Key points of investment: Xinbang Holdings, founded in 2002, is a Chinese supplier of automotive electroplated parts, and has now expanded into a global supplier, serving a number of international first-class suppliers and vehicle factories. With a good track record and a vertically integrated business model, coupled with capacity expansion and mergers and acquisitions, Xinbang is on a path of rapid growth. Xinbang is currently valued at 14x 2017E and 11x 2018E, with a discount of 29 per cent and 30 per cent for more sensitive (425 HK, unrated).
Two major barriers to entry in the automotive electroplating industry. First of all, before the parts manufacturer becomes a supplier to the customer, it usually takes many years to establish a reliable business relationship with the customer. Second, because the electroplating industry is a polluting industry, the Chinese government will implement an increasingly stringent policy on the automotive electroplating parts industry, which actually makes new access quite difficult.
The vertically integrated production mode makes the product yield higher than the average of the industry. Xinbang's main products are electroplated interior parts of passenger cars, such as interior handles, door trim panels, transmission lever covers, steering wheel parts, control panel components and dashboards. Xinbang attaches importance to the one-stop production capacity of mold production, injection molding and electroplating, so the finished product rate is relatively high. The management pointed out that every 1% increase in the finished product rate can lead to a 1% increase in gross profit margin. The finished product rate of Xinbang in 2016 is as high as 90.7%, higher than the industry average of 85-89%.
The finished product rate in the first half of this year was 89.6%, but it was mainly due to the short-term factors that new production capacity had just been launched.
Production capacity increased by nearly 23% in 2018. As of June this year, Xinbang has an actual production capacity of about 2.5 million square meters, and the company plans to add two new production lines, one in Huizhou (with a production capacity of 350000 square meters) and the other in Mexico (220000 square meters). This will lead to a 23% increase in new production capacity next year.
The pace of mergers and acquisitions is ideal, providing room for sales growth. Xinbang recently announced two mergers and acquisitions: (1) the company acquired Wanlitong (Jiujiang) Metal Surface treatment Technology Co., Ltd. for 36 million yuan in September. The company plans to build two new production lines with a total production capacity of 700000 square meters. Production is expected to start by the end of 2018. (2) in October, the company bought a Japanese electroplating company in China for 55 million RMB. The target company is located in Changzhou, about an hour's drive from Xinbang's existing Wuxi production base. The company has two existing electroplating production lines capable of carrying out discharge permits with a daily drainage capacity of 500 tons. Xinbang plans to rectify and adjust the production line, which is expected to help increase production capacity in 2018.
A large number of on-hand orders support growth in the coming years. Vehicle manufacturers generally require first-tier suppliers to achieve price reduction tasks and targets every year. As a result, Xinbang's first-tier supplier customers will ask for a reduction in the price of spare parts during the supply period, which is generally between 2% and 6% per year on average. Nevertheless, Xinbang has raised the average product price over the past few years by obtaining orders for new models and offering more diversified products (from RMB4.0 per unit in 2014 to RMB4.8 in 2016), and we expect this trend to continue. As of June this year, Xinbang had an order of 8.7 billion yuan (equivalent to 5.6 times the sales of 1.54 billion yuan in 2016), which already reflects the price reduction terms requested by customers.
Risk factors: (1) higher-than-expected price reductions requested by customers; (2) significant increases in raw material costs, including plastic resins, electroplating chemicals (nickel sulfate) and metal parts (phosphorus copper balls); and (3) policy risks in the United States and Mexico.