The company's recent situation
On March 16, Wencan Co., Ltd. disclosed the “Notice on Signing a Framework Agreement on Equipment Procurement”, announcing that it signed an “Equipment Procurement Framework Agreement” with Shenzhen Lingwei Technology, a subsidiary of Lijin Technology, on March 16, 2023, to purchase 38 large-tonnage die-casting machines customized from its company. The procurement efforts of Wencan Co., Ltd. have exceeded market expectations. Our comments and updates on the company's recent situation are as follows.
reviews
Orders for 38 large-scale die-casting machines were obtained, and cooperation with leading foundry companies was further deepened. According to the company's announcement, the contract includes 38 automatic unit islands for cold-chamber die-casting machines (including a total of 8 super-large die-casting machines of 6,000 tons or more), including 3 units of 9,000 tons, 1 unit of 7000 tons, 4 units of 6,000 tons, 8 units of 4,500 tons, 6 units of 3,500 tons, 11 units of 2,800 tons, and 5 units of 2,800 tons. It is expected that obtaining large orders will benefit the company's performance growth in the next two years.
The industrialization of integrated die-casting continues to advance, and penetration is expected to accelerate this year. Since this year, Geely Jichao, Xiaopeng, Great Wall, and FAW Hongqi have successively announced models using integrated die-casting. We believe that as new power car companies enter the mass production period, third-party die-casting manufacturers are also continuing to deploy. Furthermore, the application of technology extends from the rear bottom panel to the front cabin, the center, and even the integrated chassis. We believe that demand for oversized die-casting machine equipment is expected to usher in rapid growth. We expect the company's on-hand orders to be quite full. With the launch of the Ningbo Hangzhou Bay plant in the second half of the year, it is expected that the production capacity of 4 oversized die-casting machines per month will be released to speed up order digestion.
Demand for 2000T~5000T large die casting machines is strong, and the boom in small and medium-sized die casting machines and injection molding machines is recovering. We estimate that the continued strong downstream expansion of production of three-electric systems, aluminum body parts, etc. is expected to drive rapid revenue growth for 2000-5000T large-scale die-casting machines. According to our recent research, demand for small to medium die casters and injection molding machines, where demand was low in the first half of last fiscal year (3M22-9M22), also bottomed out in the second half of the fiscal year. We believe that the growth rate of the company's performance in 2023 is expected to recover upward.
Profit forecasting and valuation
Considering that the company signed large orders for oversized die casting machines and the recovery of the boom for small and medium-sized die casters and injection molding machines, the profit forecast for the 2023-2024 fiscal year was raised by 7.3%/4.9% to HK$647 million/HK$843 million. The P/E corresponding to the 2023/2024 fiscal year was 18.6x/14.3x. Considering the increase in profit forecasts, we raised the target price by 5% to HK$10.99, corresponding to the 2023/2024 P/E being 23x/18x, a potential increase of 25.5%, maintaining outperforming the industry rating.
risks
The penetration of the integrated die-casting process fell short of expectations; market competition intensified; and the increase in profitability fell short of expectations.