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Taiwan Equity Analysis
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| Title |
• | Minth Group (0425.HK) OUTPERFORM: Auto/Components | |
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• | Initiate Coverage on China Paradise (0503.HK) | |
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• | Yorkey Optical (2788.HK; Outperform) | |
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• | Ju Teng (3336 HK; Outperform): FEB 8, 2006) | |
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• | Shanghai Electric OUTPERFORM | |
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• | Jiansu Expressway: Outperform | |
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| More Titles | Page 1 | |
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| Title: | Minth Group (0425.HK) OUTPERFORM: Auto/Components |
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| Download File: | 0425 HK Mnth Group 060616--- SinoPac.pdf  |
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| Summary: | Initiate Coverage: In the pole position
Riding strong passenger car demand. Minth Group is China’s largest
producer of structural and decorative parts for passenger cars (10% market
share). This places it in a coveted position to ride the strong sales of
passenger cars in China, which we forecast a 22% CAGR for FY06-08, driven
by the extremely low car ownership rate (more than 30x less than Japan’s)
and increasing affluence/affordability. We forecast Minth’s FY06-08 top-line
growth will continue to outpace passenger car sales by leveraging off its
extensive coverage of the top 9 global automakers (81% of Minth’s total
revenue), strong R&D and pole market position.
Forecasts margin to trend down, but remain at an attractive level. Minth
managed to lower COGS from 66% of total sales in FY02 to 60% for FY05. Its
FY04-05 gross margin of 40% is nearly double archrival Lingyun’s 23% and
16% respectively, we believe, attributable to higher margin product mix, the
ability to apply cheaper alternative raw materials and effective costs control.
Nevertheless, we conservatively forecast FY06 gross margin will fall to 35%
and to 32.5% for FY07-08, factoring in the likelihood of increasing pricing
pressure from auto assemblers and rising raw material costs. But even 35%
gross margin would still be higher than the current sector average of 30.7%.
Risks and concerns. The NDRC warns if left unchecked, overcapacity in
China’s auto sector could reach 10mn units by 2010. With more than 90%
business in China, Minth faces considerable risk if auto sales substantially
slow. Fluctuation in key raw material prices is another concern, as these make
up 68% of COGS. Unification of tax rate is a further worry. Our sensitivity
analysis shows FY05 EPS would have been slashed by 20% assuming the
unified rate is 24%. But we expect a 2-3 year transition period and would not
hit its bottom line until 2011, assuming implementation in 08.
Good entry point. The counter has declined 28% from its peak of HK$7.00 in
April. We believe the current price level is a good entry point. The stock is
trading at 14.2x and 12.1x FY06-07F PER respectively, slightly higher than
average of peer companies of 12.8x and 10.5x respectively. But we believe an
even bigger valuation premium is justified for Minth given the group’s strong
fundamentals, as its ROE, ROA, gross margin and net margin are consistently
higher than sector averages. The group’s exceptional growth momentum and
No.1 position in the core products segment also imply that a greater valuation
premium is warranted. We derived a target price of HK$6.00, which translates
into 16.8x FY06F PER and represents 19% upside potential. Therefore, we
initiate coverage with an Outperform rating.
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| Date: | 2006/06/16 |
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| Author: | Wendy Huang, CFA |
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