World Precision Machinery Limited

Kim Eng on 27 Mar 2012


Background: World Precision Machinery is a manufacturer of stamping machines and related components. It produces both standard and customised stamping machines to suit the needs of a variety of industries, including automotive, electronics and white goods.

Recent development: The group recently announced that it has added three leading manufacturers of auto parts and home appliances to its clientele, including a major auto parts supplier to Hyundai Motor Group. We note that the total value of the contracts secured is about RMB11.1m, giving a welcome boost to the group’s outstanding orderbook of RMB200.0m (with delivery stretching over the next 3-9 months).

High demand for locally made auto parts. High-end stamping machines are generally employed in the auto parts sector to generate better margins. According to management, World Precision will supply high-performance and high-tonnage stamping machines to its newly acquired clients. Its two production plants in Danyang City, Jiangsu Province, are built on the high-performance/high-tonnage and CNC-based technologies, positioning them to ride the growing demand arising from import replacement.

Room for margins to improve. We also understand that the machines used to produce auto parts can typically fetch a higher gross profit margin of above 35%, compared to an average of about 25% for conventional stamping machines. We therefore expect the group’s profit margin to improve along with a positive shift in its product mix going forward.

Capacity expansion to capture growth. To capture the ever-increasing demand from the Bohai Rim area, World Precision is building another high-performance/high-tonnage and CNC-based production plant in Shenyang City, Liaoning Province. This will also allow it to stay close to the supply of raw materials. The new facility is estimated to have an annual production output value of RMB300m for Phase 1 and will serve as a key earnings driver in 2013. Construction is expected to complete by 2H12.

Order momentum picking up. Management said that the group’s contract wins so far have caused order momentum to pick up after a lull following the Chinese New Year holiday in January. Based on consensus estimates, the counter trades at an attractive 5x FY12 PER, with support from a decent dividend yield of about 5%.