Brokers' Take - YHI International
IN this update, we highlight the distribution segment's excellent prospects in China, despite the recent measures to cool the economy. Similarly, the planned expansion of the group's alloy wheel production capacity is running ahead of schedule and will provide a strong growth platform for the manufacturing business.
With these twin impetuses, we remain confident that YHI will meet our earnings growth forecast of over 35 per cent over the next two years. Our price target of $1.50 is based on 13x FY05PE, and we recommend that investors BUY ahead of positive earnings newsflow.
The group's addition of a fifth production line in Shanghai in May and the complete installation of the sixth line by end-July will ensure growing quarter-on-quarter earnings sequentially from its manufacturing segment. Order books are full and will keep all seven production lines (including the one in Taiwan) busy until the middle of next year.
The group also has plans to build two more lines in China in 2005 that are geared towards larger alloy wheels that yield higher margins. Demand from China's growing after-market will drive the distribution business.
Despite an expected slowdown in car sales growth in the country, China remains the world's fastest growing auto market. With production capacity at its Hangzhou tyre plant expected to reach 1.4 million pieces by the end of FY05, Yokohoma is well-positioned to capture a larger slice of the tyre after-market, which is expected to grow from 24 million pieces in 2003 to 64 million pieces by 2008. YHI will be a prime beneficiary of this development, as it will distribute most of these (1.2 million) PRC-made tyres to Yokohoma.
YHI has also begun the distribution of Hitachi batteries in China and expects to sell 150,000 pieces in FY04 and 300,000 pieces in FY05. In the meantime, growth in the South-east Asian region remains firm, led by the buoyant Malaysian automotive components after-market.
We are maintaining our BUY recommendation for YHI as it is trading at an undemanding 8.8x FY05 PE and 5.9x FY05 EV/Ebitda, vis-a-vis our target multiple of 13x FY05 PE for the group - implying a 49 per cent upside.
We see the stock re-rating upwards as the group delivers strong earnings growth in its Q2 (announcing on Aug 13) and Q3 (announcing in mid-November) results.
- DBS VICKERS RESEARCH, July 15
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