20210322-招银国际-中国宏桥-01378.HK-Re-rating_to_continue_on_strong_fundamentals_8页_1mb

China Hongqiao (1378 HK) Company Update Summary

Core Content

China Hongqiao (CHQ) reported FY20 results that exceeded expectations, with a net profit of RMB10.5bn, representing a 72.2% YoY increase. This was primarily driven by a better-than-expected effective tax rate of 17.8%, which was 8.6ppt lower than the previous year. The company also announced a full-year dividend payout of 44%, with HK50 cents in final dividends and HK15 cents in interim dividends.

Main Points

Financial Performance

• Revenue: Increased from RMB84,179mn in FY19A to RMB86,145mn in FY20A, with a 2.3% growth in FY20A.
• Net Income: Rose from RMB6,095mn in FY19A to RMB10,496mn in FY20A, a 72.2% YoY increase.
• EPS: Increased from RMB0.71 in FY19A to RMB1.22 in FY20A, and is projected to reach RMB1.55 in FY21E and RMB1.56 in FY22E.
• Earnings Growth: CMBIS revised earnings upward by 23.3% and 27.3% for FY21E and FY22E, respectively, due to improved aluminum price assumptions.

Earnings Sensitivity

• CHQ's earnings are highly sensitive to aluminum and coal prices.
• A 1% increase in aluminum price is expected to drive a 3.6% earnings growth.
• A 1% decrease in coal price is projected to result in a 1.2% net profit increase.

Target Price and Valuation

• The target price (TP) was lifted to HK$15.00, up 31.9% from the previous TP of HK$11.37.
• The current price is HK$11.74, which is 27.8% below the new TP.
• CHQ is currently trading at 6.2x PER and offers a potential dividend yield of 6.8% in FY21E, making its valuation attractive.

Debt Repayment

• CHQ is on track to repay its debts, with full repayment of mature debt in January and February 2020.
• The company had more than RMB45.4bn in cash at the end of 2020 and sufficient line of credit to support its debt repayment schedule.

Share Placement

• CHQ raised HK$6.6bn through share placements and CB issuance, boosting market confidence and liquidity.
• The recent share placement of 243mn shares with net proceeds of HK$2.32bn was well-received, indicating strong market interest.

Key Assumptions and Projections

Strategic Developments

• Secondary Aluminum Business: CHQ formed a joint venture with Scholz Recycling Group to develop a secondary aluminum business in Shandong, with a target of processing 50k end-of-life vehicles and producing 500k tonnes of green aluminum.
• Capacity Expansion: The JV is expected to start phase operations in 2022, contributing to future aluminum sales volume growth.

Market Position

• Market Cap: HK$107,085mn.
• Shareholding Structure:
  • Hongqiao Holdings: 66.62%
  • CITIC Group: 9.62%
  • Freefloat: 23.76%

Risk Factors

• Unfavorable carbon trading updates.
• Potential decline in aluminum prices due to economic slowdown.

Analyst View

• Rating: BUY (Maintain).
• Reasoning: Strong fundamentals, solid debt repayment, share placement activities, and a favorable outlook for aluminum prices support the re-rating of CHQ.
• Key Drivers: Strong market commodity sentiment and good performance of aluminum prices.
• Valuation: Trading at 6.2x PER and with a potential dividend yield of 6.8% in 2021E, the company is considered undervalued.

Summary of Key Financials

Income Statement Highlights

• Gross Profit Margin: Increased from 19.6% in FY19A to 22.5% in FY20A, with a projected 26.6% in FY21E.
• Operating Margin: Rose from 16.6% in FY19A to 20.0% in FY20A, with a projected 24.8% in FY21E.
• Net Margin: Improved from 7.2% in FY19A to 12.2% in FY20A, with a projected 14.5% in FY21E.

Balance Sheet Highlights

• Current Ratio: Increased from 1.43 in FY19A to 1.33 in FY20A, projected to rise to 1.78 in FY21E.
• Net Gearing Ratio: Declined from 56.5% in FY19A to 39.7% in FY20A, and further to 21.7% in FY21E.
• Total Net Assets: Rose from RMB66,016mn in FY19A to RMB76,802mn in FY20A, projected to reach RMB88,621mn in FY21E.

Cash Flow Highlights

• Net Cash from Operations: Increased from RMB14,541mn in FY19A to RMB17,779mn in FY20A, with a projected RMB20,742mn in FY21E.
• Net Change in Cash: Rose from -RMB3,537mn in FY19A to RMB3,655mn in FY20A, and is expected to reach RMB2,976mn in FY21E.

Conclusion

CHQ's strong FY20 performance, combined with solid fundamentals, successful share placements, and a positive outlook for aluminum prices, supports a re-rating to BUY. The company is well-positioned to benefit from continued demand and favorable market conditions, with a target price of HK$15.00, representing a 31.9% increase from the previous TP.