Investment positives
We initiate coverage with a BUY rating and a target price of HK$13.17,a 16x 2019e target P/E.
Why a BUY rating?
Machine tool industry recovering with growing CNC ratio. Themachine tool industry is cyclical with a span of 7–10 years, the lastbottom being 2016. In China, driven by downstream capex expansionand technological upgrading, the ratio of CNC use has been rising. Weexpect the total consumption of CNC machine tools in China willreach US$19.2bn in 2020e, with a CAGR of 14.4% over 2017–2020e.
Expert in fast growing niche markets, especially precision lathes.PTC ranks #4 among Chinese machine tool manufacturers and #1 inprecision automatic lathes with a market share of 58% in 2016 interms of output. It is now expanding into precision turret machines,whose market size is 10 times that of automatic lathes. We expectPTC’s revenue from automatic lathes and turret machines to see aCAGR of 17% from 2019–2021e.
Competitive advantages, expanding product lines and capacity. Itsparent company Tsugami （Japan） gives PTC a renowned brand,top-tier technologies and suppliers, and loyal staff. A strong cash flowhas allowed consistent new product launches and investment in newplants. Upon completion of the Pinghu and Anhui plants, the capacitywill be 8,400 units p.a., or 40% enhancement from the current level.Economies of scale will help to improve margins.
How do we differ from the market? We are confident that TsugamiChina can deliver long-term growth as the machine tool industry isrebounding, CNC usage is rising and it is launching new products.
Potential catalysts: New product launches, strong new orders,further gross margin improvement due to economies of scale.
Financials and valuation
Our EPS forecast is Rmb0.51 for 2018 and Rmb0.65 for 2019, a CAGRof 47.2%. The company is trading at 16.4x 2018e or 12.8x 2019e P/E.We use comparable valuation and give the company a target price ofHK$13.17, or 16x 2019e P/E, implying 24% upside. Initiate with BUY.
Risks
Downstream industry demand misses expectations.