We hosted Minth NDR this week. In 1Q24, we expect total revenue to increase by 15% YoY, behind full-year growth target of 20% YoY, mostly attributable to the revenue slowdown in overseas market, whereas net profit may climb faster for the period. Due to the constant heavy capex and the lack of external funding resources amid the unfavourable interest-rate environment, the company has not declared final dividend for the first time since listing. However, we reckon the company does not change its long-term stable dividend policy, and any potential dividend resumption could help restore investor confidence, thus positive to share prices. Now its shares are trading at 6.7x 2024E P/E and 0.7x 2024E P/B, dipping into the historical low level. We deem the current valuation seems already priced in the pessimism over the company’s outlook, in contrast with the management positive guidance for mid-term growth backed by abundant backlog. Maintain BUY rating with lower TP of HK$20 (10x 2024E P/E).
　　Key Factors for Rating
　　1Q24 business update. We expect total revenue to add c.15% YoY in 1Q24, lagging behind the full-year growth target of 20% YoY mostly attribute to the revenue slowdown in overseas market; in contrast, domestic revenue performed well thanks to the contribution of new order from multiple Chinese brands accumulated over the past year. Net profit may present faster growth of 20% YoY with constant improvement in margin in 1Q24. Regarding the annual price drop matters, management conveyed confidence in our NDR meeting to hold the annual price reduction steady at between 2%-2.5% range.
　　Potential impact from AD/CVD investigations in US for aluminium extrusions imports. Many investors raised concerns over potential impacts from the anti-dumping (AD) investigation and countervailing duty (CVD) investigation in US for aluminum extrusions imports from Mexico. According to the preliminary determinations of CVD investigation, we estimate the Department of Commerce would impose extra CVD of 1.68% on the aluminum extrusion product of Minth that imported from Mexico since March. In fact, Minth has been beefing up preventive measures ahead of final decision on AD/CVD duties to tackle increasing protectionism and geopolitical tensions. In the near term, they would team up with major US OEM clients to claim for duty- relief for aluminum extrusions imported from Mexico. For mid-to-long run, the company is planning to establish a new capacity hub in Canada as an alternative to current Mexico base, which may not be a cost competitive choice vs. current Mexico hub but more reliable and durable to ensure the localised supply security given the partnership steadfastness between the US and Canada.
　　Dividend suspension is temporary with possible interim dividend resumption as management positive attitudes towards keeping dividend policy. During our NDR meeting, the mgmt. further explained the suspension for the final dividend for 2023. On the one hand, the company’s CAPEX has been staying high at above RMB3bn for three-consecutive years from 2021 accompanied by intensive overseas capacity expansion and innovative business investment. One the other hand, the financing environment has become increasingly tough in particular triggered by the unprecedented rate-hike cycle from early 2022. As a result, the company has turned into net debt position since 2020 and witnessed a widening net debt in recent three years . By end-2023, Minth’s net debt reached all-time high at RMB4.2bn coupled with surging finance cost last year. In light of the cash flow strains and the invisibility of external funding amid current interest-rate climate, the company suspended the final dividend declaration for the first time, thereafter leading to recent wipeout of prior rewarded investors. However, given the investors’ strong negative response to dividend suspension, we reckon management may reconsider potential dividend payout in 2024, though the payout ratio may not reach the normal level of 40%.
　　Additional localised capacity overseas and new innovative business may lead to a prolonged CAPEX cycle. Management guided the overall capex at RMB2.5bn-3.5bn for the full-year of 2024, largely outstripping the previous estimates. Given the continued investment in Canada hub, stronger local supply needs from Japanese clients in North America, and considerable spending on innovative business, we deem Minth’s CPAEX cycle may last longer than previously anticipated.
　　Innovative business operation update: (i) Body and chassis structural components delivered revenue of RMB400m with a meager gross margin of below 10% in 2023, trailing the overall profitability of battery housing BU in our estimates. Going forward, the mgmt. expected a robust YoY growth for the sub- segment that on par with entire batter housing BU of 50% in 2024. (ii) Intelligent integrated exteriors posted revenue of RMB400m in 2023. For 2024, management guided a revenue scale of RMB500m-600m as the massive order conversion is still in the early phase of production count. In spite of the milder sales ramp-up this year, we view it a meaningful driver for the plastic BU’s future growth and margin improvement in the mid-to-long run. (iii) In addition to above innovative business that speed up into harvest season, the mgmt. also shared with us several new business opportunities such as cell structural parts, EV wireless charging technology and hydrogen storage system.
　　Earnings Forecast and Valuation
　　We slightly lower our net profit forecasts for 2024-2025E by 4%-5% to RMB2.1bn/2.5bn, respectively, to reflect lower revenue forecasts considering the uncertain global vehicle market, especially for overseas market shadowed by slower electric migration, geopolitical tensions as well as possible disruptions from AD/CVD duties.
　　To ride on the industry electric migration trend, Minth has been actively embarking on its own transition over the past three years, evidenced by go- global practice with wider coverage and stronger localised supply ability, as well as expansion of innovative product offerings related to electrification. We reckon Minth has gone ahead of most Chinese component counterparts in terms of global operational capabilities. However, the large capital inputs related to overseas manufacturing expansion and new business expansion have brought about cash flow strain, which lifted the street’s concerns over the sustainability of future dividend distribution, prompting its substantial de-rating over the past two years.
　　Now its shares are trading at 6.7x 2024E P/E and 0.7x 2024E P/B, dipping into the historical low level. Yet we reckon the current valuation seems already priced in pessimism over the company’s future outlook, in contrast with the company’s positive guidance for mid-term growth backed by abundant order backlog. Thus we maintain BUY rating but lower TP to HK$20.00 by adopting 10x 2024E P/E (vs. 13x 2024 E P/E before). The key factors for valuations count on the delivery of guidance for this year’s revenue and margin, possible interim dividend declaration in August, and the final determination of AD/CVD investigation that would possibly be issued by Department of Commerce in October.