CHINESE CAPITAL GOODS makers like Bright World are on the brink of strong growth, if the economic history of Japan and Korea is anything to go by, according to Deutsche Bank.
In its report issued on 3 Jan, the foreign broker identified key trends that will drive China’s industrial structure to shift rapidly toward equipment manufacturing. These include:
1) Wage growth will lead to higher demand for equipment.
2) China’s technical competency in manufacturing equipment is now in a “golden age” and will enable it to gain export market share from Japan, South Korea and Germany, where production costs are much higher.
3) China’s costs are falling faster than its competitors due to productivity growth.
4) Its large domestic market and localization policy mean that China is best placed to enjoy economies of scale, which will likely offer growing cost advantages to domestic producers against global competitors.
Recently, NextInsight spoke to Bright World CFO Samuel Ng, and found the capital goods makers’ growth drivers do echo those cited by Deutsche Bank.
# 1 Beneficiary of consumption boom
The CFO explained that all production lines for metal press or forming components need stamping machines such as those produced by Bright World.
Yet, there are only 100-odd local makers of conventional stamping machines. These machines contribute about 40% to group revenues.
It also customizes high-tonnage stamping machines for automakers. Because of the exacting standards required by automakers, competition here is even lower, with only 20-odd local manufacturers.
Because of the shortage in supply and a boom in consumer electronics and automobiles, Bright World’s quarterly net profit doubled over the past 4 quarters to reach Rmb 37.6 million in 3Q10.
This augurs a stellar FY2010 results announcement next month, considering that revenues for the first 9 months ended Sep 2010 alone have reached Rmb 727.3 million, some 30% more than the entire FY2009.
”I'm confident our earnings growth trajectory is sustainable," said Mr Ng during the interview with NextInsight.
Orders are coming in every month. Current order books are at about Rmb 200 million, most of which will be filled in 3 months.
China‘s demand for household appliances and automotive has been booming for a few years. To stimulate rural consumption and buoy the nation's economy during the global economic downturn, China had been giving subsidies of household electrical appliances to farmers.
To date, there has been no indication that government subsidy contracts signed with manufacturers of household electrical appliances will lapse any time soon.
Started in Feb 2009, the program subsidizes up to 13% of the home appliance’s retail list price.
It has been so successful, rural purchases of home appliances were boosted by a whopping 180% year-on-year to Rmb 150.41 billion over the first 11 months of 2010.
#2 Collaboration with world-class technology leaders
The extent of advanced technology necessary to enter the capital goods business is a strong deterrent to fresh competition, but Bright World keeps its edge by working with international players.
Last year, it inked a technology collaboration agreement with a world leading metal stamping press maker, Japan's AIDA, to manufacture the world's fastest servo press line for Honda's factory in China.
#3 Foreign technology at local prices
Production of capital goods requires advanced technology and has long been a specialization of developed nations like US, Germany and Japan.
Thanks to its advanced technology, Bright World is one of China’s leading players with a market share of 8% for metal stamping machines (management's estimates).
”Our machines are more affordable than US, European, Japanese and Taiwanese competition, and yet we have strong R&D, fast turnaround to market demand, and the ability to accommodate variation orders,” said Mr Ng.
#4 Over 2,000 customers
Capital equipment makers are typically subject to cyclical ups and downs, but being relevant to a multitude of industries mitigates this by allowing Bright World to target fasting growing sectors.
It has as many as 2,100 customers from diverse industries which use its stamping machine to produce a myriad of metal parts, ranging from consumer electronics giants like LG or Sony, to leading Chinese white goods makers like Galanz, Gree and Haier.
For the past couple of years, robust top line growth of up to 40% by automobile customers such as Volkswagen and Chery Automobile have been contributing to Bright World’s superb growth story.
Sales of passenger cars in China during Jan-Nov 2010 grew 29.5% year-on-year. Even though this is expected to moderate to a healthy 10% this year, the management is still confident of sustaining the company's stellar growth as it is able to diversify into new markets.
The best performing equipment makers, according to Deutsche Bank, will serve the following sectors: coalmining, construction, medicine, rail, power, shipbuilding, telco and industrial automation. It believes that China’s new rail equipment will be nearly 9 times that of Japan by 2015.
”The growth from industrial automation has been good. We are hoping to secure customers from the railway sector soon,” said Mr Ng.
Related story: BRIGHT WORLD: Record volume today, stock up a bright 209% since start of year
