Cheng Shin continues growth, stock rating upgraded
Financial analysts have upgraded their view of shares in the Maxxis tyre brand’s manufacturing parent company Cheng Shin Rubber. Describing it as “one of the most successful Taiwan stories in China”; Morgan Stanley gave Cheng Shin the “overweight” rating, raising its earnings per share projections by 1 per cent and 9 per cent for 2011 and 2012 respectively. At the same time the stock’s price target was raise from NT$68.33 to NT$78.3.
“Its profitability, scale and brand name in the China market are rivalled by few, if any, Taiwanese companies,” the analysts continued, adding that with two new greenfield plants in China slated to start production in the foruth quarter of 2011, there is the potential for “renewed growth momentum.”
According to Morgan Stanley, Cheng Shin is engaged in one of the biggest expansions among the top tyre makers in China: “We estimate that Cheng Shin will add 26 per cent and 102 per cent new PCR and TBR capacities, respectively, from 2011-13 to underpin a top-line compound annual growth rate of 21 per cent.”
The bank is particularly positive about the establishment of the firm’s Chongqing plant, which was announced last year. The reason is that this is the first operation for Cheng Shin in western China (Chongqing is a major auto production base in China). “With a manufacturing presence in that region, we believe CSR will be able to expand its market share quickly,” they continued:
There is also cause for optimism now that raw material costs have subsided to some extent. After its peak in 2Q11, the price of natural rubber has reportedly fallen by 20 per cent, while the prices of key raw materials for synthetic rubber have fallen too. And this is expect offer relief in cost pressure that will help support stronger future margins. As a result Cheng Shin’s gross margins are forecast to recover from 17 per cent in the first quarter of 2011 to 18.2 per cent in the second quarter and 20.7 per cent in the third.