Summary

Qingling Motors Co, Ltd reported a 5.3% and 4.8% yoy growth respectively in revenue and net profit FY2008, mainly due to price cutting and increase of interest income. The Company continues to adjust the price of middle to high end segment in order to capture share. We expect Qingling's profitability will remain high level and EPS in 2009 and 2010 will reach HK$ 0.100 and 0.113, as the incoming mass production of its new engine project plus China's 5 billion yuan new subsidies to spur auto sales in rural areas. Our target price is HK$1.67, BUY rating.

Net profit grew 4.8% in FY08, mainly due to the increase of interest income

Qingling Motors makes Isuzu trucks, pick-ups, multi-purposes vehicles and other vehicles and automobile parts and accessories such as diesel and petrol engines. It's mainly production, Isuzu light trucks is the most popular high-end light truck throughout China. The Company has made most sales in China and few export sales to Japan during the year, accounted for approximately 96.6% and 3.4% of the turnover respectively.

Qingling 2008 revenue grew 5.3% yoy to RMB 3.96 billion. While gross margin dropped 0.6 ppts to 17.2% due to the increased cost. Net profit increased 10% yoy to RMB 175 million, with EPS stood 0.07 yuan, which is 8% below our forecast, and the Company declared a final DPS of RMB0.05 for 2008.

Qingling's net profit was mainly lifted by interest income that grew 45% yoy to 111 million yuan, excluding of which, its net profit would fell 28% yoy.

Volume grew Vs ASP declined

Qingling sold out 35209 vehicles in 2008, representing an 8.7% yoy growth.

Light truck：

Qingling sold 18146 light trucks, decrease 10.5% yoy. Sales revenue of the light trucks recorded a 7.6% yoy drop, but better than the -11.2% in 1H08. Besides the Earthquake, the snow disaster and fiercer competition, the worsened macro economy from 2H08 also brought negative impact to its sales performance.

Pick-up：

Income from pick-up increased 20.3% yoy and sales volume surged 46% yoy to 14735 units, far more than the peer level of 8%, which is mainly contributed by the price cutting. From 2008, Qingling reduced the price by as much as RMB23000 to RMB35000 for its 30 categories of petrol and diesel pick-ups. Thus for the first time it entered into the medium-end segment under RMB100K.

Others：

The sales of multi-purposes vehicles (mainly U series SUV) plummet by more than 80% yoy and heavy duty trucks grew 32% to 1440 units. The new launched medium trucks (700P) in July 2008 sold 758 units.

Only light trucks edge up in ASP among the four main models of the Company, others had decreased greatly in 2008. Operating margin (excluding interest income) contracted to 2.38% from 3.0% in 2007.

Continuous to expand sales by introducing middle-end models

Thanks to the Auto bailout plan and the “4-trillion-yuan” stimulus package, the China auto market began to recover. The light truck segment saw a growth of 5% in the first 5 months, higher than the whole commercial vehicle's -2%.

Qingling launched a low price 100p light truck of Euro III emission in April 2009 at RMB 86000, which is 25% lower than its previous Euro II emission light truck. This marketing strategy proved to be effective as the monthly sales soared 32% in April to 3593 units, and 15% to 12475 units in the first 4 month of 2009.

We believe the price promotion rely on the higher location ratio and lower cost as the Company had grasped the opportunity offered by the substantial decline in the raw material price such as cast iron and coke during 4Q2008 effected by the financial crisis and had purchased major raw material, meanwhile, built up inventories of raw materials.

We forecast the Company's unit sales will keep growing owing to the good reputation of its light trucks. In addition. any more price promotions can`t be excluded with its aim of further capturing medium-end market shares.

Beneficiary of China's New Rural Subsidies

According to the new rural subsidies released by China government on 10th June, besides minibus, farmers who buy a new light truck or a minivan can get a subsidy equal to 10% of the purchase price, up to a maximum of 5000 yuan.

In the former policy which runs from the start of March only subsidized farmers replacing light trucks. The minibus thus boosted a 43% yoy sales growth in domestic in the first 4 months of 2009 light trucks, proving there is a obvious link between the policy and the rising sales. Therefore, we estimate the sales of light truck is supposed to rise in the last half of 2009.

Cooperation start to get an effect after 2005 when Isuzu upped its stake in Qingling to 20%, together with the joint ventures with Isuzu in engine and sale continued to start up, which would likely lead to many opportunities in future. We forecast the Company may have its sales growth up from 5.3% currently to 9% with such stimulates.

Risk

As it belongs to investment goods, the consumption of the commercial vehicle was in high correlation with the business cycle. The growth opportunity of company will be very high in economic prosperity cycle for the robust downstream demand. Contrarily, the risk should be on guard in time of economy recession.

Valuation

The profitability of Qingling was stable and remained at relatively high level over the past years. Though ASP was decreased, the scale effect, a higher location ratio and efficient cost-control will help to offset the negative influence of price cut. The Company has started to cooperate with Isuzu to establish an affiliated company specialized in engines manufacture with a sales target of 175000 engines a year by the end of 2010. At that time, the cost of engines is forecasted to be reduced, which lift 3-4% of the Company's gross margin. Thus, we estimate, in the coming two years, the Company's gross margin will still remain at relatively high level.

Moreover, Qingling's net cash and bank deposits per share at the end of 2008 stood at HK$1.92, 32% higher than yesterday's closing price of HK$1.45, which means the share price still has upwards space.

Qingling shares trade at only 0.44x 2009E BVPS, remaining the lowest among HK automobile companies. We estimate its EPS in 2009 and 2010 will reach RMB 0.088 and RMB 0.10 respectively (corresponding to HK$ 0.10 and HK$ 0.113). Considering the optimistic forecast for the Company's performance in 2009, we give its 12-month target price at HK$1.67 on 15x P/E of 2010E EPS which is based on 23% discount to Qingling's average estimated P/E of 19x since 2006.Our target price is 15% higher than the last close price and upgrade the Company to Buy rating.

Earning Forecast

More...