20210125-BOCI-津上机床中国-01651.HK-BOCI_Industrials_Corporate_Day_takeaway_5页_1021kb

Summary of Company Update: Precision Tsugami China (1651 HK)

Core Content and Key Highlights

• Investment Recommendation:
  BOCI Research recommends a BUY on Precision Tsugami China (1651 HK), with a target price of HK$11.44, implying a 35% upside from the closing price of HK$8.47 on 22 January 2021.

• Sector Rating:
  The sector rating is NEUTRAL, indicating a mixed outlook for the broader machinery industry.

• New Order Trends:
  The company has seen a strong recovery in new orders, especially from downstream industries such as auto, 3C, and construction machinery hydraulics.

  • January 2021: New orders surged by over 100% YoY.
  • 4Q20: New orders grew by ~92% YoY.
  • 2020: New orders increased gradually, from +7% YoY in 1QFY20 to +58% YoY in 3Q20.
  • Domestic demand has been the main driver, while overseas demand has been recovering slowly.

• Revenue Guidance for FY21:
  The company revised its FY21 revenue guidance to RMB2.8bn, which is higher than the previous estimate of RMB2.5bn. This indicates improved confidence in the company's performance for the upcoming fiscal year.

• Production Capacity:
  Tsugami China's factory utilization rate has exceeded 100%, and workers are working overtime to meet the demand. Labour is a production bottleneck, and the company is expected to hire ~300 additional workers after the Chinese New Year.

• Share Liquidity:
  The liquidity of Tsugami China's shares is a key risk, as it may take time to improve.

Valuation and Financial Performance

• Valuation Metrics:

  • Core P/E (x): 10.8 (FY21E), 9.5 (FY22E), 8.4 (FY23E)
  • Fully diluted P/E (x): 10.8 (FY21E), 9.5 (FY22E), 8.4 (FY23E)
  • EV/EBITDA (x): 5.8 (FY21E), 5.0 (FY22E), 4.3 (FY23E)
  • P/B (x): 1.7 (FY21E), 1.5 (FY22E), 1.3 (FY23E)

• Financial Performance:

  • Revenue (RMB m): 2,851 (2019), 1,944 (2020), 2,576 (2021E), 2,839 (2022E), 3,126 (2023E)
  • Reported Net Profit (RMB m): 368 (2019), 156 (2020), 250 (2021E), 284 (2022E), 320 (2023E)
  • Core EPS (RMB): 0.964 (2019), 0.409 (2020), 0.656 (2021E), 0.746 (2022E), 0.840 (2023E)
  • DPS (RMB): 0.350 (2019), 0.300 (2020), 0.241 (2021E), 0.273 (2022E), 0.308 (2023E)

• Profitability:

  • EBITDA margin: 18.0% (2019), 13.1% (2020), 16.5% (2021E), 16.6% (2022E), 16.4% (2023E)
  • EBIT margin: 16.5% (2019), 10.7% (2020), 14.3% (2021E), 14.3% (2022E), 14.2% (2023E)
  • Net profit margin: 12.9% (2019), 8.0% (2020), 9.7% (2021E), 10.0% (2022E), 10.2% (2023E)
  • Return on Equity (ROE): 26.0% (2019), 10.6% (2020), 15.3% (2021E), 15.7% (2022E), 15.9% (2023E)

Liquidity and Balance Sheet

• Liquidity Ratios:

  • Current ratio: 3.1 (2021E), 3.6 (2022E), 3.3 (2023E)
  • Quick ratio: 1.8 (2021E), 2.3 (2022E), 2.0 (2023E)

• Balance Sheet Highlights:

  • Cash & cash equivalents (RMB m): 368 (2021E), 494 (2022E), 602 (2023E)
  • Receivables (RMB m): 550 (2021E), 616 (2022E), 668 (2023E)
  • Inventories (RMB m): 680 (2021E), 634 (2022E), 817 (2023E)
  • Total assets (RMB m): 2,180 (2021E), 2,326 (2022E), 2,668 (2023E)
  • Shareholders' equity (RMB m): 1,633 (2021E), 1,813 (2022E), 2,016 (2023E)
  • Net debt/equity (%): Net cash (2021E), Net cash (2022E), Net cash (2023E)
  • Major shareholder: Tsugami Corporation holds 72% of the shares.

Cash Flow and Activity Ratios

• Cash Flow from Operations (RMB m): 217 (2021E), 295 (2022E), 290 (2023E)
• Free cash flow to firm (RMB m): 117 (2021E), 230 (2022E), 225 (2023E)
• Activity Ratios:
  • Inventory days: 125.7 (2021E), 106.1 (2022E), 123.9 (2023E)
  • Accounts receivables days: 78.0 (2021E), 79.2 (2022E), 78.0 (2023E)
  • Accounts payables days: 54.5 (2021E), 42.7 (2022E), 53.6 (2023E)
• Dividend Payout Ratio: 36.7% (2021E), 36.7% (2022E), 36.7% (2023E)

Peer Valuation Comparison

• Tsugami China (1651 HK):

  • P/E (x): 17.3 (FY20), 10.8 (FY21E), 9.5 (FY22E), 8.4 (FY23E)
  • P/B (x): 1.8 (FY20), 1.7 (FY21E), 1.5 (FY22E), 1.3 (FY23E)
  • ROE (%): 10.6 (FY20), 15.3 (FY21E), 15.7 (FY22E), 15.9 (FY23E)
  • EV/EBITDA (x): 7.5 (FY20), 5.8 (FY21E), 5.0 (FY22E), 4.3 (FY23E)

• Haitian International Hldgs (1882 HK):

  • P/E (x): 22.2 (FY20), 19.9 (FY21E), 17.8 (FY22E)
  • P/B (x): 3.0 (FY20), 2.7 (FY21E), 2.6 (FY22E)
  • ROE (%): 13.3 (FY20), 13.7 (FY21E), 14.4 (FY22E)
  • EV/EBITDA (x): 10.9 (FY20), 14.3 (FY21E), 12.6 (FY22E)

• Global Peers (JP and TT):

  • Tsigami Corporation (6101 JP): P/E 48.4 (FY20), P/B 2.8 (FY20), ROE 14.1 (FY20)
  • DMG Mori (6141 JP): P/E 120.9 (FY20), P/B 3.2 (FY20), ROE 17.0 (FY20)
  • Amada Holdings (6113 JP): P/E 19.7 (FY20), P/B 1.0 (FY20), ROE 7.3 (FY20)
  • Okuma Corp (6103 JP): P/E 38.4 (FY20), P/B 1.2 (FY20), ROE 11.1 (FY20)
  • FANUC Corp (6954 JP): P/E 84.2 (FY20), P/B 3.8 (FY20), ROE 10.7 (FY20)

Key Risks and Notes

• Liquidity Risk: Share liquidity may take time to improve, which could affect trading activity and investor confidence.
• Overseas Demand: Overseas new orders are recovering slowly, with less than 100 units in October and November 2020, and about 130-140 units in December 2020 and January 2021.
• Analyst Disclosure: All views are based on the analysts’ personal opinions and are not influenced by compensation or other incentives. BOCI Group has not taken steps to ensure the suitability of the securities for any particular investor. Investors are advised to make independent decisions and consult financial advisers.

Conclusion

Tsugami China is showing strong signs of recovery, with a significant increase in new orders and revenue guidance for FY21. The company is actively working to improve production capacity and liquidity. Despite the challenges, BOCI Research maintains its BUY rating and target price of HK$11.44, which reflects a 35% upside. The company's valuation remains competitive compared to its peers, and its financial performance is expected to improve in the coming years. However, liquidity and overseas demand remain key risks to consider.