FY12 and 2H12 results preview
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Yingde is due to report FY12/2H results on 28-March. We expect the company to report 2H12 NPAT of RMB347m, +2% YoY. We increased our FY12e profit 6.3% to RMB739m on the back of anticipated lower tax and interest expense due to higher capitalization of borrowing costs. Our 2012e op income is relatively unchanged at RMB1.01bn. We expect Yingde to declare a RMB 0.12/shr dividend (28% payout). We maintain a Buy on the stock on the back of strong earnings growth 2014e/2012e and an improving operating environment.
Adjusting our operational estimates
We raise our onsite gas volumes per plant to reflect DB’s more bullish stance on the Chinese steel sector, but tone down our 2012e / 13e onsite start-up expectations to account for potential commencement delays. Mgmt originally guided for approximately 8 /10 facility starts 2012e / 13e. We have reduced our installed oxygen capacity and corre sponding cost of sales 2012-13e in an attempt to de-risk new business start-ups. Elsewhere, we also lower our 2013/14 merchant ASPs from continuing weakness in argon prices
Investment thesis – unchanged. Buy maintained
We continue to like Yingde on the back of an improving China steel story and an anticipated strong pick up in earnings 2014 /2012e. Roughly 60% of Yingde’s installed oxygen capacity is leased to China steel companies, the single largest user of outsourced indu strial gases (c.25% market share) in China. We see strong earnings growth 2014e due to increasing capacity additions from new customer contracts signed in 2011 and expected in 2012e.
Valuations are discounted – ri sks are principally macro
We use the Gordon Growth Price-to-Book (ROE-g/COE-g) model to value Yingde. Our CoE of 8.0% includes a China Rfr of 2.9%, Erp of 5.7% and beta of 0.9x. Our Erp and Rf are standardized by DB. We apply a TG rate of 2.5% which is our LT China inflation estimate. Our Yingde target P/B ratio is 2.22x on 2013-14e ROEs of 13.6% and 16.0%, respectively. The principal risks to our Buy rating are: 1) a slowdown in China’s economy; 2) customer credit risk; and 3) competition from both domestic and international gas suppliers.