China High Speed Transmission Equipment Group
China High Speed Transmission
Equipment Group (‘company’) is a leading supplier of wind gear transmission
equipment for wind turbine manufacturers. It also supplies industrial gears for
the heavy equipment market. This combined segment (‘wind’) contributed 90% of
profits.
It concentrates on the 2MW-7MW
wind turbine market though prototypes for 8MW-15MW are in the pipeline. It supplies
the leading manufacturers in China as well as prominent overseas manufacturers
such as GE, Siemens, Suzlon, and Doosan (15% export sales).
In addition, it manufactures rail
transport gear transmission equipment (2% of sales) and started a trading
business in 2020 dealing mostly in refined oil, electrolytic copper, and steel
products (30% of sales but only 5% of profits).
Though sales in the wind segment
were up 3.3% over the year, segment profit margins declined from 14.5% to 11%.
In addition, operating cash flows were strained with large working capital
requirements resulting in outflows of 1.5b rmb. Capex of 1.1 rmb added to the pressure
and these were mostly financed by borrowings (see below) as well as a partial
stake sale of a subsidiary (from 93% to 50%).
Sales have grown steadily over
the years and this seems to be a result of greater demand for wind power rather
than unusual product pricing spikes.
The company reported 20b rmb of
sales (including 6b rmb of trading revenues), EBITDA of 2.2b rmb, and net
profits of 1.3b in 2021.
Though borrowings increased, the
company reported a net cash position of 2.1b rmb (including 3.3b rmb of bills
receivables discounted with banks; and after working capital requirements).
The common stock was selling for
6b rmb. This is backed by 5b rmb of net current assets alone – mostly
comprising receivables, inventories, and other liquid assets.
Recent earnings of 1.3b doesn’t
appear to be abnormally good and could be taken as an indicator of normal
earnings. Returns on tangible assets are just under 12%, which appears
reasonable (despite allocations to loss-making associates and other unlisted
investments totaling 2.3b rmb).
This represents an earnings
multiple of <5x. In addition, prospects are at least reasonably bright as
China forges ahead with its dual carbon goals of peak carbon use by 2030 and
carbon neutrality by 2060.
Dividends weren’t declared in
2020 or 2021 though it paid out regular dividends of ~300m rmb before then.
Overall, this stock appears to be
reasonably priced on an investment basis.