Investment Highlights
Telecommunications business: Die casting products seeingsteady growth while the market for filters will expand rapidly. TheCompany has made its way into the list of suppliers for renowned mobilecommunication equipment manufacturers including Nokia SiemensNetworks, Huawei, Alcatel-Lucent and Ericsson. With the constructionof 4G base stations around the world and the advancement of 5Gnetwork technology, the Company is well-positioned to maintain steadygrowth for its aluminum alloy structures segment and expand itscustomer base for filters and other RF (radio frequency) components,bringing a significant boost to its margins. Overall we expect itscommunications business to maintain profit growth of 30-40% over thenext 2-3 years.
Consumer electronics business: The shipment of tablet cases islikely to rise sharply, and die casting phone shells could become akey earnings driver. The Company has established a completeprecision aluminum alloy processing and manufacturing systemcovering the full process from precision casting and systematic finishingto precision CNC (computer numerical control) machining. Moreover, ithas also solved the technical difficulty of anodizing die-cast aluminumand achieved small batch production. Based on the order intake of theCompany so far, we expect the shipment of its tablet cases to surge andbring revenue of over Rmb500mn in 2016. The Company is now scalingup its production of die casting phone cases, the yield of which remainslow for now. If the yield could improve to 70% in the future driven bytechnological advancement, the die casting process will cost notablyless than the CNC processing technology. Assuming an ASP (averageselling price) of Rmb100, a net profit margin of 15% and 2017Eshipment of 20mn units, this will translate into net profit of Rmb300mn.
Auto lightweight products: The Company is expanding itspresence in auto lightweighting solutions, a concept about buildingvehicles that are less heavy to achieve better fuel efficiency. With thegovernment stepping up efforts in energy-saving and environmentalprotection, auto lightweighting has become an irreversible trend. As aleading manufacturer of precision aluminum alloy structures, theCompany has been quick in capturing the trend and started building itspresence in this segment. Its major products including casings ofhandbrake lever, chambers of auto A/C cooling system, motor shellsand seat belt reels are now adopted by many domestic and overseasautomakers. In our view, auto lightweight products are likely to becomea major growth catalyst for the company as auto lightweighting gainsmomentum.
Venture into the defense business: Growth prospects aresupported by both organic and inorganic expansion. ConsideringChina’s supportive stance toward civilian-military integration and the Company’s relevance, we believe thecompany will likely venture into the defense sector by capitalizing on its strengths in the die casting andtelecom segments. Its presence in the defense sector could be gradually cemented by recent actions,including the strategic partnership agreement with the Management Committee of Xi’an Yanliang NationalAviation Hi-tech Industrial Base in April 2015 to establish an M&A fund, and the letter of intent on equitytransfer and capital injection signed with Xi’an Xinghang Aviation Manufacturing Co., Ltd in January 2016.We expect the Company to quickly expand into the military products segment through continuous M&As.
Potential risks: Lower-than-expected yield of aluminum die-casting phone cases; and disappointingprogress in expanding its operations into the military and defense industry.
Earnings forecast, valuation and rating: We estimate the Company’s 2016-18E EPS atRmb0.38/0.60/0.72, implying 3-year PEs of 26x/16x/14x based on its current share price of Rmb9.74.Considering the rapid expansion of its core operations, imminent breakthroughs in the consumerelectronics area, as well as increased exposure to the defense fields, we reiterate our BUY call on theCompany with a target price of Rmb19.
