summary
Titan's convertible bond will be listed on November 15 (Wednesday) with a scale of 295 million yuan. According to our new securities pricing model, we believe that under the current stock price of the company, its convertible bond listing position may be around 124.01 yuan, with a premium rate of about 33.9%.
Underlying stock analysis
The issuer Titan Co., Ltd. is mainly engaged in R&D, production and sales of textile machinery and equipment. The main product, rotor spinning machines, has a leading domestic market share, and the shift in the textile industry chain has driven the expansion of the company's overseas market scale. The company's main products include three types of products: spinning equipment, weaving equipment and printing and dyeing equipment. In the company's 22-year main business composition, spinning equipment accounted for the highest proportion, reaching 62.22%. The rest includes weaving equipment (21.21%), textile yarn (13.59%), and the rest of the business accounts for a relatively low share. The overall industry in which the company is located is scattered and competition is sufficient. Each enterprise has an advantage in different segments. The issuer's main products, the rotor spinning machine and rapier loom, have a high market share in the domestic market. According to the company's estimates, the domestic market share of the two types of products in 2022 was 37.59% and 14.49% respectively. The company's textile machinery production capacity has not changed much since 2020. In 21-22, the company's revenue increased by 86.18% and 28.74% year-on-year respectively, mainly due to strong downstream orders, overseas market development, and full production of textile yarn subsidiaries.
In line with the trend of shifting the textile industry chain to Southeast Asia, South Asia and other regions, the company adjusted its sales strategy to focus on overseas market development. In 2022, the company's overseas revenue accounted for 40.77%, a significant increase from 13.57% in 2020. Among them, the Indian and Turkish markets accounted for 28.99% and 4.87% of the company's revenue in '22, respectively. 1H23 Affected by the weak economy in overseas markets, the company's overseas revenue fell 58.47% year on year, dragging down the company's overall performance.
The total amount of capital raised by the issuance of convertible corporate bonds to unspecified targets was no more than RMB 295.5 million. After deducting related issuance expenses, the capital raised was 160 million yuan for the intelligent textile machinery equipment manufacturing base construction project, 50 million yuan for the Hangzhou R&D center construction project, and 0.8 billion yuan for supplementary working capital.
In terms of growth, the company's compound revenue increased by 24.83% in the past five years (2018-2022), and net profit increased by 17.32%. The average compound revenue growth rate of companies in the same industry in the past five years has reached 12.2%, and the net profit growth rate has reached 23.4%.
The company's average ROA for the past 3 years (2020-2022) was 4.8%, compared to 5.5% in 2022. There are certain fluctuations in gross margin. The average gross margin for the past 3 years was 18.6%, compared to 21.6% in 2022. The average 3-year ROA for companies in the same industry was 5.8%, the 2022 average ROA was 4.5%; the industry's 3-year average gross margin was 28.8%, and the 2022 average gross margin was 27.2%. 1-3Q2023 achieved revenue of 1.11 billion yuan (YoY -14.0%), mainly dragged down by weak overseas demand. Net profit for the same period was 120 million yuan (YoY +11.0%).
The company's financial risk is moderate. We estimate the net debt risk factor to be 2.2%. The company's debt burden is medium. As of the end of 3Q23, the company's balance ratio is 52.58%, capital liquidity is medium, the fluctuation ratio is 1.4, and the short-term cash debt ratio is 1.3.
In terms of underlying equity, the actual controllers of the company are Chen Qixin and Chen Yourong (personal nature). As of September 30, 2023, the largest shareholder (Shaoxing Titan Investment Co., Ltd.) held 65.48% of the company's shares. In terms of restricted shares, the ban on 72.4% of restricted shares will be lifted on January 29, 2024. On November 10, 2023, the company announced that the controlling shareholder Titan invests in pledged shares, accounting for 24.75% of its shares and 16.2% of the company's total share capital, mainly used to provide pledge guarantees for the company's issuance of convertible bonds.
The market value of the underlying stock is small, and the elasticity is average. The total market value of the underlying stock is 2.8 billion yuan. The scale is small, accounting for 26.25% of the circulation market. The company's current P/E (TTM) is 19.6x, which is at a low level in its own history, and P/B (MRQ) is 2.07x, which is at a low level in its own history. The interest of stock institutions is low. The volatility rate for the past 180 days is 25.58%. According to our model forecast, the annualized volatility for the next 2 months will be about 37.0%, with average elasticity.
Terms and pricing
The scale of debt conversion is small, and debt base protection is weak. The current bond conversion scale is 300 million yuan, the initial conversion price is 13.81 yuan, and the starting point of the conversion period: May 1, 2024, the latest average price is about 93.48 yuan, the term 6.0 years, the coupon interest rate is 0.50%, 0.70%, 2.50%, 3.00%, 1.70%, 2.50%, 3.00%, and the maturity redemption price is 115.0 yuan. The corresponding YTM is 3.35%, and the debt base is about 67.25 yuan. The debt base protection is weak. The downgrade clause is 85%, 20/30 (net assets and face value at the bottom). The triggering conditions for the downgrade are strict. The redemption clause is 130%, 15/30, and the resale clause is 70%, 30/30.
According to our pricing model, Lake to Bonds, Xing Shuai to 2, Bohui to Bonds, Shenzhen Technology to Bonds, and Maimi to 2 have a large reference value for this period of debt conversion. We expect their secondary market pricing to be around 124.01 yuan, with a premium rate of about 33.9%. We believe that when the listing price is above 127.73 yuan, it can be considered overvalued; when it is above 130.21 yuan, it is significantly overvalued; when the listing price is below 120.29 yuan, it can be considered undervalued, and when it is below 117.81 yuan, there is significant undervaluation.
risks
Downstream demand has weakened; overseas market conditions have deteriorated.