SWHY released a research report stating that it has initiated coverage on the minth group (00425) with a 'buy' rating, and expects the company's main revenue for 2024-2026 to be 23.81 billion/28.25 billion/34.32 billion, plus other operating income, with total operating income of 23.91 billion/28.35 billion/34.42 billion, indicating a year-on-year growth rate of 16.0%/18.6%/21.5%; the gross margin for 2024-2026 is expected to be 27.4%/27.4%/27.1%; net income attributable to shareholders is projected to be 2.25 billion/2.68 billion/3.17 billion yuan, with a year-on-year growth rate of 18.3%/18.9%/18.3%.

Shenwan Hongyuan's main points are as follows:

The minth group is one of the top 100 global companies in the components sector and a hidden champion in global automotive exterior small parts.

The group's predecessor, Ningbo Minfu Machinery Co., Ltd., was established in 1992 and has a history of thirty years. After its establishment, the company quickly developed its business and integrated its subsidiaries in 1997 to form the minth group, listing on the Hong Kong Stock Exchange on December 1, 2005 (0425.HK). As an excellent components enterprise, the company has maintained a CAGR of 19.7% in main business revenue and a CAGR of 12.2% in net income attributable to shareholders from 2006 to the present. Such a high growth rate maintained over nearly 20 years for a quality company is quite rare; in 2023, it achieved a revenue of 20.52 billion yuan and a net income of 1.9 billion yuan.

The company is a rare global symbol.

The minth group's experience in globalization is extremely rich, with a history of 17 years of going global. Since 2007, the company has accumulated rich experience in overseas factory establishment and operation during its globalization process, forming a relatively complete system from acquisitions to joint ventures and self-construction in global resource integration. If this bank analyzes the overseas market as a whole, the company’s revenue grew from 0.124 billion in 2006 to 9.97 billion in 2023, resulting in a CAGR of 29.4% over the 17 years, and by the first half of 2024, overseas revenue accounted for over 50%, indicating that rapid growth overseas suggests a relatively smooth globalization path. The layout of global factories is expected to become the company's 'core competitiveness' amid ongoing de-globalization and escalating tariff challenges.

Why focus on Minth Group at this stage?

1. The company's growth logic is significant, with the battery box business recently leading to performance realization, while the asia vets exterior business is expected to be a growth point for the next phase. As of the first half of 2024, the company has 125.08 billion yuan in battery shell orders on hand. Assuming the order release life cycle is 8-10 years, the annual sales could reach 12.51-15.635 billion yuan, which will greatly contribute to the company's annual revenue. The battery shell business belongs to heavy asset investment, and the minth group has already achieved globalization investment and profitability, combined with a sufficiently rich customer structure and solid market positioning, is expected to continuously increase market share.

2. The company's profitability and financial indicators are improving. As heavy asset investment slows down, the company is expected to see a recovery in financial indicators and an increase in valuation. Firstly, due to significant investment in the battery shell business after 2020 and the company's maintenance of high dividends, free cash flow was negative, but it turned positive in 2023. Secondly, the capacity ramp-up of the battery shell business has improved, leading to a further increase in gross margin, which in turn boosts the company's overall gross margin, net margin, and roe. Lastly, the company plans to start buybacks in the second half of 2024 and has clarified future dividend expectations, with pb valuation positioned at a historical low. It is believed that, as a global company with strong growth potential, minth group is likely to see its valuation recover amid sustained improvements in financial data.

Risk warning: Lower-than-expected downstream sales, international trade environment risks, and slower-than-expected development of new businesses.