Investment Highlights
Leading domestic manufacturer of smart power controls venturinginto intelligent motors and control systems. Yunyi is primarilyengaged in the manufacturing of automotive rectifiers, regulators anddiodes. Its clientele includes local carmakers such as SAIC Roewe,Geely and Jianghuai Automobile. Meanwhile, it is also cutting into thesupply chains of mid to high-end JV brands including Dongfeng Nissanand Chang’an Ford. Yunyi has maintained a 20%-plus domestic marketshare and set up a subsidiary (52% stake) in 2013 for its foray into“intelligent automotive motors and control systems”.
Intelligent motor and control system products entering trialproduction stage, and are expected to become new profitdrivers.Automotive electronics will take the lead in the race ofmanufacturing smart vehicles. Yunyi’s smart motor products mainlyinclude motors for windscreen wipers, blowers, seats, windows, etc.The Company has designed capacity of 1.1mn units of smart motorsand over 8mn sets of related core components, translating into totaloutput of Rmb400mn. With the projects entering trial production stage,we believe they will break even in 2016E and start to generate profitsfrom 2017E onwards.
Private placement to fund its heavy-duty diodes capacityexpansion and AEV motors projects, which will significantly boost itsearnings once completed. Yunyi is looking to raise Rmb550mn to fundits: (i) heavy-duty diodes capacity expansion project (Rmb350mn):construction cycle of 18 months and annual capacity of 230mn units.The incremental capacity will bring in extra revenue and total profit ofRmb580mn and Rmb120mn p.a. (ii) industrialization of motors andcontrol systems for AEVs (Rmb120mn): construction cycle of 18 monthsand annual capacity of 36,000 units. This project will generate averageincremental revenue and total profit of Rmb200mn and Rmb30.69mnfor the Company once completed; (iii) testing and experimentationproject (Rmb80mn). Given Yunyi’s total profit was merelyRmb93mn in2014, these projects will give a notable boost to its earnings if they aresuccessfully put into operation.
After setting up an M&A fund for investing into smart vehicles andAEV fields, inorganic growth warrants expectations. Yunyi recentlyset up a JV investment management firm mainly engaged in investinginto smart vehicles and AEV fields. Currently, Yunyi holds overRmb500mn in cash assets while its debt ratio stands at merely 13%,suggesting a healthy capital structure. We anticipate Yunyi willpersevere with industry upgrading along the path of manufacturingsmart auto components and electronics. Hence, its inorganic growth ispromising in the future. In addition, Yunyi has completed the purchaseof stocks to be offered in its first employee stock ownership scheme (bought a total of 1,465,000 sharesat an average price of Rmb25.3/share), which forms strong support for its share price.
Risks: (i) continued downturn of business climate for the auto sector; (ii) disappointing market launch ofnew products including smart motors; (iii) outcome of private placement and acquisitions falling short ofexpectations.
Earnings forecast, valuation and investment rating: We forecast its 2015-17E EPS to beRmb0.36/0.50/0.68 (2014A: Rmb0.41). Its current market price of Rmb24.09 implies 2015-17E P/E of67/48/36x (does not take into account of the private placement). With steady growth of its traditionalsmart power controls business, its venture into intelligent motors and private placement are expected togive a significant boost to Yunyi’s earnings. Moreover, by venturing into driver assistance and AEV fields,as well as establishing an M&A fund to ramp up its presence in emerging areas, we are upbeat on theCompany’s long-term prospects. Taking into account sector average valuation, we believe Yunyiwarrants a fair valuation of 55-60x 2016E P/E, initiate coverage with OVERWEIGHT and target price ofRmb28.5.
