COMPANY NEWS Minth Group Limited [425.HK; HK$19.7 Not Rated] - Key Takeaways from Ningbo Production Base Visit

Market Cap: US$2,820m; Free Float: 60.0%; 3-month Average Daily Turnover: US$3.2m

The Company. Minth Group Limited is primarily engaged in the design,

manufacture and sales of trims, decorative parts, body structural parts and

other related auto parts. With manufacturing bases in China, the US,

Mexico, Thailand and Germany, and technical centres in China, Germany,

North America and Japan, it is able to provide services to major automotive

markets around the world and meet the growing demand from its customers.

We organized a visit to Minth’s Ningbo production base last week.

Minth’s Ningbo production base (华东二区) is responsible for manufacturing

decorative parts and generated revenue of over RMB700m in 2015, roughly

10% of the group’s total revenue last year and carried a higher than group

average gross margin through higher operating efficiency and economies of

scale. The current utilisation rate stands at ~70% for this base.

Export business continues to grow. Minth’s export sales accounted for

~40% of overall sales in 2015, up from 38.2% in 2014. It both exports

directly and sets up overseas factories. The export business benefits from

the global purchasing strategy in the automotive industry. Major overseas

customers include GM, Ford, BMW, Nissan, Honda and Toyota. Minth has

factories in Thailand, Mexico, Germany and the US. In Europe, Minth won

new business for 10 models globally with Daimler (for a maximum annual

volume of ~one million units). It also secured its first roof rack orders from

BMW and secured orders for stainless steel trim products from Volkswagen.

For US OEMs, Minth obtained trim business for Fiat Chrysler’s car models in

the South American market and achieved a breakthrough in the long sliding

rail business of General Motors. It also has new orders from luxury brands,

including the Honda Acura and Jaguar Land Rover.

Aluminium products continue to make progress. Minth’s aluminium

products include roof racks and trim. Aluminium contributed ~15% of the

revenue mix in 2015 and is expected to rise to 23%~24% in 2016. The

company manufactures its aluminium products in the Huai’an plant, Jiaxin

plant and CST plant in Germany. The gross margin for its aluminium

products is similar to group’s average margin, while the Huai’an plant has a

higher margin because of its improving utilization rate. The margin for its

aluminium products is expected to improve further. Currently Minth’s

aluminium products have been massively successful for the luxury cars of its

European customers. Its products for Audi will go into production in 2H16,

while those for Daimler will start delivery in 2017. According to the company,

average aluminium use per car is only 5% in the Mainland compared to 12%

internationally, which leaves huge room for the company’s aluminium

products, considering the increasing demand for lightweight car body

designs.

Expected margin improvement in 2016. Management expects the

Company’s gross profit margin to improve from 31.7% last year to 33%~35%

in 2016, and expects the operating margin to climb over 18% from 17.4%

last year. According to the company, the upward margin trend is due to the

rising contribution of alumnium products, declining commodity prices, RMB

depreciation and improving overseas profitability. Raw material costs,

although slightly rebounding from the end-2015 level, are still lower than in

1H15. RMB depreciation should also help the company as ~40% sales are

April 27, 2016

Source: Bloomberg, Company Data.

[Minth Group Limited ]

from overseas markets. The Company’s Mexican factory and wholly

owned US subsidiary Plastic Trim International have also improved

their profitability from the previous below-company-average level

through yield enhancement.

High order visibility supports growth. Minth secured RMB4.7bn in

new orders in 2015 and is targeting RMB4.2bn in new orders in 2016,

which combined with its previous backlog and future order visibility,

supports management’s previous guidance of ~15% revenue growth

in 2016 and a mid-term revenue target of RMB20bn in 2020. In Q1

2016, domestic sales achieved ~30% YoY growth because of

business growth from Honda, Nissan, GM, Chang’an, etc. Capex for

2016 is expected to decrease to RMB1bn from RMB1.18bn last year

owing to lower investment in land.

Our view. A number of factors can help boost Minth’s mid-term

growth: a diversified customer base, global footprint, high order

visibility and margin recovery, combined with the Company’s efforts

to expand its portfolio to take advantage of business opportunities

from the lightweight, intelligent, automatic trend in the auto industry.

Risks. Weaker-than-expected passenger vehicle sales, auto parts

purchase price cut from OEMs, slower overseas GPM recovery

progress.

Analyst: Nevin Ning nevinning@chinastock.com.hk; Tel: (852) 3698 6321

Mark Po, CFA markpo@chinastock.com.hk; Tel: (852) 3698 6318

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Turnover (RHS) Price (LHS)

Key Financials

(in Rmb m)2014 2015 2016E 2017E

Rev enue 6,683.9 7,654.1 8,961.6 10,334.0

Gross Prof it 2,085.2 2,427.7 3,008.7 3,497.4

Gross Margin % 31.2 31.7 33.6 33.8

Net Prof it 1,117.6 1,271.7 1,517.5 1,751.1

Net Margin % 16.7 16.6 16.9 16.9

EPS (Basic) 1.02 1.15 1.37 1.58

ROE (%) 14.2 14.5 15.5 16.0

Div idend Yield (%) 2.41 3.35 3.24 3.78

PER (x) 16.79 14.21 11.64 9.96

PBR (x) 2.27 1.97 1.70 1.49

Capex (m) (1,219.2) (1,180.0) (980.0) (913.7)

Free cash f low (m) (99.9) (137.7) 413.7 802.7

Net cash/(net debt) (mn) 885.7 808.7 2,146.3 1,896.5

Figure 2: Sample decorative parts

Source: CGIS Research

Figure 1: Minth’s Ningbo production plant

Source: CGIS Research

Source: Company data, CGIS Research Source: Company data, CGIS Research

Figure 3: Sales by delivery location Figure 4: Overseas sales/Overall turnover

China60.2%

North America24.7%

Europe8.7%

Asia Pacific6.4%

2015

China61.8%

North America22.5%

Europe9.1%

Asia Pacific6.6%

2014

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10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

Domestic sales Overseas sales

Figure 5: Peer Comparison

Sources: Company data, Bloomberg, CGIS Research

Ticker Company PE EV/EBITDA

Price Market Cap 2016F 2017F 2018F 2016F 2017F 2018F 2015 2016F 2015 2016F 2015 2016F 2015 2016F

Lcy US$m x x x x x x x x % % % % % %

China auto parts

425 HK Minth Group Ltd 19.70 2,820 11.6 10.0 9.0 8.5 7.4 6.4 2.0 1.7 14.5 15.5 9.3 11.2 2.5 3.1

2339 HK Beijingw est Industries Inter 0.20 152 n.a. n.a. n.a. n.a. n.a. n.a. 1.5 n.a. n.a. n.a. 15.1 n.a. n.a. n.a.

1148 HK Xinchen China Pow er Holdings 1.27 210 5.3 5.2 0.4 3.8 3.3 0.5 0.5 0.5 11.7 9.7 5.5 6.3 0.0 n.a.

1316 HK Nexteer Automotive Group Ltd 8.38 2,699 11.0 9.6 8.7 5.7 5.0 4.6 3.3 2.6 25.8 25.7 8.7 10.6 1.5 1.8

838 HK Eva Precision Industrial Hld 1.13 274 6.3 5.9 5.1 4.0 3.5 3.2 0.8 0.7 12.5 10.8 5.5 6.1 4.2 4.2

3606 HK Fuyao Glass Industry Group-H 17.50 5,575 12.2 10.8 9.8 7.5 6.5 5.9 2.2 2.1 26.6 17.3 12.5 12.6 5.1 5.2

600741 CH Huayu Automotive Systems -A 15.21 7,382 8.3 7.5 7.1 5.5 5.1 4.1 1.4 1.4 21.1 18.1 6.7 6.3 n.a. 5.0

002284 CH Zhejiang Asia-Pacif ic Mech-A 20.90 2,374 73.6 64.5 60.1 44.2 36.5 n.a. 6.0 5.6 9.5 7.1 3.4 4.2 n.a. 0.4

000559 CH Wanxiang Qianchao Co Ltd-A 15.42 5,448 40.6 33.9 27.5 n.a. n.a. n.a. 8.0 7.3 19.0 18.8 6.4 6.4 n.a. 1.6

002590 CH Zhejiang Vie Science & Tec-A 29.33 2,166 94.0 76.0 56.7 69.9 57.4 50.2 14.9 7.8 10.6 11.0 4.7 4.7 0.2 0.3

300100 CH Ningbo Shuanglin Auto Part-A 39.24 2,391 44.4 32.9 23.4 26.1 20.0 15.0 7.3 6.3 9.2 15.1 6.3 8.8 0.3 0.3

600114 CH Nbtm New Materials Group C-A 14.63 880 22.3 n.a. n.a. n.a. n.a. n.a. 3.7 n.a. 11.6 11.0 7.3 n.a. n.a. n.a.

Average 30.0 25.7 20.8 19.5 16.1 11.2 4.3 3.6 15.6 14.5 7.6 7.7 2.0 2.4

Overseas auto parts

AXL US American Axle & Mfg Holdings 15.54 1,189 5.2 5.0 5.3 3.9 3.8 4.0 3.9 2.3 185.8 56.1 7.3 6.9 0.0 0.0

BWA US Borgw arner Inc 38.44 8,388 11.8 10.5 9.7 7.0 6.5 6.2 2.4 2.2 18.3 19.5 7.6 8.1 1.4 1.4

DLPH US Delphi Automotive Plc 76.04 20,987 12.5 10.9 9.6 8.7 7.9 7.2 9.4 6.4 49.8 59.3 12.8 13.5 1.3 1.5

JCI US Johnson Controls Inc 41.68 27,018 10.7 10.0 8.7 8.3 7.6 7.1 2.6 2.4 10.3 21.0 4.8 8.0 2.6 2.7

MGA US Magna International Inc 43.22 17,405 8.4 7.4 6.4 4.8 4.4 4.0 1.9 1.4 20.6 22.0 10.7 10.1 2.0 2.3

TEN US Tenneco Inc 50.41 2,887 9.2 8.2 7.4 4.7 4.5 4.2 6.7 4.9 48.6 55.6 6.2 8.5 0.0 0.0

EO FP Faurecia 36.37 5,702 11.4 10.1 9.3 4.0 3.8 3.6 2.1 1.8 10.3 16.7 3.9 4.5 n.a. 2.0

FR FP Valeo Sa 134.75 12,113 12.8 11.5 10.6 5.5 5.0 4.7 3.0 2.5 21.9 21.6 6.8 7.6 n.a. 2.4

LEO GY Leoni Ag 30.74 1,136 16.3 10.0 7.9 5.1 4.1 3.7 1.0 1.0 13.2 6.0 2.8 2.8 n.a. 2.5

5802 JT Sumitomo Electric Industries 1415.00 10,127 11.9 10.4 9.5 6.0 5.5 5.2 0.8 0.8 5.9 6.9 3.0 4.7 n.a. 2.5

011210 KS Hyundai Wia Corp 110000.00 2,603 7.3 6.3 6.0 4.4 3.9 3.8 0.9 0.8 17.0 12.2 5.2 6.2 n.a. 1.0

204320 KS Mando Corp 178500.00 1,459 9.9 8.6 7.7 5.2 4.8 4.7 1.3 1.2 n.a. 12.5 3.1 4.2 n.a. 2.7

Average 10.6 9.1 8.2 5.6 5.2 4.9 3.0 2.3 36.5 25.8 6.2 7.1 1.2 1.8

ROA Div yieldP/B ROE

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :