20130916-大和证券-Initiation__a_proxy_for_strongLNG_growth_in_China_30页_1mb

CIMC Enric Summary

Core Content

CIMC Enric is a leading manufacturer of liquefied natural gas (LNG) and compressed natural gas (CNG) equipment in China. The report initiates coverage with a Buy rating, highlighting the company's strong position in the LNG and CNG equipment market and its potential for significant growth due to the expansion of natural gas vehicles (NGVs) and related infrastructure in China.

Main Points

• Investment Justification: CIMC Enric is viewed as a proxy for strong LNG growth in China, with the potential to benefit from the government's push for cleaner energy solutions.
• Market Share: The company holds approximately 50% of the CNG/LNG equipment market in China.
• Growth Drivers:
  • NGVs: China aims to have 5% of its vehicles fueled by clean energy by 2020. Assuming 50% of the clean-fuel vehicles market will be NGVs, the number of NGVs is expected to increase six-fold by 2020 and threefold by 2015.
  • Peak-shaving LNG Tanks: Northern cities are converting coal-fired heating centers to gas-fired ones, leading to an increase in peak gas consumption and a need for LNG storage tanks.
  • LNG Vessels: The market for LNG vessels is expected to expand with the release of new standards.
• Valuation: The company's 11x 2014E PER is considered undemanding compared to peers (Chart Industries: 27x, Furuse: 26x). The six-month target price is HKD15.50, based on a 19x 2014E PER with a 25% discount.
• Earnings Forecast:
  • Gross Profit CAGR: 24% for 2012-15, driven by a 29% CAGR in the energy segment.
  • Energy Segment Contribution: Expected to rise from 50% / 60% in 2012 to 60% / 65% in 2015.
  • Chemical Equipment: Steady 8% gross profit CAGR.
  • Liquid Food Equipment: Strong turnaround in volumes and margins following the acquisition of Ziemann in August 2012.
• Financial Highlights:
  • Revenue: Expected to grow from CNY10,359m in 2012 to CNY14,804m in 2015.
  • Operating Profit: Projected to increase from CNY1,294m in 2012 to CNY1,797m in 2015.
  • Net Profit: Forecast to rise from CNY1,037m in 2012 to CNY1,426m in 2015.
  • EPS Growth: Fully diluted core EPS is expected to grow from 0.539 in 2013 to 0.741 in 2015.
• Risks:
  • Tariff Hikes: Concerns about city-gate gas price increases, though expected to have minimal impact.
  • Margin Squeeze: Possible pressure on margins due to increased competition or cost inflation.
  • Overcapacity: Risk of overcapacity in the LNG equipment market.
  • Global Economy Dependency: Chemical and liquid food equipment sales depend on the global economy, which is cyclical.

Key Information

• Target Price: HKD15.50
• Upside: 74.0%
• 12 Sep Price (HKD): 8.91
• Market Cap (USD bn): 2.16
• 3m Avg Daily Turnover (USD m): 6.13
• Shares Outstanding (m): 1,882
• Major Shareholder: CIMC Group (70.4%)
• CNG Equipment Revenue (CNY m): Expected to grow from 1,139m in 2009 to 2,237m in 2015.
• LNG Equipment Revenue (CNY m): Expected to grow from 619m in 2009 to 5,887m in 2015.
• Energy Consultancy Revenue (CNY m): Expected to grow from 0 in 2009 to 399m in 2015.
• Gross Profit Margin: Expected to increase from 17.8% in 2008 to 20.6% in 2015.
• EBITDA Margin: Expected to increase from 12.1% in 2008 to 13.8% in 2015.
• Operating Profit Margin: Expected to increase from 8.9% in 2008 to 12.1% in 2015.
• Net Profit Margin: Expected to increase from 6.4% in 2008 to 9.6% in 2015.
• ROE: Expected to decline slightly from 23.2% in 2013 to 22.0% in 2015.
• ROIC: Expected to rise from 29.2% in 2013 to 29.7% in 2015.
• Dividend Yield: Expected to increase from 1.4% in 2013 to 2.0% in 2015.
• Free Cash Flow Yield: Expected to rise from 4.0% in 2013 to 5.1% in 2015.
• COGS and SG&A: Both are expected to increase in line with revenue growth.
• Cash Flow from Operations: Expected to rise from CNY788m in 2008 to CNY1,380m in 2015.
• Capital Expenditure (Capex): Expected to remain relatively stable, with CNY700m in 2014 and 2015.
• Balance Sheet:
  • Total Assets: Expected to grow from CNY4,297m in 2008 to CNY12,629m in 2015.
  • Shareholders' Equity: Expected to increase from CNY2,566m in 2008 to CNY7,056m in 2015.
  • Net Debt to Equity: Expected to remain net cash throughout the period.

Valuation Metrics

• PER (2014E): 11x
• Peer PER Average: 26x
• Target PER (2014E): 19x
• EV/EBITDA (2014E): 6.9x
• PBR (2014E): 2.2x
• BVPS (2015E): 3.749

Policy Support

• NDRC Policy (November 2012): NGVs, centralised urban heating, and LNG vessels are now prioritised, leading to increased demand for LNG liquefaction and storage.
• CO2 Emission Reduction Targets:
  • Road Transportation: 9-37% reduction by 2020.
  • Water Transportation: 15-23% reduction by 2020.
  • Public Transportation: 17-37% reduction by 2020.

Conclusion

CIMC Enric is well-positioned for growth in the LNG and CNG equipment market, supported by government policies, increasing demand for cleaner fuels, and the expansion of related infrastructure. Despite potential risks, the company's strong market position and diversification offer a compelling investment opportunity.