Morningstar | Yutong on Track to Solid 2019 Despite Industry Headwinds; FVE Maintained
Narrow-moat Yutong reported first-quarter earnings in line with our estimates. Stronger- than-expected gross margin was offset by higher research and development costs. Shares of narrow-moat Yutong Bus are trading at more than 25% below our fair value estimate of HKD 17.70 per share, putting them in 4-star territory.Despite falling sales volume across the industry during the first quarter of 2019, Yutong sold 6% more buses than it did a year ago, reaffirming the firm’s market-leading position. Falling average selling prices from reduced government subsidies resulted in a 4% increase in Yutong’s revenue and a 5% increase in net profit compared with the same period last year. Continuing product mix shift toward electric buses led to a 160-basis-point increase in the firm’s gross profit margin, but a 59% year-over-year jump in R&D expense limited the positive impact to its bottom line. The firm attributes an increase in R&D expenses to new development projects and rising employee head counts. Management also expects R&D as a percentage of sales ratio to stabilize in the future.
With government subsidies on electric buses set to phase out by 2021, we continue to expect loss-making manufacturers to exit the Chinese market, leading to a larger market share for Yutong. On overseas markets (around 13% of revenue), the bus maker booked a year-over-year sales volume increase of 13% and aims to deliver 10%-20% growth for 2019. While we are excited by the firm’s plan to introduce higher-end buses to the international market at the end of this year, it is still unclear exactly how much margin improvement this will bring to the group.
On the strategy front, Yutong will continue to invest in assisted and autonomous driving. To date, Yutong has publicly showcased its Level 4 (self-driving in controlled circumstances) buses. Although the technology might remain some distance away from mass adoption, it gives investors reasonable assurance that the firm is well-positioned for major technology shifts in the years to come.
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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