Report guide
FOSCO Singapore and Fushi buckle Zhejiang was established, the company will officially enter the overseas and domestic urban rail (including urban) fastener market, breaking the growth ceiling.
Main points of investment
Investment suggestion
Xianghe is a typical high-profit company, with a 19-year gross profit margin of 43.76% and a net profit rate of 26.43%. The company's asset-liability ratio is only 6.69%, financial leverage is very low, and ROE has a lot of room for improvement. It is expected that with the establishment of FOSCO, the company will change from a high-speed rail fastener non-metallic fitter to a fastener system integrator, while entering overseas and urban rail (including urban areas) and other new infrastructure fastener markets, the growth ceiling will be broken. The company's net profit is expected to increase by 11.86%, 23.13% and 11.93% year-on-year from 2020 to 2022, with corresponding valuations of 29 times, 24 times and 21 times, respectively. Because the company's current valuation is at the upper end of the historical valuation range and is also higher than the comparable company's valuation, we give the company an overweight rating.
More than expected factors
By 2019, the mileage of China's high-speed railway has reached 35400 km, exceeding the 13th five-year Plan.
With a target of 30,000 km, it is expected that the target of 38000 km in 2025 in the medium-and long-term Railway Network Planning will also be achieved in 2020. The market believes that investment in high-speed rail will decline during the 14th five-year Plan period, and there are fewer investment opportunities in the industrial chain.
We believe that the logic of the company exceeded expectations: 1) at the industry level, according to our incomplete statistics, the mileage of high-speed rail under construction or planning in China exceeded 15000 km by March 2020, in order to hedge against the macroeconomic downturn, it is still necessary to maintain a certain intensity of high-speed rail investment, and high-speed rail fasteners have entered a centralized renewal cycle during the 14th five-year Plan period, coupled with the increment brought by high-speed rail fasteners applicable to intercity railway standards. The demand for high-speed rail fasteners may rise rather than decline during the 14th five-year Plan period. 2) at the company level, with the establishment of FOSCO Singapore and Fushi buckle Zhejiang, the company will change from a high-speed rail fastener of non-metallic parts to a fastener system integrator, while entering overseas and urban rail (including urban areas) and other new infrastructure fastener markets, breaking the growth ceiling.
Over-expected logic derivation path
Industry level: the market believes that the decline in the new mileage of high-speed rail during the 14th five-year Plan will lead to a decline in the market size of fastener non-metallic parts. We believe that the annual mileage of high-speed rail will be increased by 2600 km during the 14th five-year Plan period, although it is less than 3432 km during the 13th five-year Plan period, but with the updated demand and the application of high-speed rail fastener standards for inter-city railways, the average annual demand for high-speed rail fasteners during the 14th five-year Plan period is expected to reach 27.08 million sets, an increase of 18% over the same period last year.
Corporate level: the market believes that 88% of the company's revenue mainly comes from high-speed rail fasteners. Once the mileage of new high-speed rail declines, so will the company's performance. We believe that 1) the renewal demand and the increment brought by the intercity railway will make the demand for high-speed rail fasteners increase rather than decline during the 14th five-year Plan period; 2) after the establishment of FOSCO Singapore and Fushi Zhejiang, the company will change from a high-speed rail fastener to a fastener system integrator, and the value of a single set of products will be changed from the original non-metallic parts to a complete fastener system, and the value will be increased by 1.5 times. At the same time, it can enter the overseas and urban rail (including urban areas) and other new infrastructure fastener markets, breaking the growth ceiling.
Catalyst
1) the company has related orders landed in the city, subway and overseas; 2) the quarterly results exceeded expectations.
Core risk
1) the intensification of competition in the new market leads to the decline of gross profit margin; 2) the sharp increase in raw materials such as nylon and natural rubber