Key points: we believe that Yihe will continue the trend of profit recovery in 2018. The growth is mainly driven by: (1) strong orders from major customers such as Hewlett-Packard, Fuji Xerox and Ricoh; and (2) the company's capacity construction in various regions is making satisfactory progress. With profits rebounding 150% from a low base in 2016 to HK $134 million in 2017, the company has granted stock options to management and, coupled with continued share buybacks, we believe that management is confident of earnings growth over the next two years.
Company background. Yihe Precision Industry is a vertically integrated precision manufacturing service provider in China, with the ability to design and manufacture precision metal and plastic moulds, which is very important for office automation equipment and automobile production. At present, the company's main customers include Canon, Fuji Xerox, Kyocera, Ricoh, Dongfeng and Faurecia. Yihe currently has eight production bases in China and one in Vietnam and one in Mexico (the Mexican base will be put into production by the end of this year).
Revenue from office automation equipment has recovered this year. Office automation equipment is the largest source of revenue and contributes 60% of revenue in 2017. Samsung Electronics's Samsung copier program, the main customer of Yihe, was acquired by Hewlett-Packard in September 2016, resulting in a 95% year-on-year drop in revenue and a 2% drop in total revenue in 2017. However, Yihe has previously received an order from Hewlett-Packard and set up a new base in Weihai, Shandong Province to meet the new order. we expect the order this year to reach HK $200 million, which is similar to the amount given by Samsung before the acquisition. Management expects the order amount to rise further from 2019. On the other hand, we expect revenue from Fuji Xerox to grow by 20% a year in 2018 and 19. Fuji Xerox, the largest customer of Yihe, contributed 18% of its revenue last year.
New production bases in Weihai and Vietnam drive revenue growth. In February this year, he bought the right to use three plots of land in Weihai, Shandong Province, at a cost of 142 million yuan. The new land will be used for the construction of new factories and is expected to start production in the second half of 2019. To meet HP's current orders, Yihe bought a parts maker for HK $52.7 million in December last year and rented a temporary plant in Weihai. In Vietnam, the first phase of the production line was put into production at the beginning of last year, mainly serving Fuji Xerox and Kyocera. Yihe is now building the second phase of the production line on schedule and is expected to start production by the end of 2018.
The auto sector continues to grow. Due to strong orders from Faurecia, Yihe is building a production base in the state of San Luis Potosi, Mexico, and the first phase is expected to be operational by the end of this year. We expect revenue from the auto business to maintain double-digit growth.
A sound balance sheet supports capital expenditure and dividend distribution. The total estimated capital expenditure for 2018 and 2019 is HK 800 million In addition, the company has maintained a dividend ratio of 30% since 2012, which we believe will continue in the future. Since the company's net debt-to-equity ratio was only 4.5% at the end of last year, we believe the company has room to meet investment and distribution through debt financing.
Grant stock options and buy back shares. 67 million and 70.3 million share options were granted to management in 2016 and 2017 at an exercise price of HK$0.692 and HK$1.10 per share, respectively, equivalent to 7.8 per cent of the shares issued by the company. On the other hand, the company bought back 90.8 million shares in the market last year at HK $99.2 million (the average price is HK$1.09), and so far this year, it has bought back 48.3 million shares at HK $58.7 million (the average price is HK$1.21). We believe that the management will have a great incentive to achieve profitable growth.
Risk factors: (1) weakening demand for office automation equipment and cars; (2) delays in the construction of new capacity.