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The new emission standards of the State Environmental Protection Administration are a great challenge for all domestic fuel injection system manufacturers and a historical opportunity for Weifu. Weifu's response is to cooperate with Bosch to establish a Bosch diesel system to cope with the huge R&D expenses and possible risks in development.
We believe that the cooperation between Bosch and Weifu will be a win-win result. The success of Euro III products not only needs Bosch's technology research and development support, but also needs Weifu to provide a complete after-sales service network for Euro III products in the future, and it will be the largest in China. As the most technologically advanced oil pump company, Weifu can become a supplier of Euro III product matching parts, thereby increasing the localization of products, ensuring cost competitiveness, and achieving higher profitability.
With Euro III products all produced by the Weifu joint venture Bosch diesel system, the company's headquarters business will be transformed into Euro III products to provide spare parts production and processing, and investment income will gradually become the company's main source of profit.
We expect Bosch Diesel Systems to achieve a balance between revenue and expenditure in 2007 and will enter a period of rapid growth in profits in 2008. We estimate that Bosch's diesel system can achieve sales of about 300,000 sets of electronically controlled fuel injection systems in 2008, achieving a sales income of about 4.5 billion yuan.
Taking into account the company's rapid growth in the next two years and the absolute leading position of the company's joint ventures in the industry, based on the 20x 2008 P/E ratio, we set the target prices of A-shares and B-shares at 13.3 yuan and 13.3 Hong Kong dollars respectively. The first rating gives outperform.
2008 opportunities
The State Environmental Protection Administration formally implemented the "Limits and Measurement Methods for Exhaust Pollutants of Compressed Ignition, Gas Fueled Ignition Engines and Vehicles for Vehicles (China III, IV, V Phase)" on January 1, 2007 (GB17691-2005 The contents stipulate that new models of engines and new models must strictly comply with the corresponding emission standards; otherwise, they will not be approved for listing, and major cities like Beijing and Shanghai will be implemented earlier. From January 1, 2008, all new cars and new engines that do not meet the national phase III emission standards must not be sold, used, or registered.
The new emission standards are a great challenge for all domestic fuel injection system manufacturers and a historical opportunity for Weifu. With the increase of emission standards to Phase III standards, the mechanical fuel injection pump technology commonly used in China will be eliminated and the fuel injection system will be upgraded to an electronic control system. Because of the high technical content of electronically controlled fuel injection systems, our country’s domestic No oil pump company has mastered the core technology. In addition, taking into account the huge investment and possible risks of research and development of new technologies, and the continued R&D and investment that will soon be required for Phase IV emission standards in 2010, Weifu, the industry leader, decided to establish Bosch Diesel Systems in cooperation with Bosch.
The German Bosch Euro III standard fuel injection system products have a global market share of 80-85%. In the domestic market, we expect Bosch's electronic fuel injection system to have a market share of over 70%. Europe is the region with the most advanced diesel engine technology and the most widely used diesel passenger vehicles. Bosch and European OEMs have long been committed to researching and developing fuel injection technologies that meet environmental requirements. At present, Bosch's fuel injection system technology has reached the top Four generations of emission standards.
The future development of joint ventures between Bosch and Weifu will focus on the development and production of products that are in strict conformity with domestic emissions standards (China III, IV, V emission standards).
We believe that the cooperation between Bosch and Weifu will be a win-win result. The success of Euro III products not only needs Bosch's technical R&D support, but also needs Weifu's after-sales service network to provide Euro III products in the future. The most important is that With the largest and most powerful oil pump company in China, Weifu can become a supplier of EU III product matching parts, thereby increasing the localization of products, ensuring cost competitiveness, and achieving higher profitability. The goal of the Bosch diesel system is to achieve full production in 2010. The production target will be to produce 700,000 systems per year, with an annual output value of 1.2 billion euros.
With the promotion of passenger vehicle dieselization in China, we believe that the application of diesel engines will also gradually expand from the current commercial vehicle sector to the passenger vehicle sector. Therefore, we expect that the future market size of electronically controlled fuel injection systems will also increase. Significantly larger than current mechanical pumps, in addition to taking into account Bosch's world-leading technological advantages in this field, as well as the advantages of localization through cooperation with Weifu, we expect Bosch Diesel Systems Euro III products to be comparable to Weifu Hi-Tech ( 12,0.12,1.01%) The original European II product market share in the country will further increase.
Profit outlook
Weifu Gaoke's main products are diesel engine fuel injection systems consisting of oil pumps and injectors. In 2005, the company's main business income, various types of fuel injection pumps accounted for 80% of company revenue. With Euro III products all produced by the Weifu joint venture Bosch diesel system, the company's headquarters business will be transformed into Euro III products to provide spare parts production and processing, and investment income will gradually become the company's main source of profit.
Company's main business
After 2008, the Euro III standard for diesel engine emissions will be fully implemented. The Euro III standard products produced by Bosch Diesel Systems will enter the market on a large scale, and the company's original Euro II products will be affected greatly, but we believe that due to Bosch diesel systems The price and profitability of the Euro III products will be significantly higher than Weifu's current Euro II products, so we expect Weifu's earnings from the joint venture to be higher than its current earnings. At the same time, Weifu, as the main component supplier of the joint venture company, can also partially compensate for the reduction in sales of Euro II products.
We believe that 2007 will be a peak in the sales of Euro II products. It is expected that sales will exceed RMB 3 billion, up 20% year-on-year. In 2008, the headquarters business will experience a certain degree of decline. It is estimated that sales will be approximately RMB 2.2 billion, down from a year earlier. 27%. Among them, the supporting business of Euro III is expected to be 65 million yuan in 2007, and it will exceed 250 million yuan in 2008, and it is expected to grow rapidly with the expansion of the Euro III market.
Exhaust gas purification business
At present, the company through the controlling company Weifu Lida produces exhaust gas purifiers, mufflers and other products. Weifu Lida has formed an annual production capacity of 3 million liters of catalyst and 1 million sets of automotive exhaust catalytic converters. It is the largest supplier of domestic automotive exhaust catalytic purification equipment. Currently, Lida has been supporting more than 20 major models of more than 10 automobile manufacturers in China and its market share is about 10-15%. We expect Weifu Lida's sales revenue in 2006 to be around RMB 200 million, which represents a year-on-year increase of more than 60%. We forecast that the company’s sales revenue in 2007 and 2008 could reach RMB 300 million and RMB 400 million, respectively. At present, the entire market is still mainly occupied by foreign brands. We believe that there is a large room for growth in the latter part of the business and it is expected to become the company's new profit growth point.
Investment income
Prior to 2008, Bosch diesel systems were still in the incubation phase of new products. Training of technicians, depreciation of new equipment, testing costs incurred by engine manufacturers, and new products have not yet been widely used, resulting in full reliance on revenue and profitability. Due to product injectors and injectors, Bosch diesel systems will experience relatively large losses in 2005 and 2006, and we expect to achieve balance of payments as new products gradually enter the market in 2007. After 2008, the products of Bosch Diesel System Euro III standard will enter the market on a large scale, and the company's profit will mainly come from the investment income of Bosch diesel system. In addition, we expect the profit growth of China United Automotive Electronics will also be limited by the decline in the profitability of downstream auto makers. We forecast that the profit contribution of the Bosch diesel system in 2008 is 255 million yuan, and the profit contribution of China United Automotive Electronics is 58 million yuan.
We expect the market share of Euro III products from Bosch Diesel Systems to account for 70%. By 2008, when the government implements new emission standards, most newly-marketed medium- and heavy-duty diesel engines will adopt fuel injection systems that meet the Phase III emission standards. It is expected that in 2008 this market capacity will be around 400,000 to 500,000 units. At present, we understand the situation, the average price of Euro III products is much higher than that of Euro II, which is approximately between 1-2 million. We expect the average price of Euro III standard electronic control system to be 15,000. Yuan around. We estimate that the Bosch diesel system can achieve sales of about 300,000 sets of electronically controlled fuel injection systems in 2008, with a sales income of about 4.5 billion yuan, plus other services for diesel engines. The joint venture company can achieve sales revenue of more than 4.6 billion yuan. .
Profitability analysis
The gross profit margin of the original Euro II products will decline slightly with the decrease in sales volume, but we expect the gross profit margin for the Euro III supporting business will be very high, reaching a level of 23-25%, and will grow rapidly in the next two years. The gross profit margin of the tail gas purifier business is also very high, about 22%. Therefore, overall, we estimate that the company's main business gross profit margin will slightly decline in the next two years, and the overall gross profit margin level can still be maintained at 20. %the above.
We believe that the price and profitability of Bosch's diesel systems will be significantly higher than those of Weifu's own products. The original PS7100 pump produced by Suzhou Bosch (now Weifu Diesel Systems) and Weifu's PW2000 pump are similar products, but the PS7100 pump In terms of overall performance, the average selling price is around 8,000-9,000 yuan, which is twice the price of the PW2000 pump. We believe that when the Euro III products formally enter the market on a large scale, the profitability of the Bosch diesel system will return to its original level. With reference to the profitability of the Bosch Euro II products, the net profit margin in 2004 will be over 20%. After the three-year adjustment period, we expect its net profit margin to rise back to 18% in 2008.
The main risk
National III Emission Standard Implementation
Since the start of 2008, nationwide will implement the III emission standard. In our profit forecast, the company's main source of profit will be based on the Euro III standard products and related accessories business in 2008. However, if the implementation of emission standards in 2008 is lower than our expectation, for example, the implementation and supervision of some second-tier cities will not be sufficient, which will directly affect the sales and profits of the company's Euro III products.
Impact of macroeconomic policies
The downstream products of the company's main products are heavy trucks and construction machinery equipment. We believe that changes in the government's macroeconomic policies will have a greater impact on company performance. If the government believes that investment is overheated, then the decline in macroeconomic control and fixed asset investment will be significant. The company's downstream industry has a very large negative impact.
Changes in the competitive environment
After entering the era of Euro III products and Euro IV products, all domestic manufacturers have quit the first-line competition due to the high technical threshold, and the company’s competitors will become international giants, and the competitive environment may become increasingly fierce. However, as the largest company in the industry and China's largest conglomerate, we are very optimistic about the cooperation between Bosch and Weifu.
Financial status
The investment style of the company has always been relatively stable. We believe that in the next 2-3 years, the company’s capital expenditure will be significantly less than the investment in the previous two years, with the European III products all transferred to Bosch diesel system production, and the Bosch diesel system Large-scale investment is nearing completion. The company's major investment in the future is the production line of Euro III product parts. We expect the capital expenditure in 2007 to be approximately 79 million yuan, and the capital expenditure in 2008 will be approximately 54 million yuan, and the company will maintain reasonable In terms of debt level, the net gearing ratio in 2007 was 20.7%. In 2008, the company's net gearing ratio will drop to 3.7%.
Valuation
The electronically controlled diesel injection system plays an important role in the emission performance of diesel engines. We believe that with the cooperation with Bosch, Weifu Hi-Tech will become the direct beneficiary of the upgrade of domestic fuel emission standards. It is estimated that from 2008, the demand for Bosch Diesel System Euro III products will gradually be released. We predict that the company's net profit growth rate will exceed 100% in the next two years. With the continuous deepening of the implementation of emission standards, the company will enter a period of rapid growth of profit and net assets income of 3-5 years, and if the diesel vehicle of passenger vehicles can make a big breakthrough in the country, the company’s profit will exceed Our expectations.
Currently, Weifu Hi-Tech's 2008 P/E ratio is 16.3 times. We think the value of the company is underestimated. Taking into account the company's rapid growth rate in 2007 and 2008 and the huge Euro III market in the future, we believe Weifu Hi-Tech can enjoy a higher valuation. Based on 20 times of the 2008 P/E ratio, we set the target prices for A-shares and B-shares at 13.3 yuan and 13.3 Hong Kong dollars respectively. The first rating is better than the market.
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