World’s largest trailer maker inches closer to a Hong Kong IPO

CIMC Vehicles, the world’s largest maker of specialty truck bodies and trailers as measured by sales volumes, increasingly appears to be heading for an initial public offering (IPO) on the Hong Kong Stock Exchange.

It has been a bit of a ‘will-they-or-won’t-they’ situation as the company has filed IPO documents several times, but as yet it has not gone through with the IPO. 

However, this time, the company is widely reported to be in its “pre-marketing” phase in Hong Kong. New documents that have been published via the Hong Kong Stock Exchange have been heavily redacted due to the early stage of the IPO.

About CIMC Vehicles

CIMC Vehicles is a subsidiary of Shenzhen, China-based CIMC, which makes a variety of logistics equipment, including shipping containers. At the latest practicable date prior to filling the June 23 “application proof,” the largest shareholder in the company was CIMC with 63 percent of the equity. Other major shareholders include Shanghai Taifu (16.82 percent) and Taizhou Taifu (10.77 percent).

The company makes and sells a wide range of automotive products including chassis and flatbed trailers, fence trailers, tank trailers, center-axle car carriers, dump beds, mixers, dry van trailers, reefer trailers, curtain-side trailers and semi-trailers. It does not make prime movers/tractors. It sells globally in over 40 countries including China, Algeria, Australia, Indonesia, Japan, Malaysia, Saudi Arabia, South Africa, Thailand and Vietnam. In the U.S. it primarily makes and sells semi-trailers under the “Vanguard” and “CIMC” brands.

CIMC has 18 manufacturing plants in China, two in the U.S. and one each in the U.K. and Belgium. It also has nine “assembly” plants across Australia, Poland, South Africa, Thailand and the U.S.

In the latest application proof document, filed over the weekend, the company released some of its sales and financial results.

Go figure… sales, revenue and profit numbers

In 2015, it sold 113,610 units and that figure rose to 122,427 units in 2016 and increased yet again to 161,821 units in 2017. For the six months ended June 2018, it sold 89,491 units. The company has also been generating revenues over the last three months too. In the 2015 calendar year, it generated Chinese Yuan (CNY) 13,148 million; in 2016, CNY 14,555.6 million; in 2017 CNY 19,367 million. The overwhelming majority of its sales (63.5 percent) are made in China. Just under 21 percent of sales are made in North America and just under 11 percent are made in Europe.

Gross profits have been on an upward path with CNY 1,878.2 million recorded in 2015, rising to CNY 2,848.3 million by the end of 2018. Gross profit in the first half of 2017 was CNY 1,409. million. Profit after tax rose from CNY 661.4 million in 2015 to CNY 1,011.5 million in 2017.

Main markets – China and North America

The company attributes its growth primarily to the continued growth in vehicle sales in China. That, in turn, is driven by sales of dump beds and mixers due to increased demand for vehicles from a growing construction industry. Infrastructure-building in China appears to be at the root of demand.

In North America, the company attributes its growth to increased demand for chassis trailers and a depreciation of the Renminbi against the U.S. dollar. (The Renminbi is the official name of China’s money; the Yuan is the unit of account. For instance, a person might say, ‘I happen to have several leftover five yuan notes after my trip to China, but the Renminbi is not legal tender here in the U.S.’).

The company says that it intends to use about 70 percent of the funds to build new manufacturing plants in the U.S or Europe; about 10 percent of the funds will be used to research and develop new products; 10 percent will be used to pay debt and 10 percent will be used for working capital and general purposes.

Analyst reactions – unfavourable

Equities analyst Arun George of Global Equity Research, who publishes on the Smartkarma platform, argued that “CIMC Vehicles’ fundamentals are mixed, which needs to be reflected in the proposed IPO valuation.”

George argued that although the company is gaining market share, growth in the key geographies is expected to be “materially slow.” He also argued that the revenue growth for the company in China is “solid, but declining,” which he argues is driven by new regulations and lower demand. Chinese regulations apparently favor alternative modes of transport to trucks, especially rail and waterborne.

However, he potentially sees gross margins rising in 2019 owing to a “rising mix of high margin center-axle car carriers.” He also argues that a “rapid revenue growth” in the North American market has been driven by the pull-forward of demand, driven by favorable economic conditions. He also noted that margins in this market are declining because of a combination of currency issues, rising costs of raw materials and higher tariffs.

“CIMC Vehicles intends to establish a U.S. plant in the next two to five years to manufacture chassis trailers to offset the impact from tariffs,” George says.

Meanwhile, George has been disappointed that strong revenue growth has not led to higher profits. “EBIT, and adjusted EBITDA margin has declined over the track record period. The lack of operational leverage is due to gross margin pressure as both selling and distribution expenses and administrative expenses as a percentage of revenue declined over the track record period,” George explains.

Meanwhile, equities analyst Ke Yan of Aequitas Research, who publishes on the Smartkarma platform, argues that although the company is a market leader in the trailer segment, there is “little growth ahead.”

Yan notes that industry consultants are forecasting a large decline in sales volumes in China but only small offsetting growth in the U.S. He also notes that, while the company has had a large increase in revenues and profits it was driven by “replacement demand” created by regulatory changes in China.

He says that, although the company is a market leader, the competition is intense and the market is fragmented. And, as growth surged owing to replacement demand and the sector is forecast to shrink, “it is not an attractive market,” he concludes.