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8 Feb, 2024 (Thursday)

            
YUM CHINA(9987)
Analysis:
The financial results of Yum China (9987) in 2023 surpassed the industry`s growth rate and set new records for both revenue and profits. Total revenues were up 21% year-on-year to US$11 billion excluding F/X. Full Year System Sales was also up 21%, attributable to 9% net new unit contribution, 7% samestore sales growth and lapping temporary closures from the pandemic in the prior year. Adjusted Operating Profit grew 86% to US$1.1 Billion and 1,697 net new stores were opened, exceeding the full-year net new store target. Total number of stores reached 14,644 in over 2,000 cities. The board declared a 23% increase in cash dividend to $0.16 per share for the fourth quarter of 2023. Yum China returned approximately US$833 million to shareholders for the full year through share repurchases and cash dividends. This stands as the highest full year return thus far in the Company`s history. The Company plans to repurchase $1.25 billion of its common stock in 2024. Joey Wat, CEO of Yum China, remains very positive about the vast growth opportunities in China. Currently serving just one-third of China`s population, the Company`s ambitious goal is to extend its reach to half of the population by 2026. Over half of its new stores are located in lower-tier cities, strategically positioned to capture the demand from longterm consumption upgrades there. The Company is well-positioned to achieve its growth targets for 2024- 2026 and deliver excellent returns to its shareholders through increased cash dividends and stepped-up share buybacks. (I do not hold the above stock)
Strategy:
Buy-in Price: $308, Target Price: $350, Cut Loss Price: $290


EB ENVIRONMENT(257)
Analysis:
China's high-quality development has continued to guide the transformation of the domestic environmental protection industry from high-speed development into high-quality development, as well as to foster the extension of the industry chain towards directions relating to pollution and carbon emission reduction and clean production. China Everbright Environment (00257) continued to focus on the three major areas, namely solid waste, water-related business and clean energy. It actively extended and improved the relevant industry chain layout and solidified its industry-leading position. In the first half of 2023, the company recorded a total revenue of HK$16.297 billion, of which revenue from operation services was similar as the first half of 2022 amounting to HK$9.539 billion, and revenue from construction services decreased by 55% from the first half of 2022 to HK$4.070 billion. The revenue from operation services, construction services and finance income accounted for 59%, 25% and 16% of the total revenue, respectively. In terms of the traditional business areas, the company continued to secure new projects in areas like wasteto-energy, waste water treatment and integrated biomass utilisation. In terms of new breakthroughs, for the first time, the company secured multiple environmental protection projects based on the EPCO model, as well as new businesses in county-level markets such as Dafang County in Guizhou Province and Shen County in Shandong Province. The National Conference on Ecological and Environmental Protection, which was held in July 2023, stressed that the coming five years will be critical to the building of a beautiful China and approved of the "Opinions on Promoting the Gradual Transition from Control of Total Amount and Intensity of Energy Consumption to Control of Total Amount and Intensity of Carbon Emissions". With the support of important policies, which will continue to boost development momentum to the domestic ecological and environmental protection industry.
Strategy:
Buy-in Price: $2.84, Target Price: $3.09, Cut Loss Price: $2.68



Sinotruk (3808.HK) - Positive Profit Alert Beating, With a New High Share

Company Profile

As one of the leading heavy truck manufacturers in China, Sinotruk specializes in the heavy trucks, light trucks, buses and related major powertrains and parts. With heavy trucks as the main products, the Company serves a wide range of customers in the infrastructure, construction, container service, logistics, mining, steel and chemical industries.

Investment Thesis

Expects NP to Grow by Max. 2.4x in 2023, Beating the Consensus

Recently, Sinotruk has released an announcement on positive profit alert, according to which, the Companys expect its NP will grow by 200-240% from RMB1.67 billion in 2022 to approximately RMB5.01 billion - RMB5,678 million in 2023, exceeding the market expectation. This growth was mainly attributed by the management to demand recovery in the heavy duty truck industry along with considerable momentum of exports. Meanwhile, by seizing opportunities on the market, and continuously adjusting the product and business structures, the Company achieved a massive growth in product sales, with the proportion of high-end products continuously growing and the profitability significantly enhanced. Our analysis shows that the massive growth in sales drove an increase in the capacity utilization rate, and the growth in net profit was tremendously higher than the growth in sales.

The Sales and the Growth in Sales Were Industry-leading, with the Market Share Reaching a New High

The heavy duty truck market generally showed a slowly upward trend in 2023, as the sales began to rise slowly in the second quarter, and ten YoY positive increases were recorded in monthly sales from February on. According to CAAM's statistics, the total sales for China's heavy duty truck industry reported 910 thousand in 2023, representing an YoY increase of 36% or 239 thousand. Specifically, the cumulative sales of new energy heavy duty trucks grew by 31.5% to 33 thousand, the cumulative sales of exported heavy duty trucks grew by 60% to 275 thousand, and the cumulative sales of LNG heavy duty trucks grew by 310.8% to 152 thousand. Obviously, the market increase was mainly attributed to the export market and the booming sales of LNG heavy duty trucks. In this context, Sinotruk sold 234 thousand heavy duty trucks in 2023, a number that was better than the industry's average. Meanwhile, the YoY increase reached 47.5%, which was significantly higher than the industry's average (36%). Furthermore, Sinotruk's share in the domestic heavy duty truck market was 25.74%, up 2.2 ppts over the same period last year and remaining to rank first. Sinotruk also delivered an impressive performance in both the export market and the sub-market of LNG heavy duty trucks: On the one hand, relying on Sinotruk International's network layout, the Company's exported sales exceeded 130 thousand, accounting for more than half of the total sales; on the other hand, in the sub-market of LNG heavy duty trucks, the Company ranked second among industry peers in terms of sales and had a market share of 17.7%. As the ASP of LNG heavy duty trucks was RMB80 thousand - RMB100 thousand higher than that of normal heavy duty trucks, the Company's sale structure and profitability significantly improved. For 2024, we expect that continuous recovery will remain to be the main trend of the heavy duty truck market, and the total sales will reach one million - 1.1 million.

The Share Incentive Scheme with High Criteria Demonstrated Our Confidence in Growth

At the same time, the Company released its share incentive scheme, according to which, the Company intends to grant approximately 1% of the total share capital in the form of restricted shares to no more than 194 employees at the price of RMB6.896 per share. As for the granting criteria, 30%/30%/40% of the restricted shares will be granted for 2024/2025/2026, respectively, if the income is no less than RMB94.8 billion/RMB109.1 billion/RMB125.5 billion and the return on sales ratio is no less than 7.5%/8%/8.5% (namely, the profit from sales is no less than RMB7.11 billion/RMB8.73 billion/RMB106.7 billion), respectively. Sufficient incentives have further improved the Company's mechanism for income distribution, and conduce to the enthusiasm of key employees and the continuous growths in the Company's future business performance. Additionally, an average annual profit growth rate of approximately 20% also reflects the management's strong confidence in the future business development of the Company..

The Industry Is Likely to Bottom out

In February 2023, China ended a 21-month consecutive decline in heavy truck sales, with the growth rate turning positive from negative to a yoy increase of 15%.The sales in March and April increased significantly yoy by 49.6% and 83%, respectively.

Valuation & Investment Suggestion

In terms of the domestic economic situation, China needs to boost its economy after the pandemic. With the further implementation of the government's policies to stabilize the economy, infrastructure investment and logistics demand will maintain the momentum of rally, which will provide a foundation for the recovery of the heavy truck market. Secondly, since the implementation of the National VI emission standard in July 2021, the heavy truck industry has fallen into a downturn for one and a half year. While, the heavy trucks in the previous round of peak consumption have gradually entered the replacement period. In addition, the stricter emission regulations of the industry, the overload transportation governance, and the elimination of backward and old models will play a positive role in the recovery of the industry.

We expect the Company to continue to benefit from the recovery of the domestic heavy truck industry and the growth trend of the export market. In the medium to long term, there are opportunities for value enhancement in some segmentations of heavy trucks brought by innovation. We revised the Company's EPS in 2023/2024/2025 to be 1.92/2.22/2.58 yuan, respectively, and adjust the target price to HKD 24.1, corresponding to 10/8.6x P/E and 1.4/1.2x P/B in 2024/2025, a `BUY` rating. (Closing price as at 5 February)

Risk

The economic recovery was less than expected, resulting in lower than expected sales of heavy trucks

Overseas market risk, adverse exchange direction risk

Risk of significant increase in raw materials

Financials

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Recommendation on 8-2-2024
RecommendationBUY
Price on Recommendation Date$ 17.460
Suggested purchase priceN/A
Target Price$ 24.100
Writer Info
Zhang Jing
(Research Analyst)
Tel: (+86 21 51699400-103)
Email:
zhangjing@phillip.com.cn

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