FY2018 results in line with expectations
Precision Tsugami announced its FY2018 results: revenue rose 41.4%YoY to Rmb2.3bn and net profit attributable to shareholders grew72.4% YoY to Rmb194mn or Rmb0.51/sh, in line with expectations.
Revenue and gross margin expanded. In FY2018, PTC’s precisionlathe, precision machining centers, precision grinding machines andprecision thread & form rolling machines grew 42.9%, 41.5%, 8.3%and 8.6% YoY, respectively. Thanks to economies of scale, PTC’s grossmargin increased by 2.6ppt to 20.4%.
Period expenses ratio narrowed. Due to its IPO expenses, PTC’sSG&A expense ratio increased slightly, +0.1ppt to 7.3%; while thanksto its IPO proceeds, its financial expense ratio decreased by 0.3ppt inFY2018; and its net profit margin increased by 1.5ppt to 8.4%.
Cash flow remained healthy. In FY2018, PTC’s net cash inflow fromoperations were Rmb204mn （+11.6% YoY） and 1.05x its net profit.
PTC’s cash cow business continued to excel.
Trends to watch
Looking forward to a prosperous 2019. Since we initiated coverage ofPrecision Tsugami on June 15, its stock price has fallen by 12% due tomarket fluctuations and concerns over PTC’s growth sustainability.
Even though we see the firm as an industry proxy and Japan’smachine tool exports to China decreased 9% in May, we believe PTC’scoming new orders and sufficient backlog will assure it has aprosperous 2019.
Long term growth driver intact. We believe PTC will still benefit fromChina’s manufacturing upgrading and CNC ratio hike, along with itsown new product line and capacity expansion.
Valuation and recommendation
We maintain our earnings forecasts for FY2019/20. The company iscurrently trading at 11.6/9.5x 2018/2019e P/E, relatively cheap.
We maintain our target price of HK$13.17, corresponding to 13.3xFY19e P/E and offering 40.6% upside from the current price. Wereiterate our BUY rating.
Risks
Downstream demand is lower than expected.