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Morningstar | Narrow-moat Yutong draws competitive advantage from intangibles and cost advantage

Unlike most of its competitors, Yutong’s strategic focus on lower volume, more profitable medium-to-large size bus markets has consistently generated outsize economic profit since its inception. The company is the undisputed market leader, and we estimate it has captured 28% and 46% market share, respectively, in China’s large- and medium-size bus segment. Yutong’s intangible assets via extensive dealership network and well-diversified product lines have effectively built up switching cost for its clients, and boasting the highest production capacity in its core market also gives the company a cost advantage over competition. The company’s nationwide servicing center amounts to 1,200 and product offerings across nearly every product segment (public bus, school bus and commercial bus) all help to maximize client retention. Yutong has the highest production capacity in its core markets, which outpace its closest competitor by at least 50%, and a high direct sales ratio (over 75% of its revenue) which both contribute to company’s noticeably lower cost structure. On average, Yutong’s gross margin level is 5-6% higher than its competitors. In addition to being the conventional bus segment market share leader, Yutong also capitalizes on the rapidly growing new energy bus segment, which has become its most important growth catalyst in recent years. As of 2016, the new energy buses already accounted for nearly 50% of group’s total production capacity, with total sales volume by unit rising nearly 31% year on year. While the recent cutback on subsidy should lead to a softer top-line outlook in 2017/18, we view this as a temporary disruption in an otherwise a fundamental industry shift toward new energy vehicles.