Morningstar | Yutong Misses on Bottom Line as Government Scales Back on NEV Subsidies; FVE Reduced to HKD 16.8. See Updated Analyst Note from 28 Aug 2018
Yutong posts another disappointing quarter with operating profit coming in at 50% year-over-year decline. Management attributed the majority of the profit slump to the government's cuts in electric-car subsidies, decline in high-margin export sales, and rising manufacturing costs. With the expectation that more reductions in subsidies are to come, and Yutong's margins will suffer, we no longer think the company will achieve bottom line expansion this year. Given a less optimistic outlook, we cut our fair value estimate to CNY 16.8 from CNY 24.5 per share, and reduce earnings forecasts for 2018/19 by 32% and 39%, correspondingly.The group's gross margin for the second quarter came in at 21%, posting more than 900 basis points drop from the 30% delivered by the company during the same period last year. Following China's cut in new energy vehicle, or NEV, subsidies, Yutong is left with discounting its products to support sales volume. Recall that back in 2016, the Chinese government announced a plan to gradually phased out NEV subsidies by the end of 2020. While the company is launching new and high-range buses in an attempt to capture more of the remaining subsidies, its business will not escape the irreversible trend toward a more competitive environment. With roughly 50% of the company's production capacity falling under the NEV category, we now believe margins will decline over the next two years. We expect some stabilization in margins post-2020, as NEV pricing normalizes and demand for other bus offerings starts to boost the company's bottom line.
On the flip side, Yutong's sales have been solid for the first half of 2018. Overall volume was up 5% for the first seven months, driven primarily by a 14% year-over-year increase in the number of light buses sold. Despite uncertainties over government subsidies in the near term, our investment thesis for the company remains intact. Yutong's strong product portfolio, coupled with its robust R&D efforts should help the company reaffirm its market leadership position over the next decade.
ZHENGZHOU YUTONG BUS CO.,LTD. is a China-based company principally engaged in the research and development, manufacture and sale of passenger car products. The main products of the Company consist of urban buses, seat coaches, school coaches and other types of passenger cars. The Company also provides ground passenger transportation services. The Company distributes its products within domestic markets and to overseas markets.
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