World Precision Machinery

OCBC on 27 Mar 2012


We visited World Precision Machinery’s operations in Danyang City, Jiangsu Province last week. World Precision is China’s third largest metal stamping machine player by market share. With Phase 1 of its factory in Shenyang scheduled for completion in 2H12, the company will continue the shift of its product mix towards high-performance machines. The company will be a beneficiary of China’s 12th Five Year Plan (2012-2017), under which the high-end machinery and equipment industry is one of seven strategic industries identified. Management is optimistic about its long-term prospects. We DO NOT have a rating on World Precision Machinery.

Shifting more to high-end machinery.
World Precision’s high-performance and high-tonnage stamping machines are mainly used to produce auto parts and fetch an average gross profit margin of above 35%, compared to the gross profit margin of around 25% for conventional stamping machines. For FY11, 68% of revenue was from high-performance and high-tonnage machines. World Precision is building a factory in Shenyang to service the Bohai Rim. The first phase is due to be completed in 2H2012. We estimate that production may begin early next year.

Support for local high-end machinery.
The high-end machinery and equipment industry is one of the seven strategic industries targeted under China’s 12th Five Year Plan (2012-2017). The government will provide tax incentives and other subsidies to the industry. The government projects that high-end machinery will account for more than 30% of the machinery market by sales value. In addition, for 2012, government officials can only purchase local-brand cars. Over RMB60b is estimated to have been spent by the government on foreign-brand cars in 2010. This measure is positive for World Precision, which supplies machines to automobile components manufacturers. In FY11, 34% of the company’s sales were to automobile components manufacturers, making this the singular most important customer sales segment.

Growth in key downstream industries.
The next biggest customer group is home appliance components manufacturers, which accounted for 32% of FY11 sales. The growing disposable incomes of rural residents and rapid urbanization are increasing the demand for home appliances. The government has a rural subsidiary program in place till Jan 2013 which provides a 13% rebate on the purchase price of home appliances. Another important downstream industry that is growing is the railway industry. In Feb 2012, it was announced that China will construct 6,366 km of new railways in 2012, including 3,500 km of high-speed lines.

Not Rated.
We DO NOT have a rating on World Precision Machinery. Bloomberg’s consensus target price for the stock is S$0.78.

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%.