FY12 results –slightly above on strong
Yingde reported FY12 NPAT of RMB771m (-7.3% YoY), slightly above our RMB739m (Consensus’ RMB730m) on higher revenues, lower depreciation and administrative expense. FY12 revenues grew 16.9% YoY to RM4.96bn (in line) as stronger onsite revenues (+24.9% YoY to RMB4.36bn) outweighed weaker merchant revenues (-20.3% YoY to RMB599m). The strong onsite revenues was driven by 5 new onsite facilities added during the year, which took FY12 gas sales up 29.4% YoY to 13.27m Nm3. Yingde ended FY12 with 41 total operating facilities, along with 11 new onsite contracts. Yingde also declared a FY12 dividend of RMB0.15/share (35% payout) vs. our est 0.12/ shr.
Op margin soft but better than DBe
While FY12 revenues were strong, this came at the expense of higher selling outlays (+37.5% YoY to RMB181m) needed to maintain a larger sales team and greater administrative costs (+30.1% YoY to RMB310m; DBe: RMB365m) relating to hiring / retaining mgmt staff at the individual gas production plants. Cost of sales also grew 21.3% YoY to RMB3.38bn, in line with Yingde’s expanded operations. The higher costs, along with the sluggish merchant market drove Yingde’s FY12 margin to a record 22.2% low vs. our 20.5% estimate. The corresponding FY12 operating income was RMB1.1bn vs. DBe of Rmb 1.01bn and 2011 op income of Rmb 1.09bn.
Investment thesis
We continue to like Yingde on the back of an improving China steel story and an anticipated pick up in earnings. Roughly 60% of Yingde’s installed capacity is leased to China’s steel companies, the single largest user of outsourced industrial gases (25% market share). As at YE2012, Yingde had 30 onsite facilities underdevelopment, representing 73% of Yingde’s current total gas plants in place. If all the facilities were to commence as planned and provided Yingde can obtain sufficient capital, this would add materially to the company’s revenues and earnings over the next 2-3 years.
Valuation and risks
We use the Gordon Growth Price-to-Book (ROE-g/COE-g) model to value Yingde. We use a CoE of 8.0%, which includes Erp / Rf, as standardized by DB and a beta of 0.9x. We apply a TG rate of 2.5% to reflect China’s long-term 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 and 2) customer credit risk.