Main points of investment:
1. The business of wear-resistant ball segment continued to decline and stabilized in the fourth quarter of 2016.
The company is a leading enterprise in the domestic wear-resistant ball section, with an annual production capacity of about 85000 tons of wear-resistant materials.
The main products are high and low chromium alloy casting ball section, multi-alloy casting ball section and lining plate, etc., of which the sales revenue of high chromium ball section and ultra-high chromium ball section accounts for more than 90% of the total income. There are a wide range of downstream applications, of which the mining and cement industries account for about 75% and 80%.
Due to the impact of capacity loss in the downstream cement and mining industries, income and profits have continued to decline in recent years. In 2016, the company achieved revenue of 307 million yuan, down 26.42% from the same period last year, and its net profit was 10.23 million yuan, down 64.61% from the same period last year. However, it can be found that revenue in the fourth quarter of 2016 was 107 million, an increase of 5.41% over the fourth quarter of 2015, showing a stabilizing trend.
2. Merger and acquisition of majestic Seiko, cut into the auto parts industry
The company plans to raise an additional 1.1 billion for the majestic Seiko equity acquisition project. The main products of Xiongwei Seiko are automobile stamping parts and automatic stamping die, in which stamping die products are mainly produced for matching stamping parts. Automobile stamping parts focus on the seat parts and body accessories of the car body system, including seat frame and adjusting structure, seat belt buckle, airbag, door hinge and so on.
In 2016, the income of majestic Seiko automobile stamping parts and dies was 779.0547 million yuan and 46.9101 million yuan respectively, accounting for 94.32% and 5.68% of the total income respectively.
3. Stable customer resources and high probability of achievement of commitment.
Majestic Seiko's main customers cover Yanfeng Johnson, Foggia, Boze, Takata, Magna, Otto Liv and other world-renowned first-class auto parts suppliers, customer resources are stable.
The trading side of Xiongwei Seiko promised that the net profit in 2016 and 2017 would not be less than 115 million yuan and 125 million yuan respectively, and the cumulative net profit in the profit commitment period (2016-2018) would not be less than 375 million yuan. Xiongwei Seiko achieved a net profit of 153.84 million yuan in 2016, exceeding the promised net profit by 33.77%, mainly due to the rapid growth of the automobile industry as a whole and low prices of raw materials in the first half of the year. We believe that the majestic Seiko performance commitment is relatively conservative, and the performance commitment has a high probability of realization.
4. Profit forecast and investment suggestions
Excluding majestic Seiko, we estimate that the company's revenue from 2017 to 2019 will be 307 million, 322 million and 355 million respectively, and its net profit will be 14 million yuan, 23 million yuan and 27 million yuan respectively. If the acquisition goes smoothly, taking into account the dilution of equity and referring to the committed performance of Xiongwei Seiko, the estimated net profit is 139 million, 158 million and 172 million yuan, EPS is 1.16,1.32 and 1.43 yuan, corresponding to PE is 32 times, 28 times and 26 times.
The company's current market capitalization is small, its performance has the potential for upward adjustment, and it is possible to further accelerate epitaxial mergers and acquisitions in the future, covering it for the first time and giving it an "overweight" rating.
5. The risk indicates that the progress of the acquisition of Xiongwei Seiko is not as expected, and the business of wear-resistant ball segment continues to decline.
