Stock Information

1

TICKER SYMBOL: SHSE: 600066

MARKET CAP: RMB 48.7 billion (June 2017)

INDUSTRY: Automobiles / Industrials

Business Overview

Zhengzhou Yutong Bus Co., Ltd. is involved in the research and development, manufacturing and sale of large buses, namely urban buses, seat coaches, school coaches and other types of large passenger cars. The company also provides ground passenger transportation services. The company distributes its products both within China and in overseas markets, with its products sold in over 130 markets worldwide. It is the largest bus manufacturing company in the world. Its buses are typically used for public transportation, tour groups, and schoolchildren.

The company started as a bus repair ship in 1963, later moving into manufacturing in 1993 and going public on the Shanghai Stock Exchange in 1997. It is headquartered in Zhengzhou, the capital city of Henan province in China.

2016 revenues grew 14.9% YoY to reach RMB 35.8bn. Net profits grew 14.4% to reach RMB 4.04bn. 84% of its revenues are derived from domestic China sales, and the rest is derived from overseas sales.

Global competitors include BYD, Beiqi Foton Motor, and MAN SE. For comparison, Zhengzhou Yutong Bus sold 70,988 buses last year, compared to 39,800 and 15,000 for Beiqi Foton and BYD respectively.

Key Strengths

Largest player in China bus market

The company is the largest player in the bus market in China, with 33% market share for medium-sized and large conventional buses, and 26% for new energy buses. As a large player, it is more resilient to industry downturns and subsidy cuts, which tend to have a more dire impact on smaller players that are more dependent on subsidies.

Superior technology

Zhengzhou Yutong Bus Co. is a clear technological leader, devoting a significant amount of its budget to R&D expenses. It has been working on self-driving buses, having debuted its first product in 2015 in a 20-mile test run between the cities of Zhengzhou and Kaifeng, in Henan province.

Key Opportunities

Increasing demand for electric buses

Zhengzhou Yutong Bus is known for its electric buses that are used throughout the Chinese market. Given China’s difficulties with combating pollution and the government’s dedication to clean energy, public bus adoption of electric vehicles is progressing faster than that of passenger vehicles, and the company’s strength in this field should help power sales going forward. The company has also seen high demand in Europe as well.

Belt and Road Initiative

Zhengzhou Yutong Bus is benefiting from China’s Belt and Road Initiative, as export volumes to other developing countries rose by 56% YoY in the first quarter of 2017. The company received an order to sell 500 large buses to Myanmar. Buses have been sold to more than 40 countries included in the initiative, including Pakistan, Iran, Cuba, and Bulgaria. The company first began exporting products overseas in 2005 and its overseas business is a crucial part of the company’s strategy going forward. The company intends to compete in other developing markets as competition is less fierce than in developed markets.

Key Risks

Reduction of new energy bus subsidies

The government has cut subsidies for new energy-related vehicles, which has impacted the company. The government will also only pay out subsidies after the electric vehicles clock 30,000km of usage. Rumor has it that the company will cut prices paid to battery suppliers and will increase the prices of its vehicles for its customers in order to maintain gross margins. Currently, bus operators are hesitant to place orders as they are assessing the impact of the changes in subsidies.

Dependency on key battery suppliers

Given the difficulties of storing electrical energy, batteries are some of the priciest and valuable of an electric bus’s parts. Zhengzhou Yutong Bus does not produce its own batteries and so is reliant on its suppliers for a steady supply. Thus it is susceptible to disruption in the supply chain if its suppliers face financial difficulties or cannot deliver on time. However, it should be noted that battery supply is increasing rapidly and prices are falling, with some experts expecting battery procurement costs to fall 30% in 2017.

Valuation

The company is trading at 12.2x trailing earnings, whereas its global competitors BYD and Beijing Foton Motor are trading at 164x and 33x trailing earnings. On a price-to-book basis, Zhengzhou Yutong Bus is trading at 3.6x book value, whereas BYD and Beiqi Foton Motor are trading at 3.6x and 1.0x book value respectively.

Shareholding Structure

State-owned Zhengzhou Yutong Group owns 37% of shares outstanding. GIC, a Singaporean sovereign wealth fund owns 1.6%.

Financials for 2016

Income Statement

2016 revenues grew 14.9% YoY to reach RMB 35.8bn. Net profits grew 14.4% to reach RMB 4.04bn.

Balance Sheet

Zhengzhou Yutong Bus Co has a total debt-to-assets ratio of 15%.

Cash Flow

Net operating cash flow fell 41.2% YoY to reach RMB 3.5bn.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ker Zheng’s personal capacity. It does not in any way represent those of his employer and other related entities. Ker Zheng does not own any companies mentioned.

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