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BofA-Wuxi Lead (A) Slowing orders growth; credit impairment risk; downgrade to Underperform_Watermark.pdf
美银无锡铅 (A) 订单增长放缓；信用减值风险；降级至 Underperform_Watermark.pdf

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  1. >> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules.Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take responsibility for the information herein in particular jurisdictions.BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 9 to 11. Analyst Certification on page 6. Price Objective Basis/Risk on page 6. 12752210Wuxi Lead (A)Slowing orders growth; credit impairment risk; downgrade to UnderperformRating Change: UNDERPERFORM | PO: 16.00 CNY | Price: 19.13 CNY Slowing battery/solar capex to weigh on orders g growthWe take a more conservative view on Wuxi Lead’s revenue growth in 2024-26E, due to the battery/solar sector’s slowing capex. Leading European battery manufacturers have delayed their capex plans in recent months amid cost and demand pressures. In June, ACC stated it would halt the construction of two of its European gigafactories with a total capacity of 80GWh. In September, Northvolt also announced it would delay the construction of its EV battery plant in Quebec by up to 18 months. Meanwhile, our Greater China Auto team expects China’s battery capacity addition to continue declining in 2024-25, due to overcapacity in the domestic market. The solar supply chain’s capex has also entered a declining trend since 2024, and will likely persist into at least 2H25, according to our China Utilities team (see note). Meanwhile, Wuxi Lead recorded RMB11bn in new orders in 1H24, with 50%/20% contribution from overseas/domestic battery customers, and 10% from solar. We believe its order growth is likely to slow down in 2024-25E.Cautious on credit impairment risk in the near termWuxi Lead booked RMB331mn of impairment losses in 2Q24, mainly on receivables from its domestic battery equipment customers, as they delay equipment acceptance due to the suppressed capacity utilization. We expect this trend to continue in the coming quarters due to the prolonged client acceptance period, which we expect to hurtits near-term earnings.Cut 2024-26E earnings; downgrade to UnderperformWe cut Wuxi Lead’s 2024/25/26E earnings forecast by 9%/22%/25%, mainly due to (1) slower revenue growth forecast of its battery/solar equipment business; (2) higher credit impairment expectation in 2024-26; and (3) higher opex forecast in 2024-26. We lower our PO from RMB18 to RMB16 as we reflect the latest earnings forecast and roll forward our valuation basis to 2025E EPS (vs avg 2024-25E, previously), with a target P/E of 14x (unchanged). We downgrade Wuxi Lead from Neutral to Underperform rating, as we turn more cautious on its order growth in 2024-26E, and the credit impairment risk in the near term. Estimates (Dec) (CNY) 2022A 2023A 2024E 2025E 2026ENet Income (Adjusted - mn) 2,318 1,775 1,591 1,840 2,109EPS 1.48 1.13 1.02 1.17 1.35EPS Change (YoY) 46.0% -23.4% -10.3% 15.6% 14.6%Dividend / Share 0.537 0.343 0.406 0.470 0.539Free Cash Flow / Share 0.450 (0.903) 1.54 1.93 1.95Valuation (Dec)P/E 12.93x 16.88x 18.83x 16.28x 14.20xDividend Yield 2.81% 1.79% 2.12% 2.46% 2.82%EV / EBITDA* 8.67x 8.08x 10.53x 8.90x 8.03xFree Cash Flow Yield* 2.35% -4.72% 8.04% 10.07% 10.20%* For full definitions of iQmQmethod SM measures, see page 8.23 October 2024 CorrectedEquityKey Changes(CNY) Previous CurrentInv. Opinion B-2-7 B-3-7Inv. Rating NEUTRAL UNDERPERFORMPrice Obj. 18 162024E Rev (m) 15,477 14,9212025E Rev (m) 17,116 15,9862026E Rev (m) 17,782 16,6202024E EPS 1.12 1.022025E EPS 1.52 1.172026E EPS 1.79 1.352024E EBITDA (m) 2,431 2,3732025E EBITDA (m) 3,280 2,8062026E EBITDA (m) 3,786 3,1122024E DPS 0.45 0.41Yikai Liu,CFA >>Research AnalystMerrill Lynch (Hong Kong)+852 3508 4212yikai.liu@bofa.comMing Hsun Lee, CFA >>Research AnalystMerrill Lynch (Hong Kong)+852 3508 5006minghsun.lee@bofa.comFiona Liang >>Research AnalystMerrill Lynch (Hong Kong)fiona.liang3@bofa.comSummer Wang, CFA >>Research AnalystMerrill Lynch (Hong Kong)summer.wang@bofa.comStock DataPrice 19.13 CNYPrice Objective 16.00 CNYDate Established 23-Oct-2024Investment Opinion B-3-752-Week Range 12.88 CNY-28.80 CNYMrkt Val / Shares Out (mn) 4,213 USD / 1,566.2Market Value (mn) 29,961 CNYAverage Daily Value (mn) 119.63 USDFree Float 60.5%BofA Ticker / Exchange XZSRF / SHZBloomberg / Reuters 300450 CH / 300450.SZROE (2024E) 12.9%Net Dbt to Eqty (Dec-2023A) -29.4%Accessible versionTimestamp: 22 October 2024 04:30PM EDT Unauthorized redistribution of this report is prohibited. This report is intended for zouguanzhong@cramc.hk
  2. 2 Wuxi Lead (A) | 23 October 2024iQprofile SM Wuxi Lead (A)Key Income Statement Data (Dec) 2022A 2023A 2024E 2025E 2026E(CNY Millions) Sales 13,932 16,628 14,921 15,986 16,620Gross Profit 5,259 5,919 5,400 5,776 6,036Sell General & Admin Expense (1,130) (1,456) (1,645) (1,659) (1,628)Operating Profit 2,689 2,631 2,043 2,403 2,650Net Interest & Other Income (148) (721) (353) (358) (313)Associates 0 0 0 0 0Pretax Income 2,541 1,911 1,690 2,045 2,337Tax (expense) / Benefit (223) (140) (125) (204) (227)Net Income (Adjusted) 2,318 1,775 1,591 1,840 2,109Average Fully Diluted Shares Outstanding 1,566 1,566 1,566 1,566 1,566Key Cash Flow Statement DataNet Income 2,318 1,775 1,591 1,840 2,109Depreciation & Amortization 194 460 331 403 462Change in Working Capital (6,709) (5,360) 1,002 1,280 692Deferred Taxation Charge 0 0 0 0 0Other Adjustments, Net 5,889 2,262 (15) (6) (6)Cash Flow from Operations 1,691 (863) 2,909 3,517 3,257Capital Expenditure (987) (552) (500) (500) (200)(Acquisition) / Disposal of Investments 2,997 340 50 50 50Other Cash Inflow / (Outflow) 0 0 0 0 0Cash Flow from Investing 2,010 (212) (450) (450) (150)Shares Issue / (Repurchase) 47 63 0 0 0Cost of Dividends Paid (782) (841) (537) (637) (736)Cash Flow from Financing (806) (1,152) (537) (637) (736)Free Cash Flow 704 (1,414) 2,409 3,017 3,057Net Debt (6,169) (3,485) (5,406) (7,837) (10,208)Change in Net Debt (2,945) 2,370 (1,922) (2,431) (2,371)Key Balance Sheet DataProperty, Plant & Equipment 1,219 1,103 1,459 1,780 1,787Other Non-Current Assets 2,783 3,500 3,251 2,983 2,671Trade Receivables 6,814 10,386 10,054 9,217 8,996Cash & Equivalents 6,169 3,669 5,591 8,021 10,392Other Current Assets 15,992 16,635 15,265 16,767 15,025Total Assets 32,977 35,293 35,620 38,768 38,872Long-Term Debt 0 0 0 0 0Other Non-Current Liabilities 442 456 456 456 456Short-Term Debt 0 184 184 184 184Other Current Liabilities 21,410 22,806 22,105 24,050 22,781Total Liabilities 21,852 23,446 22,746 24,690 23,421Total Equity 11,125 11,847 12,874 14,078 15,451Total Equity & Liabilities 32,977 35,293 35,620 38,768 38,872iQmethod SM - Bus Performance*Return On Capital Employed 23.1% 20.0% 14.5% 15.3% 15.5%Return On Equity 22.5% 15.4% 12.9% 13.6% 14.3%Operating Margin 19.3% 15.8% 13.7% 15.0% 15.9%EBITDA Margin 20.7% 18.6% 15.9% 17.6% 18.7%iQmethod SM - Quality of Earnings*Cash Realization Ratio 0.7x -0.5x 1.8x 1.9x 1.5xAsset Replacement Ratio 9.9x 1.8x 3.5x 2.8x 1.0xTax Rate (Reported) 8.8% 7.3% 7.4% 10.0% 9.7%Net Debt-to-Equity Ratio -55.5% -29.4% -42.0% -55.7% -66.1%Interest Cover NA NA NA NM NMKey Metrics* For full definitions of iQmQmethod SM measures, see page 8.Company SectorAuto PartsCompany DescriptionFounded in 2002, Wuxi Lead is the largest lithium battery equipment manufacturer in China. It is mainly engaged in the design, production, sale of industrial equipment and provides integrated solution. Its products include lithium battery equipment, such as fully automated winding machines, diaphragm slitters, and vacuum filling machine. Key clients are EV battery makers.Investment RationaleWe have a Underperform rating on Wuxi Lead, given (1) slowing EV battery capacity growth in China, which is likely to drag down EV battery equipment demand, (2) more challenges in overseas opportunities, with EV growth expectation revising down in North America and Europe, and (3) credit impairment risk from its receivables in the near term.Stock DataPrice to Book Value 2.3x
  3. Wuxi Lead (A) | 23 October 2024 3Earnings revisions summaryWe take a more conservative view on Wuxi Lead’s revenue growth in 2024-26E, due to slowing capex of the battery/solar sector. Our China Auto team expects China’s EV battery capacity addition to continue declining in 2024-25E, due to overcapacity in the domestic market. The capex of solar supply chain has also entered a declining trend since 2024, and is likely to persist into at least 2H25, according to our China Utilities team (see report: Who are more sunburnt when there is too much sun?).Exhibit 1: China EV battery capacity addition forecast (GWh)Domestic capex started to decline in 2023, when it was 392GWh, 2024E is 332 GWh and 2025E is 134GWhSource: BofA Global ResearchBofA GLOBAL RESEARCHExhibit 2: China solar supply chain capacity addition forecast (GW)Our China utilities team expects China solar module capacity addition to decline to 270GW in 2024, from 523GW in 2025Source: CPIA, BofA Global ResearchBofA GLOBAL RESEARCHWe cut Wuxi Lead’s 2024/25/26E earnings forecast by 9%/22%/25%, on (1) slower revenue growth forecast of its battery/solar equipment business; (2) higher expectation of its credit impairment in 2024-26E due to delayed customer acceptance of its battery equipment in the domestic market; and (3) higher opex forecast in 2024-26E. As such, we expect the company’s earnings growth to turn negative in 2024, with only 14%-16%YoY earnings growth in 2025-26E.Exhibit 3: New versus old estimatesWe cut 2024/25/26E earnings forecast by 9%/22%/25%2024F 2025F 2026FRMB mn Old New diff. (%) Old New diff. (%) Old New diff. (%)Consolidated sales 15,477 14,921 -3.6% 17,116 15,986 -6.6% 17,782 16,620 -6.5%Gross Profit 5,593 5,400 -3.5% 6,260 5,776 -7.7% 6,504 6,036 -7.2%Operating Profit 2,100 2,043 -2.7% 2,877 2,403 -16.5% 3,324 2,650 -20.3%Pretax income 1,862 1,690 -9.3% 2,629 2,045 -22.2% 3,090 2,337 -24.4%Net Income 1,726 1,564 -9.4% 2,373 1,840 -22.4% 2,797 2,109 -24.6%Net Income attribute to shareholder 1,753 1,591 -9.2% 2,373 1,840 -22.4% 2,797 2,109 -24.6%EPS 1.12 1.02 -9.2% 1.52 1.17 -22.4% 1.79 1.35 -24.6%Key ratios (%)Sales growth -6.9% -10.3% 10.6% 7.1% 3.9% 4.0%EPS growth -1.2% -10.3% 35.3% 15.6% 17.9% 14.6%Gross margin 36.1% 36.2% 36.6% 36.1% 36.6% 36.3%Operating margin 13.6% 13.7% 16.8% 15.0% 18.7% 15.9%Net margin 11.2% 10.5% 13.9% 11.5% 15.7% 12.7%Source: BofA Global Research estimates, company reportBofA GLOBAL RESEARCH76 95 286 534 392 332 134 -1002003004005006002019 2020 2021 2022 2023 2024E 2025EGWh-1002003004005006002018 2019 2020 2021 2022 2023 2024EGW Wafer Cell Module
  4. 4 Wuxi Lead (A) | 23 October 2024Exhibit 4: P&L summaryWe forecast 36.2% gross profit margin in 2024(RMB mn) 1Q23 2Q23 3Q23 4Q23 FY '23 1Q24 2Q24 3Q24 4Q24 FYE '24 1Q25 2Q25 3Q25 4Q25 FYE '25Revenue 3,274 3,812 6,101 3,442 16,628 3,311 2,441 5,185 3,984 14,921 3,410 2,814 5,548 4,213 15,986Total cost of goods sold 1,916 2,328 3,927 2,538 10,709 2,093 1,571 3,319 2,539 9,522 2,148 1,822 3,523 2,716 10,210Gross profit 1,357 1,484 2,173 905 5,919 1,218 871 1,867 1,445 5,400 1,262 992 2,025 1,497 5,776Promotion 57 85 109 200 451 16 136 207 199 558 78 107 211 211 607G&A 218 236 242 309 1,005 306 242 259 279 1,087 273 239 266 274 1,052R&D 425 419 416 416 1,676 389 441 415 359 1,604 375 366 499 358 1,598Op taxes and surcharges 44 56 22 35 157 31 19 19 40 108 32 21 20 43 116Operating expenses 744 795 789 959 3,288 741 838 901 877 3,357 758 733 997 885 3,373Operating income 613 689 1,384 -55 2,631 476 32 966 568 2,043 504 259 1,028 612 2,403Pretax income 649 669 1,270 -677 1,911 631 -182 892 348 1,690 584 139 929 393 2,045Taxes or tax credit 103 2 165 -129 140 82 -64 89 19 125 76 14 93 22 204Profit before minority 546 667 1,105 -548 1,771 550 -118 803 329 1,564 508 125 836 371 1,840Net income 563 637 1,123 -549 1,775 565 -105 803 329 1,591 508 125 836 371 1,840EPS (RMB) 0.36 0.41 0.72 -0.35 1.13 0.36 -0.07 0.51 0.21 1.02 0.32 0.08 0.53 0.24 1.17Fully diluted shares (mn) 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566 1,566Operating Ratios Gross margins 41.5% 38.9% 35.6% 26.3% 35.6% 36.8% 35.7% 36.0% 36.3% 36.2% 37.0% 35.3% 36.5% 35.5% 36.1%Promotion 1.7% 2.2% 1.8% 5.8% 2.7% 0.5% 5.6% 4.0% 5.0% 3.7% 2.3% 3.8% 3.8% 5.0% 3.8%G&A 6.7% 6.2% 4.0% 9.0% 6.0% 9.2% 9.9% 5.0% 7.0% 7.3% 8.0% 8.5% 4.8% 6.5% 6.6%R&D 13.0% 11.0% 6.8% 12.1% 10.1% 11.7% 18.1% 8.0% 9.0% 10.7% 11.0% 13.0% 9.0% 8.5% 10.0%Operating margin 18.7% 18.1% 22.7% -1.6% 15.8% 14.4% 1.3% 18.6% 14.3% 13.7% 14.8% 9.2% 18.5% 14.5% 15.0%Pre-tax margin 19.8% 17.5% 20.8% -19.7% 11.5% 19.1% -7.5% 17.2% 8.7% 11.3% 17.1% 4.9% 16.7% 9.3% 12.8%Tax rate 15.9% 0.2% 13.0% 19.1% 7.3% 12.9% 35.4% 10.0% 5.5% 7.4% 13.0% 10.0% 10.0% 5.5% 10.0%Net margin 16.7% 17.5% 18.1% -15.9% 10.6% 16.6% -4.8% 15.5% 8.3% 10.5% 14.9% 4.4% 15.1% 8.8% 11.5%YoY % Revenue 11.9% 51.1% 34.0% -12.5% 19.4% 1.1% -36.0% -15.0% 15.7% -10.3% 3.0% 15.3% 7.0% 5.8% 7.1%Gross profit 50.6% 53.8% 28.0% -46.6% 12.6% -10.3% -41.3% -14.1% 59.7% -8.8% 3.6% 14.0% 8.5% 3.6% 7.0%Operating income 57.8% 52.9% 37.6% -106.5% -2.1% -22.3% -95.3% -30.2% N.M -22.4% 5.8% 699.5% 6.4% 7.8% 17.6%Net income 62.6% 36.7% 31.7% -184.2% -23.4% 0.2% -116.5% -28.5% N.M -10.3% -10.0% N.M 4.2% 12.7% 15.6%Fully diluted EPS 62.6% 36.7% 31.7% -184.2% -23.4% 0.2% -116.5% -28.5% N.M -10.3% -10.0% N.M 4.2% 12.7% 15.6%QoQ % Revenue -16.7% 16.5% 60.0% -43.6% -3.8% -26.3% 112.4% -23.2% -14.4% -17.5% 97.2% -24.1%Gross profit -19.9% 9.3% 46.4% -58.4% 34.6% -28.5% 114.4% -22.6% -12.7% -21.4% 104.2% -26.1%Operating income -27.3% 12.3% 101.0% -103.9% N.M -93.2% 2886.3% -41.2% -11.3% -48.7% 297.5% -40.5%Net income -13.6% 13.1% 76.3% -148.9% N.M N.M -862.8% -59.0% 54.4% -75.4% 570.0% -55.6%Fully diluted EPS -13.6% 13.1% 76.3% -148.9% N.M N.M -862.8% -59.0% 54.4% -75.4% 570.0% -55.6%Source: BofA Global Research estimates, company reportBofA GLOBAL RESEARCH
  5. Wuxi Lead (A) | 23 October 2024 5Lower PO from RMB18 to RMB16We lower our PO from RMB18 to RMB16 as we reflect the latest earnings forecast and roll forward our valuation basis to 2025E EPS. We apply a P/E of 14x (unchanged) to derive our PO. Wuxi Lead traded at >50x 1-year forward P/E in 2019-21, thanks to the capex upcycle in the EV battery industry, and has de-rated since 2022 due to an expected slowdown of EV battery capacity addition in China. Wuxi Lead is trading at 16.2x 2025 P/E, higher than its domestic peers’ average at 12.5x. We apply a P/E of 14x, which is more than 2SD below its historical average (since 2015), we believe this is justified given our more conservative view on its near-term earnings growth amid the capex downcycle of battery/solar. The 14x P/E we apply corresponds to 0.9x PEG based on its 2024-26E EPS CAGR (15%).Exhibit 5: Wuxi Lead’s one-year forward historical P/E bandOur target P/E is more than 2SD below its historical averageSource: BofA Global Research estimates, BloombergBofA GLOBAL RESEARCHExhibit 6: Wuxi Lead’s one-year forward historical P/E baseIts historical average P/E stands at 51xMean Stdev Max Min1 Year 19.6 4.4 27.7 11.52 Year 26.9 8.7 45.3 11.53 Year 33.1 12.0 61.8 11.5Since IPO 50.9 17.0 97.6 11.5Current 16.7Source: BofA Global Research estimates, Bloomberg. IPO was in 2015BofA GLOBAL RESEARCHExhibit 8: New energy equipment peer valuationDomestic peers are trading at 12.5x 2025E P/ECompany Ticker Share price Mkt cap 6M ADTV P/E (x) P/B (x) ROE%RMB US$ bn US$M 2024E 2025E 2024E 2025E 2024E 2025E Wuxi Lead* 300450 CH 19.1 4.2 63.6 18.8 16.2 2.3 2.1 13% 14%Suzhou Maxwell* 300751 CH 105.3 4.1 42.9 26.4 14.2 3.7 3.2 15% 24%SC New Energy* 300724 CH 75.3 3.7 80.4 9.8 10.1 2.4 2.0 27% 22%Yinghe Tech 300457 CH 21.7 2.0 49.3 16.4 13.4 3.0 2.7 13% 14%Zhejiang Hangke 688006 CH 18.7 1.6 8.3 15.8 12.3 2.0 1.8 12% 13%China new energy equipment sector avg. 17.1 12.5 2.8 2.4 17% 18% CKD* 6407 JP 2,657.0 1.2 6.4 21.3 13.8 1.4 1.3 7% 10%People & Technology* 137400 KS 50,600.0 0.9 26.4 10.6 7.7 2.3 1.8 24% 26%Overseas new energy equipment sector avg. 15.9 10.8 1.8 1.5 15% 18% Source: BofA Global Research estimates, Bloomberg. *estimated by BofA Global ResearchBofA GLOBAL RESEARCH020406080100120Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22Jul-22Jan-23Jul-23Jan-24Jul-24PE Ratio -2 stdev-1 stdev Mean+1 stdev +2 stdev(X)