The company defends the excellent and promotes the innovation, and gradually improves the layout of the braking field. The company's products include disc brake pads, drum brake pads and brake discs in brake components. Among them, brake pads account for the highest share of revenue, reaching more than 84 per cent over the years; brake discs are a new business in recent years, but they are growing very fast, and their business contribution has increased by 10.2 pp to 14.1 per cent in three years. The company's overseas business is mainly concentrated in the AM market, accounting for more than 85% of the company's revenue, while the company's domestic business takes into account both the AM market and the OEM market. In recent years, with the release of brake capacity, the company's performance has achieved relatively rapid growth. In 2015 and 2016, the company achieved operating income of 1.12 billion yuan and 1.29 billion yuan respectively, an increase of 5.7% and 15.2% over the same period last year, and a net profit of 160 million yuan and 210 million yuan, respectively, an increase of 13.4% and 28.6% respectively.
Overseas AM market demand growth, domestic AM and OEM business dual core drive, the company's performance growth is expected. Europe and the United States together account for about 80% of the total overseas revenue, and it is expected that overseas markets will steadily increase to contribute to the company's high performance in the future, mainly because: 1) stable demand from the developed regions of Europe and the United States; 2) incremental demand from developing countries: car sales in developing countries have increased rapidly in recent years, and it is expected that with the advent of the replacement cycle, the AM market for brake pads and brake discs will have a lot of room for increment in the next few years. It is expected that the domestic market will provide great flexibility for the company's performance growth in the future. the main reasons are: 1) the high auto market will boost OEM business: at present, there are only 140cars owned by 1000 people in China. With the rise of residents' purchasing power, the automobile market will continue to improve in the next few years, directly contributing to the OEM market business. 2) the tide of replacement is coming to boost AM business: the number of cars in China in 2016 is about 190 million, with an average life of about 4.5 years, of which nearly 100 million are new vehicles in the past four years. With the advent of the replacement cycle, the domestic AM market business is expected. In addition, the company has a strong position in the industry and is expected to enjoy industrial development dividends for two main reasons: a) compared with domestic competitors, the company is in a leading position in product quality and variety; and b) compared with foreign competitors, the company's products are cost-effective.
Brake pads and brake disc business take a two-pronged approach and complement each other. The proportion of revenue from the company's brake disc business has increased by about 10.2pp in three years. The main reasons: 1) the realization of brake disc business from 0 to 1; 2) make full use of the existing high-quality customer resources: brake pads and brake discs are dual parts to each other, and the company makes use of the original customer channels of brake pads to successfully realize the hot start of brake disc business; 3) product diversification. In addition, there is a large revenue gap between the two businesses at present, and the company's future performance is expected to achieve high growth in three aspects: a) brake pads and brake discs business to expand new customers at the same time; b) brake pads continue to infiltrate existing customers; and c) brake pads infiltrate into brake disc exclusive customers.
Replacement of backward production capacity is beneficial to the improvement of the overall capacity of the company. A total of 1.03 billion yuan has been raised, mainly for upgrading and expanding production capacity, building technology center innovation centers, and replenishing liquidity. After the completion of two upgrading and expansion projects, the replacement of 5 million sets of backward production capacity will be completed, and 10 million sets of brake pads and 6 million sets of brake discs will be added. The production capacity of brake pads and brake discs will begin to be released gradually in 2017, and the yield will reach 60% and 50% respectively in 2017, 80% and 100% respectively in 18 and 19 years, or bring huge performance increments for the company.
Investment suggestion: the company's EPS from 2017 to 2019 is expected to be 1.26,1.51,1.76 yuan respectively. It is recommended to apply for 30-40 times PE with a reasonable value range of 37.8-50.4 yuan per share.
Risk tips: car sales are less than expected, the utilization rate of new capacity is low and so on.