Investment Highlights
In-line set of 2012 results. Shenguan reported 2012 results with: (i) salesgrowth of 9.8% YoY; and (ii) adjusted net profit up 13.4% YoY, which was in-linewith the market consensus but 2% above our forecasts. In 2012, gross margindeclined 3.7ppts (to 58.2%) as a result of: (i) increase in raw material costs dueto the trial run of new production lines; and (ii) increase in electricity costs.However, increase in government grants and gain on disposal of equity; andstringent cost control on operating expenses helped offset the negative impactstemming from gross margin shrinkage. Adjusted net margin improved 1.5ppts(to 43.8%). A final dividend of HK6.5 cents/share and a special dividend ofHK3.3 cents/share were proposed, taking the full year pay-out ratio in 2012 to55% (vs. 40.5% in 2011).
Moderate sales growth momentum to remain in 2013E. We believe theCompany will continue to post moderate sales volume growth of 16% YoY in2013E; while ASP is projected to remain stable for the year. Gross margin isprojected to edge up 0.2ppt to 58.4% in light of improving efficiency after rapidinstallation of production lines in 2012 amid rising pressure on staff and rawmaterial costs.
Slowdown in pace of expansion during 2013-14E. After the aggressiveexpansions in 2012, the Company will slow the pace of its expansion during2013-14E but to ramp up its technology and to impart training for more skilledworkers after the installation of a number of new production lines in 2012. During2013-14E, Shenguan has budgeted yearly CAPEX of Rmb100-150mn toincrease its capacity by 10-15% per annum. We believe that the Company’sstrong operating cash flow is more than sufficient to finance its CAPEX internally.
2013/14E earnings forecast by -1.5%/-1.7%, respectively to reflect: (i) slowersales growth; (ii) higher production cost; and (iii) lower operating expenses. Afterconsidering the slower expansion prospects in 2013-14E, we forecast solid netcash of Rmb1,044mn and Rmb1,491mn for 2013-14E. A rising likelihood for theCompany is to maintain a high pay-out ratio for the next two years. Currently,Shenguan is trading at prospective 2013-14E PER of 13.2x and 11.5x,respectively. We fine-tune our TP slightly to HK$4.33 (prev. HK$ 4.40) based ona 2013E prospective PER of 13.8x (1-SD below the historical prospective PERsince its listing in Oct 2009 in view of moderate sales growth projected for2013-14E). All told, we maintain our OVEWEIGHT rating.
Investment Highlights
In-line set of 2012 results. Shenguan reported 2012 results with: (i) salesgrowth of 9.8% YoY; and (ii) adjusted net profit up 13.4% YoY, which was in-linewith the market consensus but 2% above our forecasts. In 2012, gross margindeclined 3.7ppts (to 58.2%) as a result of: (i) increase in raw material costs dueto the trial run of new production lines; and (ii) increase in electricity costs.However, increase in government grants and gain on disposal of equity; andstringent cost control on operating expenses helped offset the negative impactstemming from gross margin shrinkage. Adjusted net margin improved 1.5ppts(to 43.8%). A final dividend of HK6.5 cents/share and a special dividend ofHK3.3 cents/share were proposed, taking the full year pay-out ratio in 2012 to55% (vs. 40.5% in 2011).
Moderate sales growth momentum to remain in 2013E. We believe theCompany will continue to post moderate sales volume growth of 16% YoY in2013E; while ASP is projected to remain stable for the year. Gross margin isprojected to edge up 0.2ppt to 58.4% in light of improving efficiency after rapidinstallation of production lines in 2012 amid rising pressure on staff and rawmaterial costs.
Slowdown in pace of expansion during 2013-14E. After the aggressiveexpansions in 2012, the Company will slow the pace of its expansion during2013-14E but to ramp up its technology and to impart training for more skilledworkers after the installation of a number of new production lines in 2012. During2013-14E, Shenguan has budgeted yearly CAPEX of Rmb100-150mn toincrease its capacity by 10-15% per annum. We believe that the Company’sstrong operating cash flow is more than sufficient to finance its CAPEX internally.
2013/14E earnings forecast by -1.5%/-1.7%, respectively to reflect: (i) slowersales growth; (ii) higher production cost; and (iii) lower operating expenses. Afterconsidering the slower expansion prospects in 2013-14E, we forecast solid netcash of Rmb1,044mn and Rmb1,491mn for 2013-14E. A rising likelihood for theCompany is to maintain a high pay-out ratio for the next two years. Currently,Shenguan is trading at prospective 2013-14E PER of 13.2x and 11.5x,respectively. We fine-tune our TP slightly to HK$4.33 (prev. HK$ 4.40) based ona 2013E prospective PER of 13.8x (1-SD below the historical prospective PERsince its listing in Oct 2009 in view of moderate sales growth projected for2013-14E). All told, we maintain our OVEWEIGHT rating.
