Wire 12%
Extrusion 47%
Sheet/strip 31% Extrusion
Sheet/strip
Wire
Foil
Others
Source: CBI China, SWS Research
Extrusion demand in China is ~6.4M tonnes, and the industrial application market is at 2.3M tonnes. Chart 5: Industrial (non-construction) market stands at 2.3 million tonnes Consumer durable 5% Electronics 3%
Others 4%
Machinery & equipment 12%
Transportation 12%
Construction Machinery & equipment Consumer durable
Construction 63%
Transportation Electronics Others
Source: CBI China, CRU, SWS Research
Construction is the largest segment in both the Chinese and US markets consumption structure of extrusion products are similar in t We compared the consumption structure of extrusion products in both China and the US, and found that although construction is the largest segment in both markets the share attributable to industrial applications is much larger in the US, especially in the transportation, consumer durables and machinery & equipment sectors.
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October May 9,2011 12, 2010
Chart 6: Share of industrial applications much larger in the US Others 1%
Consumer durable 9% Electronics 2%
Construction 41%
Machinery & equipment 16%
Transportation 31% Construction Electronics
Transportation Consumer durable
Machinery & equipment Others
Source: CRU, SWS Research
We believe that with rapid development and upgrades in the Chinese manufacturing industry the consumption structure of extrusion products in China will gradually converge with that of the US, which means that the growth rate of industrial products will outpace that of construction products and also that the industrial segment will represent a larger share of the Chinese extrusion market. This trend has been observed in recent years. The shares of transportation, machinery & equipment, consumer durable and electrical sectors have increased by 4.6%, 5.1%, 1.5% & 0.7% respectively between 2001-2009, while construction’s share declined 9.1% over the same period. Chart 7: Growth of industrial segment outpaces that of construction 33%
35%
29%
30% 23%
25%
20%
22%
20% 15% 10% 5% 0% Construction
Transport
Machinery & equipment
Electronics
Consumer durable
2007-2010 demand CAGR by end-use Source: CRU, SWS Research
We forecast that transportation will continue to benefit from the rapid development of high-speed trains and intense use of aluminum in the automobile sector, with a CAGR of ~15-20% between 2010-2015.
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 8: Demand from transportation sector will realize a CAGR of 15~25% in the next 5 years 2000
50% 40%
1500
30% 1000 20% 500
10%
0
0% 2005
2006
2007
2008
2009
2010E 2011E 2012E
Transportation（kt，LHS）
YOY% (RHS)
Source: Ministry of Railways, SWS Research
We believe the machinery & equipment and consumer durable segments could grow by approximately 10-15% in the next 5 years.
1000
50%
800
40%
600
30%
400
20%
200
10%
Machinery & equipment （kt ，LHS ）
2012
2011
2010
2009
2008
2007
2006
2005
2004
2001
0% 2003
0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
70% 60% 50% 40% 30% 20% 10% 0% 2001
1400 1200 1000 800 600 400 200 0
Chart 10: Consumer durable will grow at around 12% in the next 5 years
2002
Chart 9: Machinery & equipment will grow at around 14% in the next 5 years
Consumer durable（kt，LHS）
Machinery & equipment YOY% (RHS)
Consumer durable YOY% (RHS)
Source: SWS Research
Source: SWS Research
In the aluminum extrusion market, Zhongwang is the largest domestic producer with a 5% share of total domestic production in 2007. Chart 11: Zhongwang is the largest domestic producer of extrusion products Zhongwang Asia Aluminum Guangdong Haomei Shandong Nanshan Guangdong Fenglu Shangdong Conglin Xingfa Aluminum Jiangyin Xinyu Fujian Minfa Guangdong Jianmei 0%
1%
Share of production
2%
3%
4%
5%
6%
of top Chinese aluminium extrusion producers
Source: Zhongwang IPO Prospectus, SWS Research
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Building Materials | Company Research
October May 9,2011 12, 2010
However, as Zhongwang used to export almost 50% of its industrial products, its domestic market share in this segment is only around 8%. As the company shifts its focus to the domestic market we estimate that it could boost domestic sales volume by 30% this year (compared with estimated market growth of 15%), thereby increasing its market share to 9%. It would achieve this through greater marketing efforts and its competitive edge in providing integrated solutions to clients. Chart 12: Zhongwang’s domestic industrial market share is 8% in 2009
Chart 13: Zhongwang could increase its domestic industrial market share to 9% in 2011 Zhongwang 9%
Zhongwang 8%
Others 92% Zhongwang
Others 91% Others
Zhongwang
Source: SWS Research estimate
Others
Source: SWS Research estimate
We think the company’s sales volume could grow in tandem with the overall market at 15% as it concentrates on the new flat rolled project over the next 2-3 years.
Earnings forecast We used conservative estimates for average processing fees and sales volumes for use in our earnings forecasts. Table 1: Processing fee & sales volume assumptions of our EPS estimates Key Assumptions Unit processing fee (RMB/t) Industrial domestic Industrial export Construction Sales volume (kt) Industrial domestic Industrial export Construction
2009 16,018 10,139 29,654 6,577 499 197 174 128
2010 16,617 9,656 30,561 4,754 347 197 122 28
2011E 9,727 9,560 32,089 4,992
2012E 10,127 9,847 33,693 4,892
299 277 6 17
337 318 6 12
2013E 10,525 10,142 35,378 5,039 381 366 7 8
Source: Company, SWS Research
Our cost structure assumptions are relatively prudent as we expect unit utility costs and other manufacturing material costs to grow by 10%, while unit labor costs will grow by 15%.
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October May 9,2011 12, 2010
Table 2: Cost assumptions of our EPS estimates COGS breakdown (RMBm) Purchase of major raw materials % total COGS
2006 4,097
2007 4,853
2008 6,784
2009 7,304
2010 5,271
2011E 5,029
2012E 6,240
2013E 7,794 84.1%
82.5%
82.2%
83.1%
85.3%
84.4%
80.8%
83.3%
Depreciation
244
246
304
312
369
434
497
562
% total COGS
4.9%
4.2%
3.7%
3.6%
5.9%
7.0%
6.6%
6.1%
Other manufacturing and packaging materials
243
310
424
566
453
428
531
661
% total COGS
4.9%
5.2%
5.2%
6.6%
7.2%
6.9%
7.1%
7.1%
Utilities
148
143
221
281
215
204
253
315
% total COGS
3.0%
2.4%
2.7%
3.3%
3.4%
3.3%
3.4%
3.4%
Labor % total COGS
40
49
61
75
60
60
77
101
0.8%
0.8%
0.7%
0.9%
1.0%
1.0%
1.0%
1.1%
Change in inventories
127
236
301
-59
-190
4
-182
-257
% total COGS
2.6%
4.0%
3.7%
-0.7%
-3.0%
0.1%
-2.4%
-2.8%
65
70
67
83
67
63
78
98
1.3%
1.2%
0.8%
1.0%
1.1%
1.0%
1.0%
1.1%
4,966
5,907
8,162
8,563
6,246
6,223
7,493
9,274
Other production costs % total COGS
Total Source: Company, SWS Research
As a result we have forecast a low level of sales revenue and net income in 2011 with a gradual recovery occurring in 2012, while gross margins are expected to fall from 40% to pre-2008 levels (~20%) to reflect the lower margin in the domestic market.
Chart 14: Gross margins expected to fall abruptly RMBm
50%
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
40% 30% 20% 10% 0% 2006
2007
2008
Net income
2009
2010
2011e 2012e 2013e
Revenue
Gross margin
Source: Company, SWS Research
Our sensitivity analysis suggests that FY11 earnings will be much more sensitive to domestic market dynamics. If the company performs well in the domestic market, earnings should be considerably improved from the low base level forecast for 2011. We believe that the key to success in the domestic market will be to avoid sharp declines in processing fees whilst increasing market share with high-end products.
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Building Materials | Company Research
October May 9,2011 12, 2010
Table 3: The company is much more sensitive to domestic market dynamics Industrial products % movement % change in EPS Domestic unit processing fee 5% 13.4% 10% 26.8% Export unit processing fee 5% 0.9% 10% 1.8% Domestic sales volume 5% 14.2% 10% 28.4% Export sales volume 5% 0.9% 10% 1.9% Source: Company, SWS Research
Valuation is fair We applied DCF, DDM & EV/EBITDA to the value of Zhongwang. As the company is currently undergoing a major turnaround we believe that an absolute valuation is more suitable than a PER valuation. It also has a track record of dividend distribution and a founding shareholder with control over 70% of the company’s shares, providing an incentive to maintain a high dividend distribution as long as the large net cash position does not deteriorate. We also feel that EV/EBITDA valuation is suitable for the company as it will not distort the resulting value when compared to similar companies with different financial structures. DCF valuation results in TP of HK$3.87 Our model applied a risk-free rate of 3.7%, an equity risk premium of 7%, and a beta of 0.83 to determine that the cost of equity is equal to 9.53%. Considering the company’s impending heavy investment in its new project, we used a debt-to-equity ratio of 60% and a cost of debt of 5.5%. With an effective tax rate of 25% we calculated our WACC as 7.5%. Our revenue estimate in the semi-explicit stage grew at 10% for 5 years, and then at 0% in the terminal stage, while EBIT margins gradually declined to 2% in the long term. Our price target for the end of 2011 was HK$3.87.. Table 4: DCF valuation: 3-year explicit stage, 5 year semi-explicit stage & Terminal stage million yuan
Stage 1( Explicit)
Stage 2(Semi-explicit) 2013E
2014E
Stage 3(Stable)
2011E
2012E
2015E
2016E
2017E
2018E
Revenue
7,606
9,227
11,263
12,390
13,628
14,991
16,490
18,140
18,140
2019E
EBIT
1,190
1,504
1,702
1,336
1,049
824
647
508
363
Minus：Tax Paid
228
313
370
334
262
206
162
127
91
NOPLAT
962
1,191
1,332
1,002
787
618
485
381
272
Plus：Depr. and amortisation in non-cash working capital
456
524
592
605
445
395
350
311
276
269
(622)
898
69
(10)
(10)
(10)
(10)
0 276
1,000
1,035
1,022
(67)
(59)
FCFF
149
1,302
4
2,632
1,326
1,098
912
761
272
Discounted amount
149
1,211
4
2,119
993
764
591
458
153
Minus：CAPEX
(1,093)
(85)
(75)
Source: Company, SWS Research
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Building Materials | Company Research
October May 9,2011 12, 2010
Table 5: DCF valuation results in TP of HK$3.87 million yuan，yuan，million shares
Value
Proportion
Fast and stable growth value
6,289
28%
Terminal value
2,033
9%
Core firm value
8,322
37%
0
0%
14,048
63%
0
0%
Total firm value
22,370
100%
Minus：Interest bearing debt
4,930
22%
0
0%
Equity value
17,440
78%
Share capital
5,406
Equity value per share (RMB)
3.23
Equity value per share (HK$)
3.87
Add：Non-core long-term investmen Bank balances and cash Held for trading investment
Minority interests
Source: Company, SWS Research
DDM valuation results in TP of HK$2.99 Our cost of equity, derived earlier, is 9.53%. We assumed a 25% payout ratio for the years 2011-2013, and 70% for 2014-2018 while net income was set to grow at only 6%. For the terminal stage (2019 onward), we assumed a 100% payout ratio with no growth. This resulted in a target price of HK$2.99 for the end of 2011. Table 6: DDM valuation results in TP of HK$2.99 Stage 1(Explicit)
million yuan,yuan
2011E
million shares Net profit
Stage 3(Semi-explicit) Eternal Growth
2012E
2013E
2014E
2018E
2019E
726
1,001
1,177
1,248
1,575
1,575
25.0%
25.0%
25.0%
70.0%
70.0%
100.0%
Dividend in cash
182
250
294
873
1,103
1,575
Discounted amount
182
229
245
665
583
Payout Ratio
Present value of each stage
655
Equity value
13,487
Share capital
5406
Equity value per share (RMB)
2.49
4094
8738
Source: Company, SWS Research
EV/EBITDA Valuation results in TP of HK$3.12 Considering the company’s significant net cash position, we believe EV/EBITDA is much more relevant than PER. We believe that Midas holdings (1021 HK) is an appropriate company to compare to Zhongwang as both are operating in the aluminum extrusion market, although Midas is focused on the high-margin passenger rail transportation sector. As Midas’ average unit processing fee is around RMB20,000/tonne (VAT 本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。15
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Building Materials | Company Research
October May 9,2011 12, 2010
inclusive), which is in line with the niche market average and much higher than Zhongwang’s RMB10,126/tonne in average, we feel it is reasonable to assume that Zhongwang should trade at a discount to Midas in terms of EV/EBITDA. We utilize 3x FY11 EBITDA (a 60% discount to Midas) to produce a price target of HK$3.12. The discount is justified by our forecasts that Zhongwang will be around 50% lower compared to Midas in terms of processing fees, 48% lower in terms of gross margin and 58% lower in terms of Return on equity. Table 7: 3x FY11 EBITDA results in TP of HK$3.12 PER
PBR
EV/EBITDA
2010 2011E 2012E
Gross margin %
ROE %
Company
2010 2011E 2012E
2010 2011E 2012E
2010 2011E 2012E
2010 2011E 2012E
Midas Holdings
14.2
11.7
9.9
1.3
1.3
1.2
10.0
7.4
6.2
34.3
34.7
34.8
10.5
11.2
12.2
China Zhongwang
20.5
14.9
12.7
1.0
1.0
0.9
1.1
3.5
2.4
40.6
18.2
18.8
16.7
4.8
6.2
Source: Company, Bloomberg SWS Research Note: we adjust Bloomberg consensus for Midas Holdings as we observe two significant outliners in consensus estimate
Consensus EV/EBITDA valuations for Midas Holdings are at a significantly low level compared to other players in the extrusion market. This is mainly due to the recent release of two significantly higher earnings estimates. The market appears to have not factored these in as the price of Midas shares has not rallied. As a result, we exclude these distorted earnings estimates to arrive at an adjusted 2011E EV/EBITDA of Midas Holdings at 7.4x. The three valuation methods provide a range of HK$2.99 to HK$3.87. The average of these figures – HK$3.33 – is our target price and is basically in line with the most recent closing price.
New investment project not included in analysis We have not factored in the potential impact of the new project likely to be commissioned in several years as details are presently lacking, and the project is unlikely to impact the share performance in the near term. We believe that capital investment for the project could be significant as market rumors suggest that the company is preparing to issue RMBdenominated debentures despite its RMB10B net cash position. Around 60% of the company’s value comes from this net cash position, and as such a future valuation of Zhongwang would depend heavily on whether it can create value by investing net cash, most likely in the aforementioned investment opportunity. As the details and prospects of the new investment project remain unclear, and key upside catalysts are lacking in the near term, our rating on the company is Neutral.
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Page 15
Building Materials | Company Research
October May 9,2011 12, 2010
Appendix Consolidated Income Statement million yuan
2009
2010
13,853
Cost of Sales Gross Profit
Revenue
Other Income
2011E
2012E
10,522
7,606
9,227
11,263
8,563
6,246
6,223
7,493
9,274
5,290
4,276
1,383
1,734
1,990
(183)
42
62
68
8
2013E
Distribution expenses
131
137
102
118
137
Adminstrative expenses
171
181
91
111
151
EBITDA
5,318
4,347
1,646
2,028
2,294
EBIT
4,988
3,958
1,190
1,504
1,702
279
298
278
252
223
Profit before tax
4,996
3,775
1,232
1,566
1,769
Income tax expense
1,188
881
228
313
370
Minority interests
0
0
0
0
0
Profit for the year
3,529
2,596
726
1,001
1,177
Finance Costs
Source: Company, SWS research
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Building Materials | Company Research
October May 9,2011 12, 2010
Appendix (Con’t) Consolidated Cash Flow Statement million yuan
2009
Profit before taxation
2010
2011E
2012E
2013E
4,717
3,477
954
1,315
1,547
Plus：Depr. and amortisation
330
389
456
524
592
Finance cost
327
363
334
304
274
0
0
0
0
0
Losses from investments Change in working capital
(1,079)
Others CF from operating activities CAPEX
1,794
(269)
623
(898)
17
150
(65)
(52)
(50)
3,355
4,955
1,183
2,400
1,096
824
1,638
1,000
1,035
1,022
57
53
51
(943)
(983)
(970)
Other CF from investing activities
(1,062)
2,415
CF from investing activities
(1,886)
777
Equity financing
8,392
Net change in liabilities
2,883
Dividend and interest paid Other CF from financing activities
0
0
(591)
(2,132)
(3,296)
(1,588)
(1,373)
(0)
(0)
0 0 (486)
50
0
0 (1,200) (524) 0
CF from financing activities
7,978
(2,179)
(3,455)
(486)
(1,724)
Net cash flow
9,448
3,553
(3,215)
932
(1,599)
FCFF
3,874
6,898
2,149
FCFE
6,429
5,945
(318)
3,373
2,048
3,069
574
Source: Company, SWS research
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Building Materials | Company Research
October May 9,2011 12, 2010
Appendix (Con’t) Consolidated Balance Sheet million yuan
2009
Current Assets
2010
2011E
2012E
2013E
19,604
19,360
16,321
17,613
16,862
13,710
17,263
14,048
14,979
13,380
2,657
1,143
1,323
1,501
2,092
862
938
934
1,116
1,373
2,375
16
16
17
17
0
0
0
0
0
4,671
4,912
5,456
5,968
6,398
0
43
43
43
43
24,423
24,640
22,173
23,977
23,630
Current Liabilities
7,170
4,086
1,861
2,844
2,794
Borrowings
4,626
2,132
0
0
0
Trade and other payables
2,112
1,814
1,722
2,704
2,654
0
0
0
0
0
3,077
4,980
5,122
5,125
3,878
10,248
9,066
6,912
7,896
6,623
0
0
0
0
0
14,176
15,574
15,261
16,081
17,007
475
475
475
475
475
10,553
11,106
11,255
11,462
11,703
3,148
3,993
3,531
4,144
4,830
24,423
24,640
22,173
23,977
23,630
Bank balances and cash Trade and other receivables Inventories Other current assets Long-term investment PP&E Intangible and other assets Total Assets
Other current liabilities Long-term liabilities Total Liabilities Minority Interests Shareholder Equity Share Capital Reserves Equity attributable Total Liabilities and equity Source: Company, SWS research
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Building Materials | Company Research
October May 9,2011 12, 2010
Appendix (Con’t) Key Financial Ratios 2009
2010
2011E
2012E
2013E
Earnings per share
0.65
0.48
0.13
0.19
0.22
Operating CF per share
0.62
0.92
2.49
5.06
2.31
Dividend per share
0.23
0.19
0.03
0.05
0.05
Net assets per share
2.62
2.88
2.82
2.97
3.15
ROIC
65.06
46.45
17.61
20.49
20.74
ROE
24.89
16.67
4.76
6.23
6.92
Gross profit margin
38.19
40.64
18.18
18.79
17.66
EBITDA Margin
38.39
41.32
21.64
21.98
20.36
EBIT Margin
36.01
37.62
15.64
16.31
15.11
Growth rate of Revenue(YoY)
22.98
(24.04)
(27.71)
21.31
22.07
Growth rate of Profit(YoY)
84.71
(26.44)
(72.02)
37.88
17.54
Debt-to-asset ratio
41.75
36.59
30.85
32.63
27.81
Turnover rate of net assets
0.98
0.68
0.50
0.57
0.66
Turnover rate of total assets
0.57
0.43
0.34
0.38
0.48
25.19
25.34
25.00
25.00
25.00
8.23
6.96
1.22
1.68
1.97
P/E
4.23
5.75
20.54
14.89
12.67
P/B
1.05
0.96
0.98
0.93
0.88
EV/Sale
0.64
0.45
0.76
0.53
0.47
EV/EBITDA
1.67
1.08
3.52
2.40
2.29
Ratios per share (yuan)
Key Operating Ratios(%)
Effective tax rate (%) Dividend yield (%) Valuation Ratios (X)
Source: Company, SWS research
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Building Materials | Company Research
October May 9,2011 12, 2010
Information Disclosure： The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst Jim Tang: Equity Analyst I am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the Company The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials. Introduction of Share Investment Rating Security Investment Rating： When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy： with a markup more than 20% better than that of the market； Outperform：With a markup 5% to 20% better than that of the market； Neutral： with a markup less than 5% better or worse than that of the market； Underperform： with a markup more than 5% worse than that of the market. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market； Neutral： Industry performs about the same as that of the whole market； Underweight：Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. HSCEI is the benchmark employed in this report.
Disclaimer： This report is to be used solely by the clients of SWS Research Co., Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report. This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.swsresearch.com). The clients may ask for follow-up explanations if they so wish. The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary. Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone. Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company. The Company possesses all copyrights of this report. The Company reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. All the trademarks, service marks and marks used herein are trademarks, service marks or marks of the Company, and no one shall have the right to use them at any circumstances without the prior consent of the Company. This report may be translated into different languages. The Company does not warrant that the translations are free from errors or discrepancies. This report is for distribution in Hong Kong only to persons who fall within the definition of professional investors whether under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (the “SFO”) or the Securities and Futures (Professional Investor) Rules (Chapter 571D of the laws of the Hong Kong under the SFO). This report is for distribution in the United Kingdom only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) order 2001 (as amended) (the “Order”) or (ii) are persons falling within Article 49(2)(a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc”) of the Order (All such persons together being referred to as “Relevant Persons”). This document is directed only at Relevant Persons. Other Persons who are not Relevant Persons must not act or rely upon this document or any of its contents. This report is for distribution in the United States only to institutional investors (subject to the conditions specified under Rule 15a-6 of the U.S. Securities Exchange Act of 1934) through Ticonderoga Securities LLC and/or its affiliates. Any US persons wishing to effect a transaction in any security mentioned in this report may only do so through Ticonderoga Securities LLC, telephone: +1 (212) 906-7500. Any failure to comply with these restrictions may constitute a violation of U.S. securities laws. For more information and important disclosures regarding the US distribution of our research, please visit http://www.ticonderogasecurities.com/swsresearch.aspx. Neither this report nor any copy of it may be taken or transmitted into Canada. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report the clients agree to be bound by the foregoing limitations.
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Page 1
Non-ferrous metals | Company Research
The Chinese View on China
June 3, 2011
China Zhongwang Holdings (1333 HK)
Neutral
Uncertainty lingers although export collapse priced in
Downgraded Market Data: May 9
Financial summary and valuation
Closing Price (HK$)
3.31
Price Target (HK$)
3.33
HSCEI
12977
HSCCI
4244
52-week High/Low (HK$)
6.44/3.09
Market Cap (USD Mn)
2558
Market Cap (HK$ Mn)
19895
Shares Outstanding (Mn)
5406
Exchange Rate (RMB-HK$)
1.20
Price Performance Chart:
Revenue (RMB million) YOY (%) Net income (RMB million) YOY (%) EPS (RMB) Diluted EPS (RMB) ROE (%) Debt/asset (%) Dividend Yield (%) P/E (x) P/B (x) EV/EBITDA (x)
2009 13852.71 22.98 3528.82 84.71 0.65 0.65 24.89 41.75 8.23 4.23 1.05 1.67
2010 10521.95 -24.04 2595.87 -26.44 0.48 0.48 16.67 36.59 6.96 5.75 0.96 1.08
2011E 7605.87 -27.71 726.24 -72.02 0.13 0.13 4.76 30.85 1.22 20.54 0.98 3.52
2012E 9226.96 21.31 1001.33 37.88 0.19 0.18 6.23 32.63 1.68 14.89 0.93 2.40
2013E 11236.21 22.07 1176.99 17.54 0.22 0.21 6.92 27.81 1.97 12.67 0.88 2.29
Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible debentures, stock options and warrants, were exercised. P/E is calculated as closing price divided by the respective year’s EPS.
投资要点： Source: Bloomberg
Analyst Jim Tang Didier Zheng [email protected]
Contact Daniel Huang (8621)23297818×7262
Related Reports "China Zhongwang (1333 HK)PVMC Model to demonstrate key drivers of higher marks-up as well as improved sale mixes" Jul 15,2009
双反调查严重影响了忠旺的盈利能力。由于 4 月 28 日美国国际贸易委员会作出行业损 害认定，美国商务部将据此发出反倾销令和反补贴令，公司实际已几乎失去美国市 场。澳大利亚于 2010 年 10 月 28 日确认了双反调查的结果，但税率远较美国为轻。我 们注意到公司去年四季度对澳大利亚出口似乎并未受澳大利亚双反的影响，与三季度 销售基本持平,然而一季度再次大幅下滑 76%。我们认为这固然有可能是因为公司需要 集中精力开发国内市场，但澳大利亚市场很可能也受到了双反调查的影响。我们假定 今年出口在一季度基础上有小幅回升，而国内销量则上升 30%以弥补出口市场的大幅 下滑。
我们认为去年四季度和今年一季度最适合用来预测公司未来的赢利能力，因为该期间 内，公司出口急剧下降，几乎失去美国市场，对澳大利亚出口也大幅下滑。公司对于 国内市场的依存度在这两个季度高达 87%和 95%。 平均单位加工费也跌至 2006 年以来 的最低点。我们相信除非公司能找到新的强劲出口市场（在贸易保护主义盛行的今天 殊非易事），公司将不得不更加依赖国内市场，忍受国内市场的激烈竞争和低加工 费，平均单位加工费将在去年四季度和今年一季度的低点附近徘徊，公司对国内市场 依存度也将维持在 90%左右（除非公司能找到其他大的出口市场）。在此基础上，我 们预计公司 2011 和 2012 年每股收益为人民币 0.13 和 0.19 元。
我们倾向于相信公司将大量投资于公司提到的未来发展方向：高附加值铝压延材项 The company or its affiliate may have equities of the listed corporation reviewed authorized by law. The company may also provide investment banking and consulting service to the listed corporation. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials. The clients shall have a comprehensive understanding of the disclosure in the last page.
本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。1
目。高附加值铝压延材主要包括铝中厚板、高端铝箔、高端铝带等，主要应用于航空 航天、船舶、轨道交通、汽车、机械设备、包装及电子等领域。我们估计该项目将需 要两到三年时间开始生产。我们相信，公司未来的价值将取决于这一项目的成败，因 为公司股价中有 60%价值来自于公司的净现金。但由于公司没有披露这一项目的细 节，并且我们认为该项目不确定性很大，我们暂时没有在盈利预测和估值中考虑这一 项目。
我们用现金流折现、股息折现和 EV/EBITDA 三种方法估值，得出目标价 3.33 港币， 对应 20.6 倍 2011 年每股收益和 15.0 倍 2012 年每股收益，对应公司股票最新收盘价 有 0.6%的升幅。我们使用比较谨慎的假设条件得到这一目标价。由于目前缺乏明确的 催化剂，并且公司高附加值铝压延材项目不确定性很大（我们认为公司目前正处于痛 苦的转型期），我们给予公司“中性”评级。
Building Materials | Company Research
October May 9,2011 12, 2010
Investment highlights: Antidumping and countervailing investigations will severely harm Zhongwang’s profitability The company has been barred from the US market after a recent determination by the US International Trade Commission. Exports to Australia also appear to have been negatively impacted by the investigations. We believe that 4Q10 & 1Q11 provide the most accurate basis for estimating the company’s future profitability These quarters saw a sharp decline in exports – there were almost no exports to the US – while the company’s average unit processing fee fell to its lowest level since 2006. We estimate that the company will now have to derive around 90% of its revenue from the domestic market, assuming it is unable to find other large export markets. As a result, Zhongwang will likely suffer from intense competition in the domestic market and the average unit processing fee will remain around the low levels seen in 4Q10 and 1Q11. On this basis, we forecast the company’s FY11 and FY12 EPS will be RMB0.13 and RMB0.19 respectively. We expect the company to invest heavily in high-value-added flat rolled products, consisting mainly of medium-to-high thickness plates, high-end foils and sheets. These products serve sectors such as aerospace, shipping vessels, railway transportation, automobile, machinery equipment, packaging and electronics. We estimate that it will take around 2-3 years for the project to start production. The success of these products is vital to the company’s future outlook. We believe that the company’s share price is currently fairly priced and that Zhongwang’s future value depends heavily on whether the new project creates or destroys value, as 60% of the stock’s value is derived from company’s significant net cash position. As the company has not disclosed further details about the new project and various uncertainties remain, we have not taken this project into account in our forecasts and valuation. Our DCF, DDM and EV/EBITDA valuation analysis resulted in a target price of HK$3.33 This price represents 20.6x FY11E P/E and 15.0x FY12E P/E, and implies 1% upside potential from the latest closing price. We believe our assumptions are prudent and feel that the company will experience a painful turnaround. Due to a lack of upside catalysts and ongoing uncertainty surrounding the company’s high-end rolled product projects, we have given the company a NEUTRAL rating.
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Building Materials | Company Research
October May 9,2011 12, 2010
Investment Case Valuation and Target Price China Zhongwang (1333 HK, Neutral, HK$3.33) After assessing the negative impact of antidumping and countervailing duties imposed after investigations into the firm’s practices in Australia and the US, our forecast for EPS in FY11 & 12 is RMB0.13 & 0.19 respectively. Our target price of HK$3.33 was determined using a blended valuation of DCF, DDM and EV/EBITDA analysis, and implies 20.6x FY11 earnings and 15.0x FY12 earnings. We feel that the company’s shares are fairly priced and have downgraded the company rating to Neutral due to lack of foreseeable upside catalysts and an uncertain future.
Key Assumptions We assume that the company’s sales results will continue the trend observed in 4Q10 and 1Q11, with at least 80% of company sales to remain domestic after the anti-dumping and anti-subsidy investigations in the US and Australia. Export sales will decline significantly to a negligible level while domestic sales volume will partially compensate for the loss of export markets with a 30% increase. Domestic sales are expected to then grow at 15% in 2012 and 2013, in line with the industry. Processing fees will remain at the low levels seen in the last two quarters as higher domestic dependency will inevitably result in much lower margins, in line with the domestic industry.
How we differ from consensus We believe that recent share price underperformance reflects the company’s difficulties in export markets, and that the market has now priced in the loss of these markets. However, we believe huge uncertainties still remain as we are cautious about the perspective of the new investment project as 60% of the share price comes from its net cash position. We think it is still risky to buy the share while concerns over the company’s future are always lingering.
Upside catalysts 1. Entry into other large export markets. 2. Earlier-than-expected initiation of the new project, favorable market conditions
Downside catalysts 1. Tight competition resulting in further declines in processing fees and sales volume in domestic markets. 2. Failure of the new project.
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Building Materials | Company Research
October May 9,2011 12, 2010
Table of Contents
Uncertain future ................................................5 Domestic industrial extrusion market to grow at 10~20%.................................................7 Earnings forecast ............................................11 Valuation is fair................................................13 Appendix ..........................................................16
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October May 9,2011 12, 2010
Chart & Table Chart 1: Unit industrial processing fees likely to be in-line with 4Q10 & 1Q11 ........... 6 Chart 2: ASP’s increasing due to higher ingot costs..................................................... 6 Chart 3: Domestic sales volume to compensate for sharp export decline.................. 7 Chart 4: Extrusion represents the largest share of total semis production ................ 8 Chart 5: Industrial (non-construction) market stands at 2.3 million tonnes ................ 8 Chart 6: Share of industrial applications much larger in the US .................................. 9 Chart 7: Growth of industrial segment outpaces that of construction ........................ 9 Chart 8: Demand from transportation sector will realize a CAGR of 15~25% in the next 5 years ..................................................................................................................... 10 Chart 9: Machinery & equipment will grow at around 14% in the next 5 years ......... 10 Chart 10: Consumer durable will grow at around 12% in the next 5 years................ 10 Chart 11: Zhongwang is the largest domestic producer of extrusion products........ 10 Chart 12: Zhongwang’s domestic industrial market share is 8% in 2009 .................. 11 Chart 13: Zhongwang could increase its domestic industrial market share to 9% in 2011 .................................................................................................................................. 11 Chart 14: Gross margins expected to fall abruptly ...................................................... 12 Table 1: Processing fee & sales volume assumptions of our EPS estimates ........... 11 Table 2: Cost assumptions of our EPS estimates........................................................ 12 Table 3: The company is much more sensitive to domestic market dynamics......... 13 Table 4: DCF valuation: 3-year explicit stage, 5 year semi-explicit stage & Terminal stage ................................................................................................................................ 13 Table 5: DCF valuation results in TP of HK$3.87.......................................................... 14 Table 6: DDM valuation results in TP of HK$2.99 ......................................................... 14 Table 7: 3x FY11 EBITDA results in TP of HK$3.12 ...................................................... 15
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Building Materials | Company Research
October May 9,2011 12, 2010
Uncertain future Loss of the US market appears inevitable At the end of March 2011, the US Department of Commerce imposed an antidumping duty of 33.28% and a countervailing duty of 374.15% on certain imports of aluminum extrusion products from China, including Zhongwang products. On April 28, 2011, the US International Trade Commission issued the final affirmative injury determination on imports of aluminum extrusion products from China (excluding finished heat sinks). As a result, the Department of Commerce will issue antidumping and countervailing duty orders on the relevant products. Zhongwang will therefore essentially lose access to the US market. Dalian local foreign trade authorities have also confirmed that two of Zhongwang’s export dealers ceased aluminum extrusion exports from the local bonded area, leading to an export reduction of US$474m in 1Q11 YoY (broadly in line withl the company’s entire exports in 1Q10; RMB2.7B). US sales for 4Q10 and 1Q11 were almost nonexistent as importers looked to other providers after the initiation of the trade case. Australian sales continue to drop significantly On October 28, 2010, Australia imposed an antidumping duty of 18.4% and a countervailing duty of 25.7% on certain imports of aluminum extrusion products from China, including those produced by Zhongwang. Despite 4Q10 sales remaining at the same level as 3Q10, 1Q11 revenue in the Australian market dropped significantly, most likely due to the impact of duties. We conservatively estimate that Australian revenue will increase slightly but not significantly improve over the rest of the year. Unit industrial processing fees will likely remain in-line with 4Q10 & 1Q11 levels The company uses a cost-plus pricing strategy and usually passes on the entire aluminum ingot cost to downstream customers, so processing fees are particularly relevant when forecasting the company’s profitability. After analyzing the impact of antidumping and countervailing investigations by the US and Australia, we estimate that the company’s average processing fee will be in line with the levels seen in 4Q10 & 1Q11 as sales will be largely skewed toward the domestic market, where processing fees are roughly one third of those in the export markets.
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 1: Unit industrial processing fees likely to be in-line with 4Q10 & 1Q11 RMB/tonne 25,000 20,000 15,000 10,000 5,000 0 2006
2007
Unit industrial fee
2008
2009
2010
2011E
Unit construction fee
2012E
2013E
Weight average fee
Source: Company, SWS Research
Higher ASP due to higher ingot costs. As we assume that processing fees will be relatively flat over the next few years, we believe higher aluminum ingot costs could push up the average selling price. Chart 2: ASP’s increasing due to higher ingot costs RMB/tonne 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006
2007
2008
Industrial
2009
2010
Construction
2011E
2012E
2013E
Weighted average
Source: Company, SWS Research
Sales volume growth is increasingly dependant on the domestic market. We have assumed higher export sales for 2011 than the annualized level of 1Q11. This implies that export volume will decline substantially – by 95% - to 5,600 tonnes. The domestic market will therefore have to absorb more of the company’s production. The company’s industrial products division is likely to produce 282,000 tonnes in 2011, down 12% YoY, while the company’s construction division will produce 17,000 tonnes as it gradually withdraws from the segment. We have assumed 15% growth in line with the domestic market growth rate, and forecast a sales volume rebound for the company’s industrial segment, with production at 325,000 tonnes and 373,000 tonnes in 2012 & 2013 respectively. Construction division output will gradually decline to 12,000 tonnes and 8,000 tonnes in 2012 & 2013 respectively. 本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。7
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October May 9,2011 12, 2010
Chart 3: Domestic sales volume to compensate for sharp export decline '000 tonnes 600 500 400 300 200 100 0 2009
2010
Industrial domestic
2011E
2012E
Industrial export
2013E Construction
Source: Company, SWS Research
Details and future prospects of the new flat rolled project are unclear at present. The company will launch high-value-added flat rolled products in the future. We believe that the company will focus on plates and strips as there are already numerous competitors in the foil segment, while more than 400,000 tonnes of plates and strips are imported from abroad annually. We believe the company will target the importsubstitution market, and estimate that 2 or 3 years are required before the project enters the production phase. The company is expected to invest heavily in the project; we estimate it could require investment of RMB67B, assuming capacity of 500,000 tonnes. The GPM of these projects could be around 25-30%. However we are very cautious about the project’s prospects as domestic competitors (such as Southwest Aluminum, Asia Aluminum, Alcoa, Nannan Aluminum, etc) are building or planning similar projects which also target the import-substitution market.
Domestic industrial extrusion market to grow at 10~20% Aluminum is processed into different forms of semi-finished product using alternative technologies, while extrusion represents the largest share of total semis production. Extrusion production accounted for 47% of total Chinese aluminum semis production in 2009 (16.9M tonnes).
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 4: Extrusion represents the largest share of total semis production Foil 9%
Others 1%
Wire 12%
Extrusion 47%
Sheet/strip 31% Extrusion
Sheet/strip
Wire
Foil
Others
Source: CBI China, SWS Research
Extrusion demand in China is ~6.4M tonnes, and the industrial application market is at 2.3M tonnes. Chart 5: Industrial (non-construction) market stands at 2.3 million tonnes Consumer durable 5% Electronics 3%
Others 4%
Machinery & equipment 12%
Transportation 12%
Construction Machinery & equipment Consumer durable
Construction 63%
Transportation Electronics Others
Source: CBI China, CRU, SWS Research
Construction is the largest segment in both the Chinese and US markets consumption structure of extrusion products are similar in t We compared the consumption structure of extrusion products in both China and the US, and found that although construction is the largest segment in both markets the share attributable to industrial applications is much larger in the US, especially in the transportation, consumer durables and machinery & equipment sectors.
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October May 9,2011 12, 2010
Chart 6: Share of industrial applications much larger in the US Others 1%
Consumer durable 9% Electronics 2%
Construction 41%
Machinery & equipment 16%
Transportation 31% Construction Electronics
Transportation Consumer durable
Machinery & equipment Others
Source: CRU, SWS Research
We believe that with rapid development and upgrades in the Chinese manufacturing industry the consumption structure of extrusion products in China will gradually converge with that of the US, which means that the growth rate of industrial products will outpace that of construction products and also that the industrial segment will represent a larger share of the Chinese extrusion market. This trend has been observed in recent years. The shares of transportation, machinery & equipment, consumer durable and electrical sectors have increased by 4.6%, 5.1%, 1.5% & 0.7% respectively between 2001-2009, while construction’s share declined 9.1% over the same period. Chart 7: Growth of industrial segment outpaces that of construction 33%
35%
29%
30% 23%
25%
20%
22%
20% 15% 10% 5% 0% Construction
Transport
Machinery & equipment
Electronics
Consumer durable
2007-2010 demand CAGR by end-use Source: CRU, SWS Research
We forecast that transportation will continue to benefit from the rapid development of high-speed trains and intense use of aluminum in the automobile sector, with a CAGR of ~15-20% between 2010-2015.
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Building Materials | Company Research
October May 9,2011 12, 2010
Chart 8: Demand from transportation sector will realize a CAGR of 15~25% in the next 5 years 2000
50% 40%
1500
30% 1000 20% 500
10%
0
0% 2005
2006
2007
2008
2009
2010E 2011E 2012E
Transportation（kt，LHS）
YOY% (RHS)
Source: Ministry of Railways, SWS Research
We believe the machinery & equipment and consumer durable segments could grow by approximately 10-15% in the next 5 years.
1000
50%
800
40%
600
30%
400
20%
200
10%
Machinery & equipment （kt ，LHS ）
2012
2011
2010
2009
2008
2007
2006
2005
2004
2001
0% 2003
0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
70% 60% 50% 40% 30% 20% 10% 0% 2001
1400 1200 1000 800 600 400 200 0
Chart 10: Consumer durable will grow at around 12% in the next 5 years
2002
Chart 9: Machinery & equipment will grow at around 14% in the next 5 years
Consumer durable（kt，LHS）
Machinery & equipment YOY% (RHS)
Consumer durable YOY% (RHS)
Source: SWS Research
Source: SWS Research
In the aluminum extrusion market, Zhongwang is the largest domestic producer with a 5% share of total domestic production in 2007. Chart 11: Zhongwang is the largest domestic producer of extrusion products Zhongwang Asia Aluminum Guangdong Haomei Shandong Nanshan Guangdong Fenglu Shangdong Conglin Xingfa Aluminum Jiangyin Xinyu Fujian Minfa Guangdong Jianmei 0%
1%
Share of production
2%
3%
4%
5%
6%
of top Chinese aluminium extrusion producers
Source: Zhongwang IPO Prospectus, SWS Research
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October May 9,2011 12, 2010
However, as Zhongwang used to export almost 50% of its industrial products, its domestic market share in this segment is only around 8%. As the company shifts its focus to the domestic market we estimate that it could boost domestic sales volume by 30% this year (compared with estimated market growth of 15%), thereby increasing its market share to 9%. It would achieve this through greater marketing efforts and its competitive edge in providing integrated solutions to clients. Chart 12: Zhongwang’s domestic industrial market share is 8% in 2009
Chart 13: Zhongwang could increase its domestic industrial market share to 9% in 2011 Zhongwang 9%
Zhongwang 8%
Others 92% Zhongwang
Others 91% Others
Zhongwang
Source: SWS Research estimate
Others
Source: SWS Research estimate
We think the company’s sales volume could grow in tandem with the overall market at 15% as it concentrates on the new flat rolled project over the next 2-3 years.
Earnings forecast We used conservative estimates for average processing fees and sales volumes for use in our earnings forecasts. Table 1: Processing fee & sales volume assumptions of our EPS estimates Key Assumptions Unit processing fee (RMB/t) Industrial domestic Industrial export Construction Sales volume (kt) Industrial domestic Industrial export Construction
2009 16,018 10,139 29,654 6,577 499 197 174 128
2010 16,617 9,656 30,561 4,754 347 197 122 28
2011E 9,727 9,560 32,089 4,992
2012E 10,127 9,847 33,693 4,892
299 277 6 17
337 318 6 12
2013E 10,525 10,142 35,378 5,039 381 366 7 8
Source: Company, SWS Research
Our cost structure assumptions are relatively prudent as we expect unit utility costs and other manufacturing material costs to grow by 10%, while unit labor costs will grow by 15%.
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October May 9,2011 12, 2010
Table 2: Cost assumptions of our EPS estimates COGS breakdown (RMBm) Purchase of major raw materials % total COGS
2006 4,097
2007 4,853
2008 6,784
2009 7,304
2010 5,271
2011E 5,029
2012E 6,240
2013E 7,794 84.1%
82.5%
82.2%
83.1%
85.3%
84.4%
80.8%
83.3%
Depreciation
244
246
304
312
369
434
497
562
% total COGS
4.9%
4.2%
3.7%
3.6%
5.9%
7.0%
6.6%
6.1%
Other manufacturing and packaging materials
243
310
424
566
453
428
531
661
% total COGS
4.9%
5.2%
5.2%
6.6%
7.2%
6.9%
7.1%
7.1%
Utilities
148
143
221
281
215
204
253
315
% total COGS
3.0%
2.4%
2.7%
3.3%
3.4%
3.3%
3.4%
3.4%
Labor % total COGS
40
49
61
75
60
60
77
101
0.8%
0.8%
0.7%
0.9%
1.0%
1.0%
1.0%
1.1%
Change in inventories
127
236
301
-59
-190
4
-182
-257
% total COGS
2.6%
4.0%
3.7%
-0.7%
-3.0%
0.1%
-2.4%
-2.8%
65
70
67
83
67
63
78
98
1.3%
1.2%
0.8%
1.0%
1.1%
1.0%
1.0%
1.1%
4,966
5,907
8,162
8,563
6,246
6,223
7,493
9,274
Other production costs % total COGS
Total Source: Company, SWS Research
As a result we have forecast a low level of sales revenue and net income in 2011 with a gradual recovery occurring in 2012, while gross margins are expected to fall from 40% to pre-2008 levels (~20%) to reflect the lower margin in the domestic market.
Chart 14: Gross margins expected to fall abruptly RMBm
50%
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
40% 30% 20% 10% 0% 2006
2007
2008
Net income
2009
2010
2011e 2012e 2013e
Revenue
Gross margin
Source: Company, SWS Research
Our sensitivity analysis suggests that FY11 earnings will be much more sensitive to domestic market dynamics. If the company performs well in the domestic market, earnings should be considerably improved from the low base level forecast for 2011. We believe that the key to success in the domestic market will be to avoid sharp declines in processing fees whilst increasing market share with high-end products.
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Building Materials | Company Research
October May 9,2011 12, 2010
Table 3: The company is much more sensitive to domestic market dynamics Industrial products % movement % change in EPS Domestic unit processing fee 5% 13.4% 10% 26.8% Export unit processing fee 5% 0.9% 10% 1.8% Domestic sales volume 5% 14.2% 10% 28.4% Export sales volume 5% 0.9% 10% 1.9% Source: Company, SWS Research
Valuation is fair We applied DCF, DDM & EV/EBITDA to the value of Zhongwang. As the company is currently undergoing a major turnaround we believe that an absolute valuation is more suitable than a PER valuation. It also has a track record of dividend distribution and a founding shareholder with control over 70% of the company’s shares, providing an incentive to maintain a high dividend distribution as long as the large net cash position does not deteriorate. We also feel that EV/EBITDA valuation is suitable for the company as it will not distort the resulting value when compared to similar companies with different financial structures. DCF valuation results in TP of HK$3.87 Our model applied a risk-free rate of 3.7%, an equity risk premium of 7%, and a beta of 0.83 to determine that the cost of equity is equal to 9.53%. Considering the company’s impending heavy investment in its new project, we used a debt-to-equity ratio of 60% and a cost of debt of 5.5%. With an effective tax rate of 25% we calculated our WACC as 7.5%. Our revenue estimate in the semi-explicit stage grew at 10% for 5 years, and then at 0% in the terminal stage, while EBIT margins gradually declined to 2% in the long term. Our price target for the end of 2011 was HK$3.87.. Table 4: DCF valuation: 3-year explicit stage, 5 year semi-explicit stage & Terminal stage million yuan
Stage 1( Explicit)
Stage 2(Semi-explicit) 2013E
2014E
Stage 3(Stable)
2011E
2012E
2015E
2016E
2017E
2018E
Revenue
7,606
9,227
11,263
12,390
13,628
14,991
16,490
18,140
18,140
2019E
EBIT
1,190
1,504
1,702
1,336
1,049
824
647
508
363
Minus：Tax Paid
228
313
370
334
262
206
162
127
91
NOPLAT
962
1,191
1,332
1,002
787
618
485
381
272
Plus：Depr. and amortisation in non-cash working capital
456
524
592
605
445
395
350
311
276
269
(622)
898
69
(10)
(10)
(10)
(10)
0 276
1,000
1,035
1,022
(67)
(59)
FCFF
149
1,302
4
2,632
1,326
1,098
912
761
272
Discounted amount
149
1,211
4
2,119
993
764
591
458
153
Minus：CAPEX
(1,093)
(85)
(75)
Source: Company, SWS Research
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October May 9,2011 12, 2010
Table 5: DCF valuation results in TP of HK$3.87 million yuan，yuan，million shares
Value
Proportion
Fast and stable growth value
6,289
28%
Terminal value
2,033
9%
Core firm value
8,322
37%
0
0%
14,048
63%
0
0%
Total firm value
22,370
100%
Minus：Interest bearing debt
4,930
22%
0
0%
Equity value
17,440
78%
Share capital
5,406
Equity value per share (RMB)
3.23
Equity value per share (HK$)
3.87
Add：Non-core long-term investmen Bank balances and cash Held for trading investment
Minority interests
Source: Company, SWS Research
DDM valuation results in TP of HK$2.99 Our cost of equity, derived earlier, is 9.53%. We assumed a 25% payout ratio for the years 2011-2013, and 70% for 2014-2018 while net income was set to grow at only 6%. For the terminal stage (2019 onward), we assumed a 100% payout ratio with no growth. This resulted in a target price of HK$2.99 for the end of 2011. Table 6: DDM valuation results in TP of HK$2.99 Stage 1(Explicit)
million yuan,yuan
2011E
million shares Net profit
Stage 3(Semi-explicit) Eternal Growth
2012E
2013E
2014E
2018E
2019E
726
1,001
1,177
1,248
1,575
1,575
25.0%
25.0%
25.0%
70.0%
70.0%
100.0%
Dividend in cash
182
250
294
873
1,103
1,575
Discounted amount
182
229
245
665
583
Payout Ratio
Present value of each stage
655
Equity value
13,487
Share capital
5406
Equity value per share (RMB)
2.49
4094
8738
Source: Company, SWS Research
EV/EBITDA Valuation results in TP of HK$3.12 Considering the company’s significant net cash position, we believe EV/EBITDA is much more relevant than PER. We believe that Midas holdings (1021 HK) is an appropriate company to compare to Zhongwang as both are operating in the aluminum extrusion market, although Midas is focused on the high-margin passenger rail transportation sector. As Midas’ average unit processing fee is around RMB20,000/tonne (VAT 本研究报告仅通过邮件提供给 申银万国香港公司 Daniel Weil([email protected]) 使用。15
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October May 9,2011 12, 2010
inclusive), which is in line with the niche market average and much higher than Zhongwang’s RMB10,126/tonne in average, we feel it is reasonable to assume that Zhongwang should trade at a discount to Midas in terms of EV/EBITDA. We utilize 3x FY11 EBITDA (a 60% discount to Midas) to produce a price target of HK$3.12. The discount is justified by our forecasts that Zhongwang will be around 50% lower compared to Midas in terms of processing fees, 48% lower in terms of gross margin and 58% lower in terms of Return on equity. Table 7: 3x FY11 EBITDA results in TP of HK$3.12 PER
PBR
EV/EBITDA
2010 2011E 2012E
Gross margin %
ROE %
Company
2010 2011E 2012E
2010 2011E 2012E
2010 2011E 2012E
2010 2011E 2012E
Midas Holdings
14.2
11.7
9.9
1.3
1.3
1.2
10.0
7.4
6.2
34.3
34.7
34.8
10.5
11.2
12.2
China Zhongwang
20.5
14.9
12.7
1.0
1.0
0.9
1.1
3.5
2.4
40.6
18.2
18.8
16.7
4.8
6.2
Source: Company, Bloomberg SWS Research Note: we adjust Bloomberg consensus for Midas Holdings as we observe two significant outliners in consensus estimate
Consensus EV/EBITDA valuations for Midas Holdings are at a significantly low level compared to other players in the extrusion market. This is mainly due to the recent release of two significantly higher earnings estimates. The market appears to have not factored these in as the price of Midas shares has not rallied. As a result, we exclude these distorted earnings estimates to arrive at an adjusted 2011E EV/EBITDA of Midas Holdings at 7.4x. The three valuation methods provide a range of HK$2.99 to HK$3.87. The average of these figures – HK$3.33 – is our target price and is basically in line with the most recent closing price.
New investment project not included in analysis We have not factored in the potential impact of the new project likely to be commissioned in several years as details are presently lacking, and the project is unlikely to impact the share performance in the near term. We believe that capital investment for the project could be significant as market rumors suggest that the company is preparing to issue RMBdenominated debentures despite its RMB10B net cash position. Around 60% of the company’s value comes from this net cash position, and as such a future valuation of Zhongwang would depend heavily on whether it can create value by investing net cash, most likely in the aforementioned investment opportunity. As the details and prospects of the new investment project remain unclear, and key upside catalysts are lacking in the near term, our rating on the company is Neutral.
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October May 9,2011 12, 2010
Appendix Consolidated Income Statement million yuan
2009
2010
13,853
Cost of Sales Gross Profit
Revenue
Other Income
2011E
2012E
10,522
7,606
9,227
11,263
8,563
6,246
6,223
7,493
9,274
5,290
4,276
1,383
1,734
1,990
(183)
42
62
68
8
2013E
Distribution expenses
131
137
102
118
137
Adminstrative expenses
171
181
91
111
151
EBITDA
5,318
4,347
1,646
2,028
2,294
EBIT
4,988
3,958
1,190
1,504
1,702
279
298
278
252
223
Profit before tax
4,996
3,775
1,232
1,566
1,769
Income tax expense
1,188
881
228
313
370
Minority interests
0
0
0
0
0
Profit for the year
3,529
2,596
726
1,001
1,177
Finance Costs
Source: Company, SWS research
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Appendix (Con’t) Consolidated Cash Flow Statement million yuan
2009
Profit before taxation
2010
2011E
2012E
2013E
4,717
3,477
954
1,315
1,547
Plus：Depr. and amortisation
330
389
456
524
592
Finance cost
327
363
334
304
274
0
0
0
0
0
Losses from investments Change in working capital
(1,079)
Others CF from operating activities CAPEX
1,794
(269)
623
(898)
17
150
(65)
(52)
(50)
3,355
4,955
1,183
2,400
1,096
824
1,638
1,000
1,035
1,022
57
53
51
(943)
(983)
(970)
Other CF from investing activities
(1,062)
2,415
CF from investing activities
(1,886)
777
Equity financing
8,392
Net change in liabilities
2,883
Dividend and interest paid Other CF from financing activities
0
0
(591)
(2,132)
(3,296)
(1,588)
(1,373)
(0)
(0)
0 0 (486)
50
0
0 (1,200) (524) 0
CF from financing activities
7,978
(2,179)
(3,455)
(486)
(1,724)
Net cash flow
9,448
3,553
(3,215)
932
(1,599)
FCFF
3,874
6,898
2,149
FCFE
6,429
5,945
(318)
3,373
2,048
3,069
574
Source: Company, SWS research
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Appendix (Con’t) Consolidated Balance Sheet million yuan
2009
Current Assets
2010
2011E
2012E
2013E
19,604
19,360
16,321
17,613
16,862
13,710
17,263
14,048
14,979
13,380
2,657
1,143
1,323
1,501
2,092
862
938
934
1,116
1,373
2,375
16
16
17
17
0
0
0
0
0
4,671
4,912
5,456
5,968
6,398
0
43
43
43
43
24,423
24,640
22,173
23,977
23,630
Current Liabilities
7,170
4,086
1,861
2,844
2,794
Borrowings
4,626
2,132
0
0
0
Trade and other payables
2,112
1,814
1,722
2,704
2,654
0
0
0
0
0
3,077
4,980
5,122
5,125
3,878
10,248
9,066
6,912
7,896
6,623
0
0
0
0
0
14,176
15,574
15,261
16,081
17,007
475
475
475
475
475
10,553
11,106
11,255
11,462
11,703
3,148
3,993
3,531
4,144
4,830
24,423
24,640
22,173
23,977
23,630
Bank balances and cash Trade and other receivables Inventories Other current assets Long-term investment PP&E Intangible and other assets Total Assets
Other current liabilities Long-term liabilities Total Liabilities Minority Interests Shareholder Equity Share Capital Reserves Equity attributable Total Liabilities and equity Source: Company, SWS research
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Appendix (Con’t) Key Financial Ratios 2009
2010
2011E
2012E
2013E
Earnings per share
0.65
0.48
0.13
0.19
0.22
Operating CF per share
0.62
0.92
2.49
5.06
2.31
Dividend per share
0.23
0.19
0.03
0.05
0.05
Net assets per share
2.62
2.88
2.82
2.97
3.15
ROIC
65.06
46.45
17.61
20.49
20.74
ROE
24.89
16.67
4.76
6.23
6.92
Gross profit margin
38.19
40.64
18.18
18.79
17.66
EBITDA Margin
38.39
41.32
21.64
21.98
20.36
EBIT Margin
36.01
37.62
15.64
16.31
15.11
Growth rate of Revenue(YoY)
22.98
(24.04)
(27.71)
21.31
22.07
Growth rate of Profit(YoY)
84.71
(26.44)
(72.02)
37.88
17.54
Debt-to-asset ratio
41.75
36.59
30.85
32.63
27.81
Turnover rate of net assets
0.98
0.68
0.50
0.57
0.66
Turnover rate of total assets
0.57
0.43
0.34
0.38
0.48
25.19
25.34
25.00
25.00
25.00
8.23
6.96
1.22
1.68
1.97
P/E
4.23
5.75
20.54
14.89
12.67
P/B
1.05
0.96
0.98
0.93
0.88
EV/Sale
0.64
0.45
0.76
0.53
0.47
EV/EBITDA
1.67
1.08
3.52
2.40
2.29
Ratios per share (yuan)
Key Operating Ratios(%)
Effective tax rate (%) Dividend yield (%) Valuation Ratios (X)
Source: Company, SWS research
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Information Disclosure： The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst Jim Tang: Equity Analyst I am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the Company The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials. Introduction of Share Investment Rating Security Investment Rating： When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy： with a markup more than 20% better than that of the market； Outperform：With a markup 5% to 20% better than that of the market； Neutral： with a markup less than 5% better or worse than that of the market； Underperform： with a markup more than 5% worse than that of the market. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market； Neutral： Industry performs about the same as that of the whole market； Underweight：Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. HSCEI is the benchmark employed in this report.
Disclaimer： This report is to be used solely by the clients of SWS Research Co., Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report. This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.swsresearch.com). The clients may ask for follow-up explanations if they so wish. The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. 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