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China High Speed Transmission Equipment Group

China High Speed Transmission Equipment Group (‘company’) is a leading supplier of wind gear transmission equipment for wind turbine manufacturers. It also supplies industrial gears for the heavy equipment market. This combined segment (‘wind’) contributed 90% of profits.

It concentrates on the 2MW-7MW wind turbine market though prototypes for 8MW-15MW are in the pipeline. It supplies the leading manufacturers in China as well as prominent overseas manufacturers such as GE, Siemens, Suzlon, and Doosan (15% export sales).

In addition, it manufactures rail transport gear transmission equipment (2% of sales) and started a trading business in 2020 dealing mostly in refined oil, electrolytic copper, and steel products (30% of sales but only 5% of profits).

Though sales in the wind segment were up 3.3% over the year, segment profit margins declined from 14.5% to 11%. In addition, operating cash flows were strained with large working capital requirements resulting in outflows of 1.5b rmb.

Capex of 1.1 rmb added to the pressure and these were mostly financed by borrowings (see below) as well as a partial stake sale of a subsidiary (from 93% to 50%).

Sales have grown steadily over the years and this seems to be a result of greater

demand for wind power rather than unusual product pricing spikes.

The company reported 20b rmb of sales (including 6b rmb of trading revenues), EBITDA of 2.2b rmb, and net profits of 1.3b in 2021.

Though borrowings increased, the company reported a net cash position of 2.1b rmb (including 3.3b rmb of bills receivables discounted with banks; and after working capital requirements).

The common stock was selling for 6b rmb. This is backed by 5b rmb of net current assets alone – mostly comprising receivables, inventories, and other liquid assets.

Recent earnings of 1.3b doesn’t appear to be abnormally good and could be taken as an indicator of normal earnings. Returns on tangible assets are just under 12%, which appears reasonable (despite allocations to loss-making associates and other unlisted investments totaling 2.3b rmb).

This represents an earnings multiple of <5x. In addition, prospects are at least reasonably bright as China forges ahead with its dual carbon goals of peak carbon use by 2030 and carbon neutrality by 2060.

Dividends weren’t declared in 2020 or 2021 though it paid out regular dividends of ~300m rmb before then.

Overall, this stock appears to be reasonably priced on an investment basis.

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