Initiate with BUY and TP of HK$21.00. Minth Group (Minth) has beentransforming from an exterior decorative parts maker to a more diversified tier- 1 supplier with manufacturing capabilities in different materials. We are of the view that investors have probably underestimated Minth's solid overseas foundation which is crucial for the upcoming trade risks, as its valuation has dropped to a historical-low level. We also think battery housing and other new products such as chassis structural parts and intelligent integrated exteriors could lift Minth's dollar content per car in the next few years, which is also an important driver for its profit growth.
Solid overseas foundation as revenue and profit driver. We are of theview that Minth is better positioned than most Chinese parts suppliers in facing potential trade risks amid rising geopolitical tensions. Minth's major overseas plants have all been making money and contributed about 10% of its total net profit in FY23. We estimate overseas net profit could double in FY26E from FY23. We think Minth could be one of the top choices for Chinese automakers when they source parts for local production in Europe.
Still room for battery housing business to grow. Although we expectbattery housing price to drop over time, we see huge room for growth at Minth amid global EV market share increases and Minth's potential share gains in the battery housing segment. We expect Minth's battery housing revenue to surge 60%/35%/30% YoY in FY24-26E, higher than our projected global EV sales volume growth. We also expect gross margin for its battery housing to widen steadily as its Serbia and Czech plants ramp up. We believe battery housing is also a stepping stone for Minth to explore chassis related new products and a hedge to its saturated traditional business. More than 10% of battery housing segment revenue in FY23 came from chassis structural parts. Such demand could increase with its offering of products like front cross-members and sub-frames.
Earnings/Valuation. We project Minth's revenue to rise 19%/15%/13% YoY and net profit to increase 18%/14%/13% YoY in FY24-26E. We also expect its net debt to improve and dividend distribution to resume. If the company maintains its previous 40% dividend payout ratio, that could result in a dividend yield of 6.8% based on our FY24E net profit forecast and current share price (as of 15 July 2024). We initiate our coverage of Minth with a BUY rating and target price of HK$21.00, which is based on a 10x FY24E P/E, in line with its average forward 12-month P/E during the past three years. Key risks to our rating and target price include lower revenue/margins, higher risks in overseas operation than we expect, as well as a sector de-rating.
