YHI International

UOBKayhian on 23 Aug 2012

Valuation
· YHI is trading at 5.0x 2011 earnings with a dividend yield of 6.2%. Based on Bloomberg’s consensus estimate, YHI is set to report S$32.0m of earnings in 2012. The stock is also trading at a 25% discount to its book value of 41.9 S cents.
Our View
· We expect the group to adopt a cautious approach amidst the economic uncertainties among the euro zone, the US, and most importantly China. Initially, YHI had targeted to achieve S$1b of sales by 2015, a CAGR of more than 16% for the next 4 years. This would be driven by its multi-brand, multi-category and multi-product defensive distribution business to provide adequate cash flow for the expansion of its higher margin manufacturing business.
· However, after this set of results and the general outlook for alloy wheels, this growth target may not be attainable. Management also guided that the manufacturing business is likely to remain challenging with heightened competition especially in China due to over capacity in this sector. Coupled with anti-dumping duties for China alloy wheels selling into Europe, we expect local manufacturers to shift excess capacity into China, depressing ASPs and margins. We have also seen a decline in sales of new cars in China of 1.8% through May although the China Association of Automobile Manufacturers (CAAM) maintains a growth forecast of 5% for 2012.
· Although YHI had completed the construction work of a new factory for its original equipment manufacturing (OEM) segment in Shanghai factory with orders expected to come in 4Q12, it is currently being utilised for its own after-market sales. As for the new plant in Malacca, Malaysia, installation of its machines is on track with production expected to start in 4Q12.
Financials Highlights
· YHI reported a 8% yoy decline in 2Q12 net profit to S$6.2m as stronger revenue was offset by higher tax expenses. Core earnings remain resilient as both the distribution and manufacturing segments recorded revenue growths of 3.2% and 5.8% yoy respectively. Gross profit grew 3.9% yoy to S$33.5m with gross margin remaining stable at 24.0%. Tax expenses rose 24.7% to S$3.3m with effective tax higher at 33.1% compared to 26.4% last corresponding period as the group’s China subsidiaries are no longer eligible for tax subsidies.
· Although the company did not declare dividends for 1H12, it maintains a dividend policy of 30% for the year.