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9 Feb, 2024 (Friday)

            
XD INC(2400)
Analysis:
XD Inc. (2400) is a global video games developer and publisher with extensive experience across development, publishing and operations. As of 30 June 2023, its games portfolio consisted of 20 online games and 29 premium games. In the first half of 2023, its total revenue increased 10% to RMB1.753 billion on a period-over-period basis, primarily due to increased advertising revenue on TapTap and the successful launch of Torchlight: Infinite and T3 Arena in China. Moreover, with the strict cost control discipline, it has successfully turned losses into profits. In the first half of 2023, profit attributable to equity holders of the Company was RMB90.19 million while loss attributable to equity holders of the Company for the corresponding period in 2022 was RMB386 million. Its adjusted EBITDA was RMB184 million, while it was an adjusted loss before interests, taxes, depreciation and amortization of RMB246.4 million for the corresponding period in 2022. Since November 2023, it had been conduction repurchase and cancellation in the open market of US$250 million 1.25% convertible bonds due 2026. The Board believes that the repurchase and subsequent cancellation of the Repurchased Convertible Bonds reflects the Company`s confidence in its long-term business prospects and could also enhance the return to the shareholders of the Company. (I do not hold the above stock)
Strategy:
Buy-in Price: $10.50, Target Price: $11.70, Cut Loss Price: $9.80


CHINA TELECOM(728)
Analysis:
In the first three quarters of 2023, China Telecom (00728) operating revenues were RMB384,254 million, representing an increase of 6.4% over the same period of 2022, of which service revenues were RMB349,743 million, representing an increase of 6.4% YoY. The profit attributable to equity holders of the company was RMB27,101 million, representing an increase of 10.4% YoY. EBITDA was RMB105,648 million, representing an increase of 5.2% YoY. EBITDA margin was 30.2%. In terms of mobile communications services, the company continuously optimised its 5G network coverage. Focusing on demands for personal digital applications, it expedited AI intelligent upgrades of 5G applications, thus realising solid growth in subscriber scale and value. Revenues from mobile communications services amounted to RMB151,916 million, representing an increase of 2.4% YoY. The total number of mobile subscribers reached 406 million with a net addition of 14.63 million. The number of 5G package subscribers reached 308 million with a net addition of 39.65 million, while the penetration rate reached 75.8%. The mobile ARPU amounted to RMB45.6, representing an increase of 0.2% YoY. Revenues from wireline and Smart Family services reached RMB92,905 million, representing an increase of 3.9% YoY. The number of wireline broadband subscribers reached 189 million. Revenue from Smart Family maintained rapid growth, driving the broadband blended ARPU to reach RMB47.8. The value contribution from Smart Family continued to improve. Driven by cloud-, AI-, security-and platform-integrated initiatives, industrial digitalisation service revenues reached RMB99,741 million, representing a YoY increase of 16.5%. Continued to optimise the deployment in strategic emerging industries, and deeply implement its Cloudification and Digital Transformation strategy, which is expected to support the company`s sustainable and high-quality development.
Strategy:
Buy-in Price: $4.12, Target Price: $4.40, Cut Loss Price: $3.92



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 9-2-2024
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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