Key points of investment:
Leading domestic automobile brake pads, operations have resumed to rapid growth
1) The company was founded in August 1999 and specializes in automobile brake pads and brake discs for disc brakes and drum brakes, which are important components in automobile braking systems. Currently, the company has 221 braking friction material formulations, which can produce more than 6,300 kinds of automobile brake pad products and more than 3,900 automobile brake disc products, which can be used in mainstream passenger car models and commercial vehicle models around the world. 2) The company's customers are distributed at home and abroad. The main sales and revenue come from the AM market at home and abroad. In 2018, the share of brake pad/brake disc sales in the AM market reached 97.17%/98.17%. 3) In 2018, brake pads accounted for 77% of main revenue, and exports accounted for more than 85% of revenue. Brake pads and overseas markets were the main source of the company's revenue and profit. In the first three quarters of 2019, the company achieved operating profit of 181 million yuan and net profit of 150 million yuan, up 87.55% and 91.27% year-on-year, returning to rapid growth.
The number of cars owned in the world is huge, and the company has broad prospects for growth
Since the company's sales volume basically comes from the after-sales market, the stock logic for the company's growth is strong. The number of new cars owned in the world is expected to be around 14-1.5 billion, and the number of new domestic cars owned is 250 million. Therefore, with the support of huge car ownership, automobile brake pads and brake discs, which are consumables, will have considerable and stable market demand. According to estimates of automobile production and ownership data, the global automobile brake pad+brake disc market has exceeded 100 billion dollars. The company's revenue is distributed over a wide range of markets, with more than 85% coming from overseas markets. Overall, more than 50% comes from the European market and about 15% comes from the North American market. The number of cars owned in Europe and North America is expected to exceed 400 million vehicles. Coupled with the Chinese market, they will form the foundation and support for the company's continued growth in the future. Relying on the cost performance advantage of products, the company is expected to gradually replace imports of high-end products and “go global”, thereby achieving a continuous increase in market share.
Product structure improvement, automobile OEM and high-speed rail innovation machine
1) The company's brake pad products are divided into the Entry/Good/Better/Best series from general to high-end. Currently, the products are mainly in the middle and high-end series. The proportion of Good series products is constantly increasing, the Better/Best series accounts for more than 70%, product prices are rising, and the product structure is improving. As the company optimizes product structure and technical structure, optimizes customer resources, and improves operational efficiency, it is expected that the product structure will continue to improve in the future, and profitability will continue to improve. 2) Compared with the AM market, the automotive OEM market has stricter product technology and quality requirements, more difficult market development, and relatively higher profit margins. For a long time, the domestic and foreign automobile brake pads and brake disc OEM markets were mainly dominated by international/joint ventures. As a leader in the domestic automotive brake pad field, the company has successfully obtained supporting supply qualifications from some OEMs through continuous R&D and innovation. In particular, the company passed Daimler's PFA review last year and officially supplied supporting products in batches for Mercedes-Benz models. This not only reflects the quality level of the company's products, but also provides important demonstrations and guarantees for the company to continue to conquer the OEM market in the future. Although the company currently accounts for a low share of OEM placements, the growth momentum is clearly better than the overall trend. In the future, as customers continue to develop and the scale effect of OEM support becomes apparent, profitability is expected to improve or even surpass the AM market. 3) Actively promote a concerted diversification strategy. For example, the company is actively developing engine brake pads and plans to enter the railway and other rail transit markets. The company has developed three EMU powder metallurgy gate products and obtained CRCC certification from the China Railway Inspection and Certification Center. As subsequent samples are detected and road tests continue to advance, the company is expected to help increase the localization rate of China's high-speed rail train braking systems in the future and will benefit from the rapid development trend of domestic high-speed rail. We believe that the high-speed rail brake pad business will open up the ceiling of the company's current business and market, and is expected to become a new growth point for the company's medium- to long-term development.
Profit forecasting, first coverage gave a “increase in holdings” rating
We expect the company to achieve operating income of 1,644/19.49/2,317 billion yuan in 2019-21, an increase of 17.45%/18.59%/18.85%, net profit of 2.12/254/303 million yuan, a year-on-year increase of 139.75%/19.89%/19.15%, corresponding to EPS of 1.04/1.25/1.49 yuan/share, corresponding to PE in 2019-21 was 16/13/11 times respectively, considering that the company is a leading domestic automobile brake pad enterprise Products and channels have comparative advantages, and for the first time they have covered a “increase in holdings” rating.
Risk warning: the growth of brake pads and brake discs is lower than expected; raw material price risk; exchange rate risk