Investment logic
The growth rate of downstream power equipment investment is slowing down, and the company is actively seeking to optimize its business pattern. Xinhongtai's main business is the development and sale of low voltage circuit breakers and key components of circuit breakers. Customers include Fuji, Siemens, Schneider, Shanghai Renmin Electric Factory, Legrand Low Voltage Electric, etc. In recent years, due to the slowdown in the growth rate of social electricity consumption and the decline in investment demand for power equipment, the company's products have been affected to a certain extent. Operating revenue for the full year of 2016 was 377 million yuan, a decrease of 4.39% over the previous year, and net profit attributable to shareholders of listed companies was 65.95 million yuan, an increase of 0.1% over the previous year. The company actively seeks to optimize its business structure and industrial layout through outbound mergers and acquisitions to enhance its sustainable profitability and resilience to risks.
It is proposed to acquire Tianyi Shangjia to build a domestic high-speed rail brake brake faucet. Xinhongtai announced in August this year that it intends to acquire 100% of Tianyi Shangjia's shares by issuing shares and paying cash for 4.32 billion dollars. Tianyi Shangjia is a leading supplier of powder metallurgy gates for EMUs and locomotive and urban rail vehicle gates in China. Our customers are mainly railway bureaus and EMU vehicle manufacturers under the Railway General Administration. Tianyi Shangjia's founder team has many years of experience in R&D and manufacturing of friction materials. It began developing and testing high-speed rail gates in 2009, and provided Changke Co., Ltd. with 10,000 powder metallurgy brakes for EMUs in 2013, successfully breaking foreign monopolies and achieving import substitution. In 2016, it achieved operating income of 471 million yuan, an increase of 72% over the previous year, and net profit attributable to shareholders of listed companies was 197 million yuan, an increase of 122%; the profitability of the company's products was strong, with a gross margin of 70% and a net interest rate of over 40%.
Complete product certification+ The only supplier of standard valves, Tianyi Shangjia has an outstanding position in the field of high-speed rail gates.
Tianyi Shangjia high-speed rail gates have two core advantages: First, the company has complete product certification and a wide range of models. Currently, it holds five EMU powder metallurgy gate CRCC certification certificates, covering 15 models, covering mainstream models with speeds of 300-350 kilometers per hour and 200-250 kilometers per hour. The EMU stock demand base is huge. (2) Tianyi Shangjia TS588A powder metallurgy brake is the only supplier of “Fuxing” EMU brakes. According to the CRCC certification process, other manufacturers will receive Fuxing certification as early as 2019. The company is expected to maintain price and market first-mover advantage in the standard driving field; in recent years, the EMU brake market share has continued to increase, reaching nearly 20% in 2016, and is expected to increase further in the future.
As a result of high-speed rail construction, the number of EMUs owned continues to grow, and demand for EMU gates is broad. In 2016, the operating mileage of domestic high-speed rail reached 22,000 kilometers, and is expected to reach more than 30,000 kilometers during the 13th Five-Year Plan period. The number of EMUs owned continues to grow due to the construction and opening of high-speed rail. In 2016, the number of EMUs owned in China ranked 2,586 standard, and is expected to exceed 4,500 trains by 2020. EMU brakes are consumables. On average, 160 brakes need to be assembled for each standard train, and the brakes need to be replaced about 3 times a year. As domestic EMU ownership continues to grow and wear increases due to accelerated high-speed rail, demand for brakes will continue to grow rapidly. We estimate that the market size of EMU gates will reach 4.6 billion yuan by 2020, double the growth compared to 2015. The total market size in 2016-2020 was 17 billion yuan, with a compound annual growth rate of 17%. We believe that Tianyi Shangjia, as the first domestic gate supplier to break the monopoly of foreign countries, has a clear market advantage. It currently has the only Chinese standard gate supplier qualification, and has broad room for future growth. The company's performance promises for 17-19 were 228 million, 263 million yuan, and 303 million yuan after deduction.
Profit forecasting
Considering the exam preparation results after the acquisition of Tianyi Shangjia, we expect revenue from 2017 to 2019 to be 998/1,25/1.41 billion yuan, an increase of 160%/22%/17% over the previous year; the net profit of the mother was 3.22/408/491 million yuan respectively, up 388%/27%/20%, respectively; EPS was 1.12/1.42/1.71 yuan respectively, and the corresponding PE was 38/30/25 times, respectively.
Investment advice
We believe that the company's acquisition of Tianyi Shangjia this time is expected to become the leading and scarce target for EMU brakes that have mastered the core technology of high-speed rail in China; the 13th Five-Year High Speed Rail construction has led to an increase in EMU ownership, and demand for EMU gates as consumables is broad; Tianyi Shangjia brake products have covered many EMU models, and are currently the only supplier of Peuding Fuxing. The market position and first-mover advantage are obvious. Future market share is expected to increase and performance will have high growth potential. We gave the company a “buy” rating, with a target price of 55 yuan for 6-12 months.
Risk warning
The risk of approval of acquisition matters, the slow implementation of EMU tenders and procurement, and the risk of increased competition in the EMU powder metallurgy brake industry.