Overseas foundation to withstand trade risks

16Jul2024 CMBInternationalGlobalMarkets|EquityResearch|Initiation MinthGroup(425HK) Overseasfoundationtowithstandtraderisks InitiatewithBUYandTPofHK$21.00.MinthGroup(Minth)hasbeentransformingfromanexteriordecorativepartsmakertoamorediversifiedtier-1supplierwithmanufacturingcapabilitiesindifferentmaterials.WeareoftheviewthatinvestorshaveprobablyunderestimatedMinth’ssolidoverseasfoundationwhichiscrucialfortheupcomingtraderisks,asitsvaluationhasdroppedtoahistorical-lowlevel.WealsothinkbatteryhousingandothernewproductssuchaschassisstructuralpartsandintelligentintegratedexteriorscouldliftMinth’sdollarcontentpercarinthenextfewyears,whichisalsoanimportantdriverforitsprofitgrowth. Solidoverseasfoundationasrevenueandprofitdriver.WeareoftheviewthatMinthisbetterpositionedthanmostChinesepartssuppliersinfacingpotentialtraderisksamidrisinggeopoliticaltensions.Minth’smajoroverseasplantshaveallbeenmakingmoneyandcontributedabout10%ofitstotalnetprofitinFY23.WeestimateoverseasnetprofitcoulddoubleinFY26EfromFY23.WethinkMinthcouldbeoneofthetopchoicesforChineseautomakerswhentheysourcepartsforlocalproductioninEurope. Stillroomforbatteryhousingbusinesstogrow.Althoughweexpectbatteryhousingpricetodropovertime,weseehugeroomforgrowthatMinthamidglobalEVmarketshareincreasesandMinth’spotentialsharegainsinthebatteryhousingsegment.WeexpectMinth’sbatteryhousingrevenuetosurge60%/35%/30%YoYinFY24-26E,higherthanourprojectedglobalEVsalesvolumegrowth.WealsoexpectgrossmarginforitsbatteryhousingtowidensteadilyasitsSerbiaandCzechplantsrampup.WebelievebatteryhousingisalsoasteppingstoneforMinthtoexplorechassisrelatednewproductsandahedgetoitssaturatedtraditionalbusiness.Morethan10%ofbatteryhousingsegmentrevenueinFY23camefromchassisstructuralparts.Suchdemandcouldincreasewithitsofferingofproductslikefrontcross-membersandsub-frames. Earnings/Valuation.WeprojectMinth’srevenuetorise19%/15%/13%YoYandnetprofittoincrease18%/14%/13%YoYinFY24-26E.Wealsoexpectitsnetdebttoimproveanddividenddistributiontoresume.Ifthecompanymaintainsitsprevious40%dividendpayoutratio,thatcouldresultinadividendyieldof6.8%basedonourFY24Enetprofitforecastandcurrentshareprice(asof15July2024).WeinitiateourcoverageofMinthwithaBUYratingandtargetpriceofHK$21.00,whichisbasedona10xFY24EP/E,inlinewithitsaverageforward12-monthP/Eduringthepastthreeyears.Keyriskstoourratingandtargetpriceincludelowerrevenue/margins,higherrisksinoverseasoperationthanweexpect,aswellasasectorde-rating. EarningsSummary TargetPriceHK$21.00 Up/Downside70.2% CurrentPriceHK$12.34ChinaAuto JiSHI,CFA (852)37618728 shiji@cmbi.com.hk WenjingDOU,CFA (852)69394751 douwenjing@cmbi.com.hk StockData MktCap(HK$mn)14,339.0Avg3mthst/o(HK$mn)47.5 52wHigh/Low(HK$)24.85/10.88TotalIssuedShares(mn)1162.0Source:FactSet ShareholdingStructure ChinJong-Hwa'sfamily38.8% InvescoAssetManagement6.1% Source:HKEx SharePerformance AbsoluteRelative 1-mth-11.1%-11.5% 3-mth-4.0%-11.6% 6-mth-8.6%-17.7% Source:FactSet 12-mthPricePerformance Source:FactSet (YE31Dec)FY22AFY23AFY24EFY25EFY26E Revenue(RMBmn)17,30620,52424,31827,89631,582 YoYgrowth(%)24.318.618.514.713.2 Netprofit(RMBmn)1,500.61,903.22,248.82,553.62,886.4 YoYgrowth(%)0.326.818.213.613.0 EPS(Reported)(RMB)1.301.651.952.222.49 P/E(x)8.86.95.95.24.6 P/B(x)0.80.70.60.60.5 Yield(%)4.60.06.87.78.7 ROE(%)9.110.811.511.812.3 Netgearing(%)17.317.613.812.18.9 Source:Companydata,Bloomberg,CMBIGMestimates PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGE1 Contents FocusCharts3 CompanyOverview4 InvestmentThesis4 Solidoverseasfoundationasrevenueandprofitdriver4 Batteryhousing:stillhugeroomforgrowthinrevenueandprofit5 AluminiumpricehikecouldbeoflittleimpactonMinth’smargins9 NewproductstoaidMinth’straditionalBUrevenuegrowth9 FinancialAnalysis11 Revenuegrowth,SG&Acostcontroltoaidsteadynetprofitincrease11 Stablecapex,localproductiontoimproveSG&Aratio11 1H24earningspreview12 Weexpectnetdebttoimproveanddividenddistributiontoresume12 Valuation14 InitiatecoveragewithBUYandTPofHK$21.00(70%upside)14 FinancialSummary15 FocusCharts Figure1:Globalautosalesvolumeforecast Source:Marklines,ChinaAutomotiveTechnology&ResearchCenter(CATARC),CMBIGMestimates Figure3:Minth’srevenuebreakdownbyregion Source:Companydata,CMBIGMestimates Figure5:Minth’srevenueforecastbyBU Figure2:GlobalEVsalesvolumeforecast Source:Marklines,CATARC,CMBIGMestimates Figure4:Minth’sASPandunitsofcarscovered Source:Companydata,CMBIGMestimates Figure6:Minth’scapexandD&Aforecasts Source:Companydata,CMBIGMestimatesSource:Companydata,CMBIGMestimates CompanyOverview Foundedin1992,MinthGrouphasbeentransformingfromanexteriordecorativeparts(e.g.trims,roofrackandgrille)makertoamorediversifiedtier-1supplierwithmulti-materialmanufacturingcapabilities(steel,aluminiumandplastics)andglobalreach.InFY23,China,NorthAmericaandEuropeaccountedfor51%,24%and20%ofMinth’srevenue,respectively.Metalandtrim,plasticsandaluminiumaccountedfor27%,27%and21%ofitsrevenueinFY23.Minthstarteditsbatteryhousingbusinessfrom2019,whichmadeup17%ofMinth’stotal