Key points of investment:
Leading commutator company with steady revenue growth. Commutators, which appeared along with the generation of DC motors, are important components of small and medium-sized motors and micromotors. According to estimates by the Micromotor and Component Branch of the China Electronic Components Industry Association, the global demand for commutators in 2015 was 6.467 billion, with a demand scale of 12.438 billion yuan; China's demand for commutators was 3.362 billion, and the demand scale was 6.746 billion yuan, accounting for 54.20% of the global market. The company is a leading global commutator company, with a global market share of 12.11% in 2015. In 2017, the company's commutator business maintained its competitive advantage and revenue grew steadily; it achieved revenue of 1,009 billion yuan, an increase of 15.05% over the previous year, accounting for 72.86% of operating income.
The advantages of large customers are obvious, and production capacity bottlenecks are expected to be broken through. The company positions high-end core precision components and always targets internationally renowned enterprises to develop business. It is an excellent partner for world-renowned customers such as Bosch, Daimler, Nippon Denso, ZF, Mahler, BYD, Johnson Electric, Valeo, Wanbao, China, Electric, etc., and has established strategic partnerships with many companies; the top five customers accounted for 45.47% of revenue in 2017. The first phase of the fund-raising project in Changsha was officially put into operation in December 2017. The company will complete the second phase of the infrastructure project in 2018, and the Shenzhen Pingshan base will be officially put into operation in July 2018. After the new production base is built and put into operation, it will effectively break through the bottleneck of production capacity restrictions, further expand the scale of production, ease the company's current situation of insufficient production space, and increase the company's market share and profitability.
Acquire 100% of the shares of SMK in Germany to further expand the three-electric system for new energy vehicles. In May 2018, Kaizhong Germany, a wholly-owned subsidiary of the company, plans to acquire 100% of SMK's shares for 25.3939 million euros (equivalent to RMB 195 million), and Kaizhong GVM, a wholly owned subsidiary of Kaizhong Germany, plans to acquire SMK production and operation plants and land for 28.20 million euros (equivalent to RMB 219 million). Established in 1950, SMK is a leading German manufacturer that mainly provides high-tech parts and functional components to the automotive industry. It has a number of patents to provide customers with core components such as automotive power heat exchange systems and gas exchange systems. It has fully automated production bases, prototyping capabilities and R&D centers in Stuttgart (famous automobile manufacturing center) and Dresden (Daimler-Benz new energy vehicle battery base). Once this acquisition is completed, it will further support the “motors, batteries, and electronic control” of the company's new energy vehicles
The layout of the three-electric system.
It was covered for the first time, giving it an “increase in holdings” rating. Without considering the impact of the acquisition of 100% of SMK's shares in Germany on the company's performance, the company's net profit for 2018-2020 is estimated to be 172 million yuan, 228 million yuan, and 316 million yuan respectively. The corresponding EPS is 0.59 yuan/share, 0.78 yuan/share, and 1.08 yuan/share respectively. Based on the calculation of the closing price of 14.84 yuan on June 12, 2018, the corresponding PE is 25, 19, 14 times, respectively. We believe that the company's leading commutator target has a scarce texture. It was covered for the first time, giving the company an “increase in holdings” rating.
Risk warning: The development of the commutator market fell short of expectations; the company's market share growth fell short of expectations; the company's major customer business development fell short of expectations; the company's production capacity construction fell short of expectations; and acquisition progress fell short of expectations.