Investment Highlights:
Focusing on four core businesses based on its hybrid powerstrategy, Corun is likely to embrace the uptick for both businessclimate and profit growth. As a leading manufacturer of advancedenergy storage materials and high-performing power cells, Corun’s corebusiness spans across four major fields: (i) energy storage materials; (ii)premium civilian-use batteries; (iii) energy conserving and AEV powerpack; and (iv) HEV power train system. Thanks to policy tailwind androbust demand, HEV (hybrid electric vehicle) is likely to grow rapidly ondomestic market. As a leading maker of nickel–metal hydride battery,(NiMH power pack) and trailblazer in the field of CHS power train, theCompany is likely to benefit from the upbeat climate for the sector(thanks to policy tailwind and robust demand) and embrace the upwardinflection point for profit growth.
HEV to embrace exponential growth on policy tailwind. According toIEA, the global HEV segment posted a CAGR of 18.7% between 2008and 2014. In 2015, the State Council included energy conservation andAEV as two of the ten major directions in Made in China 2025, withsupportive measures as following: 1) progressive targets on reducedfuel consumption; 2) AEV purchase subsidies, tax break for vehiclepurchase etc. On Oct 27 2015, locally manufactured Toyota Levin andCorolla (dual engine HEVs) were launched in China. The HEV segmentis expected to embrace exponential growth in China.
Improving profitability on the civilian use batteries segment, powercells to embrace solid development opportunities. The Companymanufactures NiMH batteries for both civilian use and poweringvehicles. In terms of NiMH batteries for civilian use, the Company issupplier for high-end overseas clients such as iRobot. Its revenue andprofit from this business has increased remarkably on a growing orderbook. In terms of NiMH power batteries, Corun mainly manufacturerstwo kinds of products: battery plates and monomers which are mainlysupplied to Toyota, one of the major HEV manufacturers. The Companyhas already began batched supply of power cell plates to Toyota, with30,000 sets of such products forecast to be shipped for full-year 2015E.Toyota plans to launch a series of HEV models by 2020 with a totalsales volume of 1.5mn p.a. and terminate its manufacturing ofconventional (ICE) vehicles by 2050. Hence, that the carmaker’sdemand for NiMH batteries will soar, which would bring opportunity forCorun’s power cell business.
Steaming ahead with its CHS project, hybrid power coachesbusiness yielding encouraging results. R&D for CHS, Corun’s JVproject with Geely has entered a critical stage. The Company is alsoengaged in negotiations with a dozen or so auto manufacturers.
Recently, its proprietarily developed technology (hybrid power andcontrol systems) has passed review by a panel of experts and been regarded to have reachedinternational advanced levels. Tests on assembled vehicles indicate that Corun’s technology has metChina Emission Standards (V). As such, future development of its hybrid power train business is worthanticipating. In addition, Corun has witnessed superior outcomes on emission reduction from its hybridpower public coaches business (demonstration and market development), with projects kicked off inFoshan and Shanghai as well as expanding into other cities. Development of this business segment isdriving sales of Corun’s NiMH power pack and power train systems, unleashing potential for its futuregrowth.
Potential risks. 1) threats to orders from and cooperation with Toyota; 2) troublesome progress of theCompany’s extending CHS power train products; and 3) slow adoption of HEV vehicles in China.
Earnings forecast, valuation and investment rating. We forecast the Company’s 2015/16/17E netprofit to be Rmb68mn/201mn/379mn, translating into EPS of Rmb0.07/0.22/0.41 (PE of 250/85/45x).The HEV vehicle segment is likely to post exponential growth in the future so that the Company isexpected to embrace uptick for both business climate and operating profit of its NiMH power packbusiness. We apply 50x PE to its NiMH power pack business (equivalent to a market cap of Rmb10bn) inreference to valuations of Guoxuan High-Tech (002074) and Do-Fluoride Chemicals (002407),yardsticks for lithium-ion power battery makers. We forecast its market cap of power train business atRmb5bn with two acquisitions (Zhongshan Broad-ocean Motor (002249)’s acquisition of ShanghaiEDrive Co., Ltd. And Yantai Zhenghai Magnetic Material (300224)’s acquisition of Dajun Tech) asreferences. Its AEV operation platform is project to be worth Rmb5bn in terms of market cap. All in all, wederive a price of Rmb21.6/share with the SOTP method. Initiate OVERWEIGHT.
