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Hangzhou Great Star Industrial:Beneficiary of US housing market recovery and CNY depreciation cycle

2016-09-30 00:00:00 作者:Jean Rao 来源:瑞银证券
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A leading maker of hand tools in China entering the next growth cycleHangzhou Great Star Industrial (Great Star) derived over 95% of its 2015 revenue fromoverseas markets such as the US, and it is particularly connected to US housing marketgrowth. The UBS US economist is optimistic about the sustained recovery of the UShousing market. In addition, a UBS Evidence Lab survey suggests US houseimprovement spending will be strong, which is good news for hand tools. We thinkGreat Star will benefit from steady growth in downstream demand and CNYdepreciation. We forecast a hand tool revenue CAGR of 12.0% over 2016-18,compared with 8%/9% in 2014/215, and a 2-4ppt improvement in gross margin.

Investments in smart equipment area likely to be profit accretive in the futureGreat Star, as a traditional manufacturing company, is one of the pioneers that investedin smart equipment in China. Its associate, Guozi Robot, is a leading producer ofinspection robots and automatic guided vehicle (AGV) robots in China. Its subsidiary,Huada Kejie, is a leader in the laser mapping industry in China. We believe synergiesexist between Guozi, Huada Kejie and Great Star in terms of product, technology andsales channels, driving revenue growth in the smart equipment segment. We expectsmart equipment to contribute 9/10/14% of Great Star's net profit in 2016/17/18.

Forecast 16% NP CAGR over 2016-18; uncertainties in investment incomeIn 2013-15, investment income, which moved +457%/+5%/-41% and represented28%/25%/15% of net profit (NP), respectively, had a big impact on NP growth. AsGreat Star has reduced its stakes in long-term investments, we do not expect thisvolatility to recur. We expect investment income of Rmb60/88/106m in 2016/17/18,representing 10/12/13% of NP. If there is a disposal loss in the company's tradablefinancial assets (debt instrument), it would have a-4.1%/-3.8% impact on ourdownside scenario earnings forecasts for 2017/18.

Valuation: Initiating coverage with a Neutral rating and Rmb18.10 price targetOur SOTP-based price target of Rmb18.10 implies 26x 2017E PE. The current valuationis near its historical mean and roughly in line with the industry average. As Great Starappears fairly valued, we are initiating coverage with a Neutral rating.





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