Maintain BUY. We are of the view that Minth’s 2H24 earnings were a mixed bag, as revenue missed but GPM beat. However, its improved operational efficiency, reflected by reduced net debt, lower capex and much higher free cash flow, could lay the foundation for future margin improvement and a higher dividend payout ratio. We see ample room for revenue growth in FY25-27E, as battery housing revenue continues to grow fast and new products start to generate meaningful income. Meanwhile, we also expect battery housing margins to further improve in FY25E, as capex winds down.
2H24 revenue miss, GPM beat. Minth’s 2H24 revenue was 9% lower than our prior forecast, dragged by Japanese brands in China. Gross margin of 29.3% in 2H24 (the highest since 2H21) beat our projection by 1.7ppts, aided by battery housing and metal and trim segments. Both operating and net profits in 2H24 were in line with our estimates. Free cash flow rose from RMB131mn in FY23 to RMB1,363mn in FY24.
Ample revenue growth room with improving operational efficiency. We are still of the view that Minth is better positioned in the global auto parts industry than most peers, despite the rising geopolitical risks. Its battery housing business in FY24, with 13.8% net margin, 32% contribution to net profit and free cash flow of RMB140mn, has proven its importance, despite an EV sales slowdown in Europe. We expect battery housing’s margins to further improve in FY25E, as capex winds down. New products including door sealing systems, sub-frames and integrated intelligent exteriors, could further fuel Minth’s revenue growth in FY26-27E. Parts manufacturing in humanoid robots and eVTOL may start to contribute meaningful revenue from FY28E onwards.
Earnings/Valuation. We project Minth’s FY25E revenue to rise 13% YoY to RMB26.2bn and GPM to be 28.6% (vs. 28.9% in FY24), as battery housing business continues to grow faster than other segments. We also expect SG&A and R&D combined ratio to narrow by 0.7ppts YoY to 17.2% in FY25E, which would result in a net profit of RMB2.7bn (+17% YoY) on our estimates. We maintain our BUY rating and raise target price from HK$21.00 to HK$26.00, based on 10x our FY25E EPS (prior 10x FY24). Key risks to our rating and target price include lower revenue/margins, higher risks in overseas operation than we expect, as well as a sector de- rating.