Looking forward to a better 2H22
- Lockdowns and high raw material cost affecting 1H22
- Tariff reduction could potentially lift pretax profit by 6%-7%
- Undemanding valuation with better 2H22 outlook
- HK$30 TP pegged to FY22F 18x PE; reiterate BUY
What’s new
Impact of lockdowns and high raw material costs. The lockdowns in Jilin and Shanghai have negatively impacted Minth’s China business by over 20% in Apr 22. Besides, the high RM cost environment (despite the recent price corrections) could impact product margins. While Minth has been successful in passing through the higher RM costs to some of its customers (for those contracts that contained the cost pass through clause), it is still negotiating with other customers to mitigate the cost pressure. Minth’s business is also indirectly affected by auto chip shortages, as auto OEM production downtime hit demand for auto parts.
The Shanghai auto sector is slowly resuming production, and normalisation is expected in Jun 22. Besides, the government has released a series of stimulus policies to boost auto consumption, including a pure electric vehicle subsidy of Rmb10,000 and issuance of an additional 40,000 license plates. New vehicle registrations plunged some 98% in Apr 22 – one of the worst hit markets in China.
The positive measures are catalysts for the vehicle eco-system. We expect Minth’s China business, which accounts for about 60% of total revenue, to post better sequential improvement in 2H22 on this positive development.
Overseas business and tariff reduction impact. The pandemic and geopolitical turmoil have dragged global light vehicle sales by c.25% y-o-y in Apr 22, with the worst hit in China at an over 40% contraction. Overseas sales account for c.40% of Minth’s total revenue, of which about half is from its Chinese plants. However, direct export from China to the US is small, estimated at 7%-8% of total revenue, implying a net impact of about Rmb150m (net of 50% cost pass through) from tariff reduction on an annual basis. Minth’s overseas factories (such as Serbia, Czech, Mexico) are still in a ramp-up stage, and an economies of scale improvement is possible going forward.
Financial impact. As a result, 2Q revenue is expected to be weak due to lockdowns and margins are likely to be under pressure, as RM cost remains high. Therefore, the weak 2Q is expected to affect 1H22 performance (1H21 GP margin was c.32%). While battery housing GP margin could improve to 15%-20% this year on the back of the scale effect, the bulk of the other products may still face margin pressure in 1H22.
Hence, there could be downward swings in FY22F revenue and margins (company has set a 30% revenue growth target), even though some catching up on missed shipments is possible in 2H.
New order outlook. This is crucial for Minth’s business growth prospects. Minth has secured new orders worth some Rmb5bn in 4M22 and is on track to meet its new order target for 2022. As of Dec 21, Minth’s outstanding backlog was valued at Rmb150bn, of which battery housing and aluminum accounted for 55% in total. The rising global electrification trend has contributed to the rapid growth of its battery housing and aluminum business. The strong backlog supports healthy revenue and earnings prospects.
Cut FY22/23 earnings estimates; maintain BUY on improving 2H22 business outlook. We revised down our revenue and gross margin assumptions due to production disruptions and high raw material cost impact. As a result, our FY22/23F net earnings were cut by 17%/12% respectively. Subsequently, our TP is lowered to HK$30, pegged to unchanged target PE of 18x FY22F. We maintain BUY as current valuation should have reflected the negatives and 2H business outlook is expected to improve as auto OEMs are resuming their factory productions.