德意志银行：中国重型卡车行业研究报告2008年11月

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收藏 2008-11-23

China Heavy Machinery Speeding into a deep downcycle Eric Lau, MBA Research Analyst (852) 2203 6191 <a href="mailto:eric.lau@db.com">eric.lau@db.com</a> Vincent Ha, CFA Research Analyst (852) 2203 6247 <a href="mailto:vincent.ha@db.com">vincent.ha@db.com</a> Fundamental, Industry, Thematic, Thought Leading Deutsche Bank's Company Research's Investment Policy Committee has deemed this work F.I.T.T. for our clients seeking differentiated ideas. We are bearish on China's heavy machinery sector. We think the coming industry downcycle in 2009 is likely to be a repetition of the 2005 downcycle, which was the worst year by far in the past decade. But despite similar negatives, the 2009 downturn could be even deeper than 2005's if the global recession is worse than expected. After all, the global economy was in good shape in 2005. Deutsche Bank AG/Hong Kong All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at <a href="http://gm.db.com">http://gm.db.com</a> or by calling 1-877- 208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. FITT Research Top picks Sinotruk (Hong Kong) (3808.HK),HKD3.18 Buy Weichai Power (2338.HK),HKD16.70 Sell Lonking Holdings Ltd (3339.HK),HKD2.90 Sell Companies featured Sinotruk (Hong Kong) (3808.HK),HKD3.18 Buy 2007A 2008E 2009E P/E (x) 23.0 5.1 5.5 EV/EBITDA (x) 6.3 1.8 2.1 Price/book (x) 2.4 0.5 0.5 Weichai Power (2338.HK),HKD16.70 Sell 2007A 2008E 2009E P/E (x) 11.2 3.2 4.7 EV/EBITDA (x) 6.1 2.2 2.8 Price/book (x) 4.5 0.9 0.8 Lonking Holdings Ltd (3339.HK),HKD2.90 Sell 2007A 2008E 2009E P/E (x) 24.9 4.0 4.4 EV/EBITDA (x) 22.4 4.5 4.9 Price/book (x) 4.7 0.8 0.7 Fundamental: China’s heavy machinery sector – initiate with underweight The Chinese heavy duty truck (HDT) and construction machinery (CM) sectors should head into a downcycle in 2009-2010 due to the implementation of the Euro III engine standard in July 2008 and a clearly slowing Chinese economy. Industry: heading into a cyclical downturn with a fragile macro situation Both the HDT and CM sectors are largely driven by domestic economic growth – more specifically, fixed asset investment and industrial production growth. We project a sharp slowdown in the Chinese macro economy during 2008-2010 that should badly hit both sectors. CM may perform better than the HDT sector, which is more correlated to infrastructure spending (road and railway construction). Thematic: HDT industry downturn in 2009 likely to mirror 2005’s We identify similar negative factors in the previous and coming downcycles in 2005 and 2009, respectively. China implemented engine policy standards Euro II in September 2004 and Euro III in July 2008, which caused advanced purchases of the preceding generation of engines at lower cost ahead of the policy introduction. Second, China tightened macroeconomic policies in both 2004 and early 2008. Thought leading: proprietary survey – clear signs of sharp industry downturn Though heavy machinery industry players are expecting flat to modest growth in 2009-2010, we expect HDT sales volume to dip by 25% in 2009 from 19% up in 2008 and CM sales to fall by 5% in 2009 from 31% up in 2008. Our recent survey suggests that almost 80% of our corporate sample purchased trucks in 2008 but only 16% plan to procure trucks over the next 6-12 months. In every case, these purchases are replacements rather than new demand for operational expansion, reflecting much lower confidence levels in outlook vs. three months ago. Sector strategy: Buy Sinotruk, Sell Weichai and Lonking We are buyers of Sinotruk despite our negative view on the HDT sector as we think Sinotruk should sustain its track record of rapid market share gain. This should continue to be supported by its new, cheaper and proprietary engine exhaust gas re-circulation (EGR) roll out. We are sellers of Weichai (highest chance of earnings downgrade risk during 2009-2010). We maintain Sell on Lonking (which we view as the most vulnerable in the sector) as Lonking offers finance leases to end-customers, which represents a significant bad debt risk in an industry downturn environment.Table of Contents Executive summary ........................................................................... 3 2005 downcycle drivers in 2009 ....................................................... 5 Comparison of duration and depth of downturn between 2005 and 2009 ............................................................................................. 6 History mirrors the future................................................................. 9 Sector strategy ................................................................................ 13 Heavy duty truck market analysis.................................................. 14 Overview of the construction machinery industry....................... 19 Long-term growth analysis............................................................. 24 Overseas market potential.............................................................. 33 Sinotruk (Hong Kong)...................................................................... 36 Weichai Power................................................................................. 58 Lonking Holdings Ltd ...................................................................... 82Executive summary Outlook We initiate coverage of the Chinese heavy machinery sector with an underweight rating. We think the sector will likely face a sharp industry downturn during 2009-2010, similar to the one it endured in 2005. 2005 was the worst downcycle year by far in the past decade (with HDT volume down 36% yoy and CM sales up merely 8.8%). We think the magnitude of the fall in this downturn should be slightly lesser compared to 2005 as there was a policy to crack down on overloading for HDT in 2005. However, the downcycle in 2009 could be even deeper than it was in 2005 if the global recession is worse than we think. By contrast, the global economy was in good shape in 2005. We project HDT sales volume to dip 25% in 2009 (from a 19% surge in 2008) and CM sales to fall 5% in 2009 (from 31% up in 2008). Construction machinery may perform better than the heavy duty truck industry as the former has a higher portion of stable infrastructure expenditure, including construction of road and railway. The coming HDT industry downcycle has negative factors comparable to the previous one: &#1048708; Tightening macro policy. China kicked off policy aimed at tightening the macro economy in 2004 and early 2008; expenditures in the HDT and CM sectors were both adversely affected by demand slowdowns and the extension of replacement cycles. &#1048708; New engine standard. New diesel engine standards Euro II and Euro III were implemented in Sep 2004 and Jul 2008, respectively. These policies stimulated the advance purchases of earlier generation engines ahead of the policies implemented for lower pricing. This is one of the reasons why industry sales leaped significantly in 2004 and 2008. We recently conducted surveys with 19 companies that own their trucks for shipping material and goods. Almost 80% of the corporates had already purchased trucks in 2008 but only 16% of them plan to procure trucks over the coming 6-12 months; these trucks are for replacement rather than new demand for operational expansion due to much lower confidence levels in their business outlooks compared to three months ago. A top-three HDT manufacturer suggested its HDT sales volume on a yoy basis started to fall &gt;20% in Oct vs. high single-digit growth in 3Q08, which also reinforces the outcome of our survey.Valuation We employ PER as the key yardstick for the valuation given the cyclical sector. We justify and cross-check the results with our DCF models. Our target prices imply 4x 2009F PE on both Weichai and Lonking. However, Sinotruk would trade at 8x 2009F PE on our target because it holds a sizeable cash reserve. Its net cash to market cap is c.40% compared with a slight net cash position for Weichai and 32% net gearing on Lonking. Although the sector valuation may appear low, we think it does not fully factored in substantial EPS downgrade risk. Our 2009-2010 EPS estimates are 30-43% lower than consensus on Weichai Power, 30-37% lower on Lonking and 14% below on Sinotruk.Risks &#1048708; An upside risk for the Chinese heavy machinery sector is a better-than-expected economic outlook in China and fiscal policy to accelerate infrastructure expenditure. &#1048708; Second, China’s government may further loosen monetary policy to relax credit policy so that end-customers will more easily be able to get financing from banks for the purchase of heavy machinery. &#1048708; A company-specific risk is unexpected M&amp;A activity, particularly for Weichai Power, which may speed up the industry consolidation because of its strong balance sheet. We believe Lonking should have no chance of major acquisition because of its high net gearing ratio. Please see individual valuation methodologies and risk discussions in the company sections of this report.