China/Hong Kong Basic Materials Please read the analyst certification and other important disclosures on last page Chiho-Tiande Group Limited (976 HK) 27 August 2010 Assembling growth from disassembling scrap Company Rating: Sector Rating: Outperform (initiation) Neutral (maintained)
A proven recycler with growing prosperity. Chiho-Tiande (CHTD) is the largest mixed metal scrap importer by scrap import quota and actual imported volume in China in 2007-2009, with an annual processing capacity of 527,000 tonnes. Leveraging its extensive network of overseas suppliers and expertise in disassembling scrap motors, CHTD specializes in processing non-standardized metal scrap into single scrap metals. We believe China’s favorable policy for the metal recycling industry – still at a nascent development stage – bodes well for CHTD. We initiate coverage on Chiho-Tiande with Outperform and a target price of HK$4.10 based on 9x 2011F PER.
A unique copper scrap play. Scrap copper and copper foundry sales combined are expected to account for 64-66% of the company’s revenue and 83-86% of its gross profit in 2010-2012F based on our estimates. With copper enjoying the strongest fundamentals among industrial metals on supply constraints, we expect higher copper prices (US$7,200/tonne, US$7,400/tonne and US$7,400/tonne in 2010-2012F, respectively, compared to US$5,185/tonne in 2009) and thus higher copper scrap prices to support CHTD’s strong earnings growth.
Strong earnings growth at 46% 2010-12F CAGR. We expect CHTD’s core net income to reach HK$583m in 2012F, underpinned by improved sales mix and remarkable volume growth. Trading at a 2011F PER of 6.6x and a three-year PEG of 0.19x, the company offers the most attractive valuation among its peers.
Risk factors include a sharp reversion of copper prices, change in government policy, termination of import/business licenses, and labor shortage. Forecast and valuation Year end 31 Dec 2008 2009 2010F 2011F 2012F Revenue (HK$m) 2,505 2,339 5,346 6,657 8,487 YoY change (%) 46 (7) 129 25 27 Normalized gross profit (HK$m) 74 246 559 725 906 YoY change (%) (33) 233 127 30 25 Normalized net income (HK$m) 31 188 323 453 583 YoY change (%) (61) 501 72 40 29 Gross margin (%) (9.4) 23.7 10.5 10.9 10.7 Normalized gross margin (%) 2.9 10.5 10.5 10.9 10.7 Normalized net margin (%) 1.3 8.0 6.0 6.8 6.9 PER (x) NA NA 9.1 6.5 5.1 Normalized ROE (%) 35.1 91.1 38.5 31.6 32.1 Source: Company data, CCBIS estimates Price: HK$2.95 Target: HK$4.10 (initiation) Trading data 52-week range HK$2.01 - 3.06 Market capitalization (m) HK$2,950/US$380 Shares outstanding (m) 1,000 Free float (%) 60 3M average daily T/O (m share) 3.6 Expected return (%) – 1 year 39 Closing price on 27 August 2010 Stock price and HSI 951001051101151201259-Jul-10 16-Jul-10 23-Jul-10 30-Jul-10 6-Aug-10 13-Aug-10 20-Aug-10 27-Aug-10Chiho-TiandeHSI Source: Bloomberg Yan Tsui (852) 2532 6164 yantsui@ccbintl.com Karen Li, CFA (852) 2532 6748 karenli@ccbintl.com Chiho-Tiande Group (976 HK) 27 August 2010 2 Table of Contents Assembling growth from disassembling scrap .............................................................................................................1 Assembling growth from disassembling scrap .............................................................................................................3 Understanding mixed metal scrap recycling .................................................................................................................6 High industry barriers for mixed metal recycling...........................................................................................................8 Robust earnings outlook ............................................................................................................................................. 11 Earnings model and operating assumptions ..............................................................................................................13 Valuation – PE-based target price of HK$4.10 ...........................................................................................................19 Investment positives ...................................................................................................................................................20 Key risks .....................................................................................................................................................................24 Appendix 1: What is Chiho-Tiande? ...........................................................................................................................25 Appendix 2: China metals outlook – copper is shining ........................................................