Business ready to rebound
- Record level of new business intakes and huge order backlog to support strong earnings expansion
- Successful venture into many global OEMs’ new vehicle platforms and product lines support strong order flows
- 2021 could be the trough; anticipate earnings recovery to be remarkable
- Reiterate BUY; pegged new TP of HK$36 to 18x FY22F PE
Record new business and order backlog to support strong earnings visibility. In FY21, Minth secured a record level of new business intakes of Rmb10.6bn (+30%) to boost its future earnings growth. Its many years of R&D efforts are paying off, with innovative and NEV products accounting for 46% and 56% of new business intakes, respectively. Minth has successfully entered many automobile companies’ EV platforms, including new Chinese startups like NIO, Li Auto, and Xpeng. What’s more exciting is that the company has become a major supplier of aluminium (AI) and battery housing for its customers’ global platforms like Tesla, Stellantis’ EMPS, Daimler’s MMA, Renault, Nissan, etc.
Thus, the total order backlog amounted to Rmb150bn+, with AI and battery housing accounting for 26% and 29%, respectively.
This should be positive for its future revenue mix and profit growth, especially in the NEV segment, supported by a high portion of AI and battery housing order backlogs on hand. In FY21, the share of revenue from NEV was 14%, up from 6.5% a year ago. Besides, AI and battery housing revenue was 24.5% of total revenue. It is estimated that NEV revenue would account for c.27% of FY22F revenue. Also, the ramping up of these new product sales should enhance its future GP margins to above 30%.
Minth’s customer coverage is extensive, including most premium OEMs worldwide and 45 platform vehicle projects across the globe.
In terms of innovative product development, Minth is carrying out more developments into AI extrusion, AI die casting, high-strength steel, and composite materials to incorporate broader battery technology such as the solid-state battery and battery swapping. The capex plan for 2022 is estimated at Rmb3bn, slightly lower than 2021.
2021 could be the trough; cut TP. Last year was a challenging period for all automobile companies globally, due to rising raw material prices, supply chain disruptions, and the shortage of auto chips. As a result, Minth’s FY21 net earnings only increased by 7% y-o-y despite revenue rising c.12%, because of a compression in GP and operating margins of 1.6ppt and 4.1ppt, respectively. Cost transfer is an ongoing process, especially for its new battery housing contracts. Minth suffered a sharp decline in GP margin of 6.7ppt in 2H vs. a year ago, due to sharp raw material cost increases (such as plastic) as well as supply chain disruption which was most acute in 3Q21. We anticipate some recovery of profit margins in FY22, since the company has secured some Rmb500m worth of raw material strategic inventories. Cost pass through is about 50% in FY21.
We cut our target PE from 21x FY22F to 18x to arrive at a new TP of HK$36 (pre: 21x; HK$49). The recent volatile stock market has also been unfavourable on the auto sector. Concerns of supply chain disruption and commodity inflation due to the Russia-Ukraine conflict are the rationales for the lower target PE. The stock is currently trading at FY22F 10xPE, which is 2SD below its historical mean.