Times Electric (Zhuzhou) reported sales and net profit up by 20.9% and 21.5% YoY in 2023, with sales in line and net profit beating our estimate by 5.3%. Gross margin expanded to 33% in 2023 from 32% in 2022.
SG&A cost increased by 17.4% YoY, lower than top-line growth.
Finance income rose by 35.1% YoY, much contributing to the bottom- line growth. Operating cash flow increased 36% YoY. Zhuzhou raised the dividend payout ratio to 35.5% in 2023 from 30.5% in 2022, a strong motivation to share the good cash holding with shareholders. We retain sales estimate and slightly revise up earnings estimate in 2024E.
We lower the target multiple from 23x to 18x 24E P/E to factor in the de- rating of home market, and derive the new TP HK$45.08. Retain BUY rating.
Key Factors for Rating
Similar to parentco CRRC, Zhuzhou benefits from a good rebound in the demand recovery in EMU (Electric Multiple Units) and locomotive in 2023. Zhuzhou's earnings are mainly driven by the rolling stock industry while its valuation is more moved by the valuation of the EV industry. The hauling system to the rolling stock industry delivered 5% YoY growth and 47% sales contribution in 2023, still the single largest segment.
In 2023, Zhuzhou continued to book strong growth in semi-conductor products: 69% YoY for the power semiconductor, 74% YoY for industrial converter products, and 75% YoY for the electric drive system of EV. The new industry accounted for 40% of total sales in 2023.
The railway equipment segment delivered 33.9% gross margin in 2023, slightly lower than 35.8% in 2022, mainly caused by the drag-down of the urban rail.
The new industry segment expanded gross margin from 25.7% in 2022 to 28.2% due to better scale of economics, contributing to the expansion of the blended gross margin. We expect growth rate of the EV application might normalize gradually with the normalizing EV industry.
Key Risks for Rating
The value chain of EV industry may be uncertain in competition patter and the outlook.
Valuation
Sales estimate is retained and earnings estimate is revised up slightly in 2024E.
We lower the target multiple from 23x to 18x 24E P/E to factor in the de-rating of home market, and derive the new TP HK$45.08. Retain BUY rating.