World Precision Machinery (DMG)

World Precision Machinery: Ramping up the order flows (BWPM SP, UNRATED)

Leading supplier of metal stamping equipment. We visited World Precision Machinery’s manufacturing facilities in Danyang city, Jiangsu. Company is a leading metal stamping machine supplier with 8% share of the domestic market. Its stamping machines are used in the manufacture of cars, white goods and train bodies. BWPM makes more than 200 kinds of stamping machines under its World brand for customers such as Haier, Chery Automotive, Honda and BYD. Recently, the group also made inroads into the railway engine component space, clinching contracts to supply to China’s state-owned train manufacturer China CNR Corp.

Good profitability track record with earnings set to surpass pre-crisis levels. The group’s prospects are driven by increasing industrialisation and growing demand for consumer products. BWPM has a good track record, maintaining profitability through the financial crisis. Earnings are set to surpass pre-crisis levels this year with consensus earnings at RMB180m for FY11 with 1Q11 earnings meeting 25% of consensus estimates. New orders are being clinched at a runrate of RMB 120-150m per month, underpinning earning visibility. As of April 2011, the group has an orderbook of RM428m for delivery over the next 3-9 months. The company achieved better margins than peers through a vertically-integrated business model and its value proposition is offering quality products at a cheaper cost to imported models.

Price drivers. Catalysts for the stock include: 1) Building of a new manufacturing facility in Shenyang to extend its geographical reach and enabling it to serve the cluster of automotive customers in northern China. The new plant also enables it to save on logistics costs; 2) management expects more orders in the railway sector and expects this new segment to account for 5-10% of sales in 1-2 years’ time; 3) The group is a conglomerate with the listed company forming only 10% of group sales. Potential injection of unlisted businesses within the group in the farming equipment, construction machinery and car parts will raise the scale and profile of BWPM. Based on consensus estimates, the stock is trading at 6.4x FY11 P/E and 5.6x FY12 P/E. The consensus target price of $0.99 implies upside of 78% from current levels. The company has paid good dividends in the past two years, amounting to 100% payout of FY09 earnings and 38% of FY10 earnings.