國軒高科(002074)

We update our earnings forecast for Guoxuan High-Tech in 2019–2020.

Guoxuan High-Tech’s earnings miss in 2018 was in line with our cautious view on the Company’s core power battery business growth outlook. Earnings growth recovered in Q1 2019, but margin contraction remained a major concern for its earnings growth recovery potential in 2019–2020E.

We think further government subsidy cuts will put more pressure on China’s power battery demand growth in 2019–2020. In addition, as a smaller player, it should face more pressure on its ASP and margins. Accordingly, we cut our earnings forecast for the Company for 2019–2020E by 20–30%.

We maintain our SELL rating on Guoxuan High-Tech and cut our target price (TP) by 29% to Rmb7.80 (13x 2019E PER). Our TP is derived from our lower earnings forecast for the Company in 2019–2020E.

2018 results a big miss; Q1 2019 earnings growth recovered but margin contraction remains a big concern

Guoxuan’s total revenue in 2018 grew only 6.0% YoY, 16.6% below its revenueguidance. With bigger margin contraction and additional asset impairment for doubtful accounts receivable, its net profit continued to fall 30.8% YoY in 2018 to RMB580m, >30% below its 2018 earnings guidance. Its revenue growth in Q1 2019 accelerated to 65.3% YoY, driven mainly by its core NEV battery segment, as OEMs are pushing NEV sales before the new subsidy policy takes effect on 26 June. But its gross profit margin contracted by 2.8ppt YoY to 30.0% in Q1 2019. There were some SG&A cost savings. But rising financing costs and a higher effective tax rate led to net profit growth of only 25.2% YoY in Q1 2019.

Low earnings growth visibility due to NEV demand growth uncertainty and margin pressure from further ASP cuts

With further subsidy cuts, we expect China’s NEV demand growth visibility to remain low in 2019–2020. Although NEV battery sales volume in Q1 2019 grew 182.6% YoY in China, this was mainly due to OEMs boosting sales before the new subsidy policy takeseffect. In addition, the subsidy cuts will put further pressure on ASP and margins forpower battery producers. Guoxuan High-Tech doesn’t have the same technology and cost competitiveness as domestic leader CATL, which puts it in a more dangerous position when facing intensified competition resulting from the massive government subsidy cut. Therefore, we cut our revenue forecast for the Company in 2019E by 14.2% and maintain our revenue forecast for the Company in 2020E. Considering further downward pressure on margins, we cut our earnings forecast for the Company in 2019 and 2020E by 33.7% and 24.4%, respectively. Overall, we expect its earnings to grow 6.9% and 23.8% YoY in 2019 and 2020E, respectively.

Rising accounts receivable a red flag

Accounts receivables at the end of 2018 represented 123% of its total revenue in 2018 vs. 91% at the end of 2017 and 57% at the end of 2016. Accounts receivable turnover days also lengthened to 382 days in 2018 from 268 days in 2017 and 175 days in 2016. Operating cash flow remained negative in 2016 and 2017. Operating cash outflow rose from Rmb100m in 2017 to Rmb1,559m in 2018. Although operating cash flow in Q1 2019 showed signs of improvement, the full-year operating cash flow situation still remains wait-and-see.

Maintain SELL

We maintain SELL on Guoxuan High-Tech, and cut our target price (TP) from Rmb11.00 to Rmb7.80, based on the same target 2019E PER multiple of 13x. The TP cut is derived mainly from our lower earnings estimates for 2019–2020.