Investment Summary

Q4 soared, making 15 percent added to the whole year's result. Recently CAERI released the 2019 preliminary result report. In 2019, the company achieved an annual revenue of RMB2,754 million, representing a slight yoy drop of 0.14%. Net profit attributable to the listed company shareholders was RMB465.7 million, a yoy increase of 15.49%. EPS was RMB0.48. Net profit attributable to the listed company shareholders after deduction of non-recurring losses and gains was RMB430 million, a yoy increase of 15.16%.

The net profit of the first three quarters was RMB94.4/95/97.4 million, a yoy increase of 8.43%/9.77%/15.9%, respectively, maintaining a steady growth with the expanding ratio. In the fourth quarter, the net profit increased dramatically by 23% yoy to RMB179 million.

The business structure was turning better, and the gross margin went up substantially. The company's revenue by quarter was low at first and went up later. The first two quarters saw the revenue of RMB501 million/RMB582 million, down 22% and 28% yoy, respectively. The third and fourth quarters saw the revenue of RMB606 million/RMB1,070 million, which increased by 8.7% and 42% yoy. The reasons behind this are as follows:

1) In 2019 H1, the engineering vehicle market encountered downturn and the company's business of special vehicle manufacturing declined sharply yoy.

2) However, since the third quarter when the domestic heavy truck market recovered, the special vehicle business had regained some stability.

3) Meanwhile, the testing cycle of models subject to the National VI standard was lengthened, and the checking time for the revenue of automotive technical services was correspondingly lengthened.

4) The company held sufficient test orders for models subject to the National VI standard, which would be delivered faster in H2.

In terms of the business structure, the company's automotive technical service has grown rapidly, with the highest gross margin and the best profitability, leading to a significant increase in the company's overall gross margin. The company's gross margin recorded in the past four quarters were 30.2%, 28.4%, 29.8%, 31.2%, respectively; with a yoy increase of 6/11.1/2.6/-4.4 ppts, respectively. The overall gross margin of the year increased by 4.2 ppts to 30.1%.

Good cost control: the company improved management and took a series of measures to cut cost and increase efficiency, so the condition of cost control was good. Sales expenses for the first two quarters fell 0.9% and 9.8% yoy, respectively. In the last two quarters of rapid growth, sales expense increased by only 1.6% and 9.3% yoy, respectively. The overall ratio of the sales expense of the year had basically no change yoy. Administration expenses increased, with the annual ratio of administration + R&D increasing by 2.1 ppts to 10.2%. Based on our assessment, it was mainly due to increased expenses on operation and depreciation after new capacity was put into operation.

New capacity was put into operation and high added-value business stepped into growing stage: in the perspective of the downward pressure on domestic economy, the slowdown development and competition in existing market of automotive industry, and the rapid development of new energy vehicle market, the factory launched new intelligent connected models which are more competitive. This will lead the rapid growth of China's automotive technology service industry, and the company's high added-value business was expected to usher in rapid growth. The new capacity built in 2019 included a new automobile wind tunnel laboratory and an intelligent connected model test base. In the future, it also plans to build the first hydrogen power quality control centre in China and a R&D test base for "new energy and intelligent connected models" in the Yangtze River Economic Belt, to further improve its strategic layout and resource integration.

Investment Thesis

In the fourth quarter, CAERI introduced equity incentive plan again, which bound the interests of core employees to those of the company, stimulated the enthusiasm of the employees, and contributed to the achievement of long-term stable growth target. Considering the high monopoly barrier of the counter-cyclical automotive technology service business of the company, as well as the turning point of result brought by the operation of the new capacity, we give target price of RMB 9.8 yuan, respectively 20.4/17.3/15.4x P/E of our expected EPS for 2019/2020/2021and an "Accumulate" rating. (Closing price as at 13 Jan)

Financials

Click Here for PDF format...