Growth in aftermarket in vehicles.

Transcription

1 . Launch Tech ( 元征科技 ) Price: HK$2.41 HKEx Code: 8196 Wed, 11 Aug 21 Riding on the growth Equity Research Auto Parts/ China Company Visit Note Key Data Close price (HK$) Months High (HK$) Month Low (HK$).5 3M Avg Daily Vol. (mn) 1.87 Issue Share (mn) Market Cap (HK$mn) 1, Free Float % Net cash/share (HK$).2 Net debt/ equity (%) 2.85 Fiscal Year 12/29 Major shareholder (s) Shenzhen Langqu- Non-H Shs (23.%) Source: Company data, Bloomberg, OP Research Closing price are as of 3/8/21 All figures are subject to rounding Price Chart Aug-9 Oct HK MSCI CHINA Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 35 % Key points: Launch Tech ( Launch ) s major product is vehicle diagnostic scanner, which helps workshops to scan vehicle problems. Launch s diagnostic scanners for vehicles stand out from its competitors by providing a wider coverage on vehicles models and a significantly lower price. The company is also benefited from the growing vehicle population. Growth in downstream. Launch s products are mostly sold to independent workshops. Increasing in vehicles population provides room for independent workshops. We expect the growth in this aftermarket will continue in the future as vehicles population in China is still below worldwide average. Coverage + low cost = winning formula. Launch s diagnostic scanner takes 6%+ market share in China with a significantly lower price and wider coverage, especially on domestic brands, which are steadily gaining market share. Launch s diagnostic scanner covered 1+ brands and 3,+ vehicles models in China. Relationship with domestic vehicles makers is an advantage. With 15 years experience in China vehicles aftermarket, Launch has established a close relationship with domestic vehicles markers by providing technology support. It offers Launch a more efficient coverage on domestic brands. Advantage in R&D. R&D engineers of Launch comprise mainly local universities graduates at lower wages than foreign competitors. Also, the R&D team provides a frequent updates on the software to provide update coverage on latest vehicles. Investment risk: Conflict of interest with SPX; Slowdown in sales growth in mid-term. Exhibit 1: Investment Summary Company Background The principal activities of the Group are engaged in the provision of technologies, products and services serving the automobile after-sales market and the automobile industry in the PRC. Create Lee Oriental Patron Securities Ltd create.lee@oriental-patron.com.hk Year end Dec (RMB mn) FY5A FY6A FY7A FY8A FY9A Revenue (mn) Growth (%) Net Income (mn) Growth (%) Gross margin (%) Profit margin (%) ROE (%) ROA (%) EPS P/E (x) P/B (x) Dividend yield (%) EV/EBITDA (X) Source: Bloomberg, OP Research

2 Growth in aftermarket in vehicles. Growing vehicles population in China. China vehicles population has been increasing steadily in previous years thanks to economic growth in China and the government stimulus plan in vehicles sales. The number rose from 54mn in 1H7 to 76mn in end-29, with ~16% CAGR in the period. The figure is expected to grow further as implied by the ratio on cars population per 1, people. The ratio is ~6 cars per 1, people in 29, as compared with ~7 cars per 1, people in developed countries. Exhibit 2: Vehicles Population in China (Million class) H7 2H7 1H8 2H8 1H9 2H9 Source: CAAM Developing aftermarket for vehicles in China. The increasing size of vehicles population means an increasing market size in aftermarket for vehicles, which includes all the needs for vehicles owners; for instance, vehicles maintenance, vehicles financing, spare parts and components, etc. It is estimated that there are over 3, maintenance shops for vehicles in China and we expect the aftermarket demand will be growing at ~2% in coming years. Mid-low end vehicles gaining pace. In 29, China government announced a cut in vehicles sales tax from 1% to 5% for vehicles <1.6L and thus inducing a strong demand growth in these vehicles. Mid-low end models dominate in <1.6L vehicles, thus the demand for mid-low end vehicles can be reflected from the sales volume on vehicles <1.6L: the sales volume on this group grows from 2.4mn in 25 to 7.2mn in 29, implying 31% CAGR in the period. 11 August 21 Page 2 of 9

3 Exhibit 3: Vehicles sales volume breakdown by volume 12 1 (Million class) <1.6L 1.6L~2.L 2.L~2.5L 2.5L~3.L 3.L~4.L >4.L Source: CAAM 11 August 21 Page 3 of 9

4 Taking off from the ground. Key product: Diagnostic scanner X431. Established in 1992, Launch Tech is a leading player in the vehicles aftermarket in China. The company provides a range of equipment and services solution. The key product of Launch is the diagnostic scanner ( X431 ), which is used for reading different operating data from a vehicle and translating into readable signal to show if there is any flaw in the vehicle. The product contributes around 6% of revenue to Launch in FY9. Exhibit 4: Revenue breakdown by segment, FY9 Others 1% Lift 3% Diagnostic Scanner 6% Source: Company Growth in downstream. Launch s diagnostic scanners are sold to 3 groups of clients: 1) independent workshops; 2) authorized 4S shops (Sales, Services, Spare parts, Survey) and 3) vehicles makers. Within which, independent workshops dominate Launch s client base. Independent workshops emerged to cater for the maintenance demand for the growing vehicles population. As Launch s X431 works on a wider coverage, especially mid-low end vehicles, the sales volume grew fiercely in 21. Good relationship with domestic vehicles makers. Diagnostic scanner was first used in high-end brand like BMW and Mercedes. While domestic brand like Chery, Geely and BYD was left unsupported. Yet, unlike other competitors in the market, Launch provided coverage over domestic brands like Chana, Chery, Greatwall, etc. Besides, leveraging on 15 years experience, Launch have been keeping a good relationship with these domestic vehicles makers on the technology support. These vehicles makers provide a better exchange of information on these domestic brands. Increasing contribution from China. The company started its business in China and has been expanding in overseas market. Revenue contribution from China rose from 42% in FY7 to 51% in FY9. Under global financial tsunami in 29 and stimulus policy on China vehicles, Launch business focus was then brought back into China once again. We expect Launch to enjoy the growth in China aftermarket for vehicles in the coming years as we believe the growth story in China vehicle market will continue in the coming years. 11 August 21 Page 4 of 9

5 Exhibit 5: Revenue breakdown by location 5 4 (RMB mn) A 23A 24A 25A 26A 27A 28A 29A PRC other than Hong Kong Europe United States of America Asia, Australia, Africa and Middle East Source: Company But why X431. There are several diagnostic scanners brands competing in the market with Launch s X431; namely, BOSCH ( 金德 ), SPX ( 車博士 ). According to company, X431 captured 6%+ market share in China. As per our channel check, we found that Launch is offering at ~5% lower price when compared with other similar products. It also provides a wider spectrum of capabilities by covering over 3, vehicles models from over 1 manufacturers. More importantly, as per our channel check, X431 works better on domestic brands when compared with other players. Exhibit 6: Diagnostic scanners brands in China Manufacturer Product Price Range Average Price Compatible brand Type Launch (X431) X431 GX3 RMB5,8~8, RMB6,5 1+ brands and 3,+ models(nearly all brands available in China) Professional X431 master RMB8,~1,5 RMB9,5 1+ brands and 3,+ models(nearly all brands available in China) Professional X431 Diagun RMB4,5~6,8 RMB5,5 all common brands in mainland China Professional SPX ( 車博士 ) Autoboss V3 RMB6,5~9,5 RMB8, main brands available in mainland China Professional Autoboss PC max RMB4,~5,5 RMB4,5 main brands available in mainland China Professional Bosch ( 金德 ) KT 6 RMB16, main brands available in mainland China Professional KT 6 (Pro) RMB29, main brands available in mainland China Professional KT 3 RMB13, main brands available in mainland China Professional SNAPON MT25 USD25~35 USD3 not for sale in mainland China Household MODIS USD4,2~5, USD4,5 not for sale in mainland China Professional Denso Toyota It2 RMB18,~23, RMB2, Toyota, Lexus and other major Japanese auto Professional Innova Equus USD15~35 USD2 Common brands in US( not for sale in mainland China) Household Source: Taobo.com, OP Research Software upgrade to enhance entry barrier. Diagnostic scanner is a tiny computer in nature. The key way to compete is the software as new vehicle models come in all the time. Independent workshops have to upgrade the software in diagnostic scanner to gain coverage on new models. Besides, with frequently upgraded software, minor bugs or flaw on the machine could be eliminated. According to Launch, the company upgrades its software at 1.3 times per day in August 21 Page 5 of 9

6 Research & Development (R&D) is the key. Software upgrades are supported by the R&D team of Launch. Unlike other manufacturers, Launch invests intensively on R&D. The company invests ~5% revenue on R&D every year. Launch possesses a R&D team with more than 5 people. According to Launch, the team size is larger than any other domestic players in the industry. The company recruited its R&D engineers from different renowned companies like Huawei. Besides, 6% of its engineers possess post graduate academic qualification in the field. R&D cost provides cost advantage. As majority of competitors are foreign based, domestic engineers provides Launch with a cost advantage. Launch s engineers comprise mostly local graduates. According to company, monthly salary of its engineers ranges from RMB5, 2,. The value is much lower than competitors engineers, who are mostly overseas based. Outsource the distribution network. Launch restructured its distribution network in previous years. The company outsourced the distribution part of its product to independent third parties. Previously, the company recruited a team of 4 5 staffs for sales activities. The company is now taking a new distribution method. The company downsized the sales related staff from 4 5 to ~1 in recent years. And the company operates through 8 different subsidiaries across China to monitor 3+ dealers (mainly exclusive distributors). Better credit terms to distributors. The company attracts distributors by a fat margin (~5%). Besides, Launch give a better credit term to its distributors, as reflected from the long account receivable days (~18 days). The reason is that inventory turnover for diagnostic scanners is not high. A distributor may take a year to sell the inventory on hand. We believe it is a necessary means for Launch to deal with distributors, given the product nature of diagnostic scanners. Subsidy from Ministry of Finance proves government support. As in Aug 21, Launch was accorded a subsidy from Ministry of Finance on the advanced technology of Launch s product. The size of the subsidy was RMB2mn in cash, which was roughly the R&D expenditure of Launch in FY9. The subsidy is a one-off; yet, more importantly, it shows the support from the government on Launch. Cooperation with world renowned player. As at 26 Jul 21, Launch announced a cooperation arrangement with world class vehicles aftermarket manufacturers, SPX Service Solutions ( SPX ). Launch plans to cooperate with SPX on lift. The company will manufacture lift for SPX (OEM). In Jan Jul 21, Launch manufactured 22, lifts. The company targets 38, lifts production in FY1 and 7,+ in FY11, within which, 5%+ will be manufactured for SPX. We expect the OEM will contribute RMB2-3mn net profit to Launch in FY11. Breaking out from garage. Launch is now developing a new platform for diagnostic scanner. An individual can perform a scanning to his / her own vehicles through an Apple I-Phone by plugging in an accessory to the phone and the installation of the software from Launch. Targeting the mid-income group, the product will be charged at low price. Though the product is still under development, the symbolic meaning to this is that the company is able to expand its client base from garage to individual or the DIY maintenance market. The company has allied with China Unicom on this as the device will be connected to the network of Launch through 3G. Main board migration in progress. Launch announced its application for main board migration in Feb 21. According to management, the company will complete the migration in Aug Sep August 21 Page 6 of 9

7 Valuation Robust growth in sales volume for diagnostic scanner and lift. Launch sold 31, diagnostic scanners in Jan Jul 21, which was 17% of FY9 s. Moreover, for lift, the company manufactured 22, lifts in Jan Jul, 21, which was 115% of FY9 s. We expect sales volume to increase ~8-1% in FY1 for diagnostic scanners and for lift. Exhibit 7: Sales volume of X431 35, 3, 25, 2, 15, 1, 5, Jan - Jul 21 Source: Company, OP research Net profit to grow at 6-7% in FY1. We do a back-of-envelope calculation on Launch. With 8-1% rise in sales volume, we expect revenue to grow at 6 7% to allow room for ASP drop due to competition. With ~14-15% net margin, the FY1 net profit will be approximately RMB1 11mn, implying ~5 6% net profit growth. Further, in FY11, we expect the growth in diagnostic scanner and other aftermarket equipment to be ~2%, which is in line with the market growth. Including the contribution from the cooperation with SPX, we expect the net profit to be ~RMB14 15mn. Current market capitalization of Launch is ~HK$1,4mn. As such, Launch is now trading at 12 13x FY1 PE and 8 9x FY11 PE. The valuation is fair, in our view. Launch will announce its 1H1 interim result on 13 Aug 21. Investment risk Conflict of interest with SPX. The latest cooperation with SPX is on lift. Yet, SPX is a competitor on diagnostic scanner with Launch in China. It may lead to a conflict of interest between these two companies. Sales volume growth is bounded by growth in 4S shops. As per our argument, the robust growth in sales volume in Launch was due mainly to the rise in 3S shop in China. Yet, we believe, as time passed by, 4S shop will expand into 2 nd and 3 rd tier cities and thus limiting the growth in the number of 3S shop and thus hindering demand on Launch s products. 11 August 21 Page 7 of 9

8 Financials Exhibit 8: Income Statement Year end Dec (RMB mn) FY5A FY6A FY7A FY8A FY9A Turnover 342,586 34, , , ,44 COGS 179, , , , ,149 GP 162,91 162, ,697 29,358 25,291 SG&A 114,367 12, , , ,754 R&D 8,5 12,853 16,27 17,212 2,297 Other operating profit 38, (6,437) (8,911) 2,551 EBITDA 99,31 74,28 122,11 83, ,526 Dep & Amor 2,84 26,76 34,743 33,84 38,735 EBIT 78,191 48,24 87,367 5,2 92,791 Interest Inc / expense (11,126) (8,147) (23,166) (26,973) (2,54) Others (23,741) (961) (2,753) (2,877) (5,333) EBT 43,324 39,96 61,448 2,17 67,44 Tax 4,97 (2,33) 11 7,339 5,353 MI NP 39,216 41,129 61,347 12,831 62,51 Dividend 19,53 19,53 3,18 12,72 18,18 EPS (basic), HKD Source: Company, OP Research Exhibit 9: Balance Sheet Year end Dec (RMB mn) FY5A FY6A FY7A FY8A FY9A Cash & eq AR Inventories Other current assets Total current assets Net PP&E Total investments Other LT assets Total non -current asset Total assets AP ST debt Other current liability Total current liability LT debt other long term liability Total noncurrent liability Total liability Capital and reserves MI Total equity Source: Company, OP Research Exhibit 1: Cash Flow Year end Dec (RMB mn) FY5A FY6A FY7A FY8A FY9A Operating cash flow (187.1) (43.4) Investing cash flow (25.8) (143.) (41.3) (57.8) (63.4) Financing cash flow (54.8) 61.6 Net Cash Flow (15.2) (44.2) (77.5) Cash beginning (31.2) Exchange rate change (.2) (.6).3 (.1).2 Cash ending 13.6 (31.2) Source: Company, OP Research 11 August 21 Page 8 of 9

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Oriental Patron accepts no liability whatsoever for the actions of third parties in this respect. 27/F, Two Exchange Square, Tel: (852) August 21 Page 9 of 9 8 Connaught Place, Central, Hong Kong create.lee@oriental-patron.com.hk Fax: (852)