A few important policies have been released to support the ongoing development of the manufacturing industry. These, along with the deployment of policies in recent months by the People’s Bank of China, China Banking Regulatory Commission and other departments, help to guide the financial industry in increasing support for manufacturers. All signs show that these policies have somewhat favoured the overall profitability of the manufacturing industry. Among which, CIMC Vehicles (1839.HK), which has received much attention since its Initial Public Offering (“IPO”), has rallied much faster than many of its counterparts and continues to outperform the market.
Stronger Industry’s growth momentum, especially cold chain logistics
Looking at the segmented fields of the semi-trailer industry, we draw attention to the growth prospects of the cold chain logistics industry. Since 2014, China’s cold chain industry has experienced a period of rapid development. According to the China Cold Chain Logistics Development Report (2019), the growth rate of China’s cold chain logistics increased from 19% in 2014 to 20.3% in 2018. The annual growth rate of circulation services and related equipment introduced by cold chain logistics has exceeded 30%. With the improvement of China’s economy, the continued trend toward urbanization and the implementation of a series of promotional policies for consumption upgrades and domestic consumption expansion, it is expected that the total volume of China’s cold chain logistics will continue to increase.
The report also pointed out that the total amount of cold chain logistics in 2018 accounted for only 1.7% of total social logistics, which is still far off the numbers being registered in developed countries, suggesting that the industry is still in its early stages of development. With the development of cold chain logistics towards warehouse integration and logistics automation, the research and development (“R&D”) as well as production of cold cars and core components for cold car demand has ushered in huge new business opportunities.
CICC’s report released on 12 December 2019 stated that China currently has about 53,000 refrigerated trailers, and that it expects China’s long-term refrigerated trailers penetration to reach 1 million units and market volume to hit RMB 40 billion (excluding tractors). The report pointed out that, as the industry leader, CIMC Vehicles had a market share of 9% in China in 2018 and that its products have certain advantages in terms of light weight, thermal insulation capacity, durability, and order response speed. It found that with the enhancement of product standards, CIMC Vehicles is expected to ramp up its market scale on the basis of size and product strength. CICC believes that as the sales structure of domestic refrigerated trucks shifts towards refrigerated trailers, the average selling price (“ASP”) of CIMC Vehicle’s refrigerated trailer products will generally rise, echoed by increased downstream demand driving growth in related businesses.
According to Frost & Sullivan, the overall sales of North American refrigerated trailers in 2017 reached 44,200 units and is expected to increase to 54,600 units by 2022. The planned capacity of a new CIMC Vehicles assembly plant in the US is expected to help the company double its market share of refrigerated trailers in the North American market. As for the European market, it is expected that the overall sales of refrigerated trailers will increase from 31,500 in 2017 to 40,100 in 2022. Before listing, CIMC Vehicles did not produce or sell refrigerated trailers in Europe. This implies, upon the formulation and implementation of the capacity expansion plan, as well as the enhancement in the production and delivery capacity of refrigerated trailers, CIMC Vehicles will experience rapid growth in its refrigerated trailers in the European market. This is based on its “Global Operations with Local Wisdom” strategy, “smart” production and extensive experience accumulated from Industry 4.0. To summarize, CIMC Vehicles is expected to quickly exploit new opportunities in China and emerging markets, as well as other mature markets in North America and Europe.
CIMC Vehicles has been expanding its refrigerated-trailers business in North America since 2008. In 2018, CIMC Vehicles had a market share of 7% in the refrigerated-trailer market in North America. As of the first half of 2019, sales of refrigerated trailers in North America increased by 67% over the same period last year, while the market share of refrigerated semi-trailers in North America continued to rise. With the prosperous development of the domestic cold chain industry, CIMC Vehicles is positioned to quickly capture significant market share. Currently, the CIMC Vehicles cold chain sector owns Shandong CIMC (covering various types of refrigerated-trailers) and Qingdao CIMC (covering refrigerated-trailers) production bases, of which standardization and customization are the two major development directions.
In addition, CIMC Vehicles is expected to continue benefitting from changes in the market structure driven by economic transformation, industrial upgrades, and the gradual increase of industry concentration, to become the biggest beneficiary under current market conditions.
Gaining attention from capital markets
CICC’s two recent industry reports also focused on CIMC Vehicles. Together with earlier reports by Haitong and CMB, various signs have indicated CIMC Vehicles is gradually gaining the attention of investors, with its stock price outperforming the HSI. The stock price of CIMC Vehicles began its ascension in September 27, and has so far rallied by over 38% from its low. Compared with the HSI, which hit its low in early October and has so far rebounded by only 7.17%, CIMC Vehicles has clearly made a positive impact among investors.
The market has also shown signs of continuous acceptance of CIMC Vehicles’ fundamentals and policy expectations. The implementation of the new national second-generation semi-trailer standards and the Chinese government’s moves to further enforce overload regulations will provide further momentum for the development of CIMC Vehicles. The company proposes a “Trailer Pioneer” product that complies with the second-generation national standard in order to help consolidate its market share in China and further enhance the company’s bargaining and pricing power as a domestic industry leader.
As the market continues to pay attention to Sino-U.S. Trade negotiations, the actual impact of these talks on CIMC Vehicles is under company’s control. CIMC Vehicles sells three models in North America, of which the van trailers are produced and assembled locally in the United States, and some parts of the refrigerated trailers are purchased in North America, meaning that trade friction has limited impact on these two models. Chassis trailer, which are produced in China but assembled in the United States, have limited exposure in the short term. However, the company’s post-IPO expansion plan includes increasing the capacity of refrigerated trailers in North America. The company’s recent announcement states that, in addition to retaining the new refrigerated trailer project in Monon, it is also setting up a refrigerated trailer assembly plant in Canada. The company will flexibly adjust the supply chain of chassis trailer in accordance with the latest trade situation in order to better deal with the impact of tariffs. Market expects that CIMC Vehicles is making its best efforts to reduce the negative impacts of tariff adjustments. As these uncertainties are gradually lifted, the market will naturally return the investment value of our shares.
Unique investment concept
CIMC Vehicles is one of the few representatives of smart and high-end manufacturing in the Hong Kong stock market. It is also a global leader in segmented fields, occupying a leading position within the industry. As an advanced manufacturing company with a unique investment concept, CIMC Vehicles currently has “low valuations and high dividend returns” for investors.
Prior to listing, the company implemented a high dividend payout policy, with dividend payout ratios ranging from 20 to 30% over the past three years. Dividend payout ratio was adjusted to 40 to 60% after listing. CIMC Vehicles disclosed in its financial report for 1H2019 its operating cash flow was RMB 855 million, which provided capital reserves and a satisfactory buffer to continue implementing its historical high dividend payout policy, and to achieve high dividend returns.
Compared with other high-end manufacturing shares in other Hong Kong stocks, such as Weichai Power (PE ratio 10.45x) and Sinotruk (PE ratio 8.12x) etc., CIMC Vehicles was rather undervalued with PE ratio around 6.94x. As the market becomes more familiar with CIMC Vehicles, the company’s valuation is expected to rise sharply.
Low profile listing for a bright start
As a leading state-owned company in a segmented industry, CIMC Vehicles landed quietly in the Hong Kong capital market and is gradually becoming recognized by the market. CIMC Vehicles is indeed at the forefront of industry development, it is certain to benefit from the opportunities brought by the increase in industry concentration, comprehensive industrial upgrades, and product enhancements. Under the influence of favourable policies, investment highlights of low valuations and high dividends are gradually being recognized by investors. CIMC Vehicles, having unique investment value and being a relatively stealthy target in the Hong Kong stock market, is expected to continue to attract investors’ attention.