Haitian had experienced earnings decline earlier than most peers as the shrinking global demand for medical plastics resulted in declines in sales and net profit since 2H22. The lower base and the ramp up of the overseas legs help offset the domestic sales trend. 2H23 witnessed good rebound, both sales and net profit rose by 15.4% YoY in 2H23, much better higher than the almost flat YoY trend in 1H23. Cash dividend payout further raised to 38.3% in 2023. The results are in line with consensus. We retain earnings and TP unchanged, and reiterate Haitian as our key recommendation.
Key Factors for Rating
Sales and net profit increased by 6.2% and 10.1% YoY in 2023, and 15.4% and 15.4% YoY in 2H23. It indicates Haitian has successfully stepped out of the earnings decline in the pasted three interims. Sales growth, margin, and net profit growth all performed better in 2H23 than in 1H23, with sales and net profit both rose by 15.4% YoY in 2H23 than the flat trends in 1H22. By geography, overseas sales rose by 17.3% YoY while domestic sales delivered flat YoY trend in 2023. Overseas sales’ contribution climbed to 39.4% in 2023, a meaningful jump from the original level of 30% in 2021.
Gross margin was 32.1% in 2023, slightly better than 31.8% in 2022. SG&A cost expanded by 12% YoY in 2023. Operating cash flow was RMB2.0bn, 13% YoY. Cash holding was RMB10.8bn by yearend 2023, 8.9% YoY. Cash situation is solid, the best among industrial peers. Cash dividend payout ratio increased to 38.3% in 2023, from 33.9% in 2022. The increased cash dividend payout indicates Haitian’s motivation to share with minority shareholders.
Overseas leg strategy comes more aggressive than expectation, more geography coverage and a broad global strategy. Haitian is not satisfied with only developing countries, but starts to build facility in Japan, Germany, and dual head office in Singapore. They also build new facility in Serbia to serve the developed countries in Europe. The production facility will commerce operation during 2H24-2025, and fully contribute since 2026. Haitian aims the overseas leg will contribute 50% of sales in medium term, from the current 39.4% in 2023.
Key Risks for Rating
Global demand recovery comes later than expected if US$ interest rate cut comes late.
Valuation
We retain earnings estimate unchanged. The same TP HK$27.99 indicated
21.7% upside. Its global strategy will work well. We highly recommend Haitian.
2023 results were in line with consensus and our estimate. Haitian is one of the first industrial manufacturers that have sales and net profit rebound after 18 months of weak results. Haitian is one of the early birds that kicked off the overseas expansion in the pasted ten years, with the highest overseas sales contribution portion of 39.4%
What really surprises us on the positive side is Haitian announced an aggressive and realistic global expansion strategy. Their vision is not limited to Vietnam, India, Mexico, but a broad and wide global strategy. They also plan to build up a second headquarter in Singapore, besides Ningbo. We summarise the global strategy as:
Dual headquarters: to build Singapore and Ningbao as dual headquarters for global strategy.
Six global administration centers: to build regional management centres in Germany, Turkey, India, Mexico, Singapore, and Japan. It is the first time Haitian includes Japan as part of the global strategy.
Six global manufacturing centers: to build the regional manufacturing centers in Serbia, India, Mexico, Japan, and Malaysia, besides the production centres and capacity in China.
Sales mix target: plan to have 50% sales from overseas in medium term from the current 39.4% in 2023.
Manufacturing capacity planning: In India, a second new plant in Chennai will commence in 2H24, will work together with the plant in Gujarat. The new plant in Serbia will start the operation in 2025. A new plant is under construction in Japan. In addition, the new plants in Southeast China will be put into operation in 2025.
With the overseas experience in the pasted ten years in Vietnam, India, Turkey and Mexico, Haitian is able to roll out a full global expansion strategy. Haitian is able to run the global strategy successfully. Haitian is the most diversified industrial manufacturers. The long-term global exposure will much help the valuation of Haitian. We reiterate our key recommendation for Haitian Int’l.