Sinotruk: Firing with all cylinders to hit a historical high

1H17 earnings expected to top 400% YoY

On July 19, Sinotruk pre-announced its 1H17 attributable net profit would grow more than 400% YoY, i.e. >Rmb1.22bn, a rise of >320% HoH, largely beating our and the market’s expectations.

Trends to watch

Sinotruk’s net profit will surely hit a historical high in 2017 and very likely rise 50% over the peak in 2010. Sinotruk’s 1H17 attributable net profit may mark a new high. The company attributes the huge YoY rise to: 1) sales volume of HDT and LDT rising 70% and 30%, leading the increase in revenue; 2) better sales mix and an increase in GPM; and 3) expense ratio reduction.

Sinotruk’s product cycle resonates with China’s HDT upgrade rhythm in a good way. T7H and C7H, developed on MAN technologies, are well positioned to meet the demand of faster and more reliable logistic trucks at the right time. As ASP and sales volume go up, the cost actually goes down with economies of scale, which leads to a sharp rise in GPM.

A balanced product mix may help Sinotruk achieve more sustainable and less volatile growth. Construction HDT demand, logistics HDT demand and export demand may function as three cylinders to drive smoother growth and extend this upward cycle.

Valuation and recommendation

We lift our full-year forecast for Sinotruk’s sales volume, and lower  our forecast cost ratios, remaining upbeat on the improved profitability and  management efficiency. We raise our  2017/18e earnings forecasts 159%/140% to Rmb2.2/Rmb2.2bn. Maintain BUY and raise TP 67% to HK$10,  implying 10.9x 2017e P/E.

Risks

HDT sales disappoint.