Stock research on global mid-cap companies

Evaluate Research

Evaluate Research provides institutional quality stock research on small-cap and  mid-cap companies on a global basis, thus helping connect investors with the company.

At Evaluate Research, we provide free of cost to all investors a 20-25 page Initiation Report which evaluates in great detail all aspects of the company:  growth opportunities, catalysts, business description, competitive positioning, SWOT analysis, risks, etc.  In addition, we determine specific price targets for the company based on detailed 5-year complete forecasts of financial statements including IS, BS, CF, ratios, etc.  Finally, whereas many sell-side brokers offer sketchy and irregular ongoing maintenance research of companies, if not outright dropped or termination of coverage, at Evaluate Research we systematically monitor and regularly publish Update Notes covering quarterly earnings, major corporate events, etc.

All of the research reports are broadly and freely disseminated globally to leading Fund Managers and analysts who invest specifically in mid-size equities, and also on leading investment information platforms including: Bloomberg, Thomson Reuters, FactSet etc.

Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

Leoch [842_HK; HK$631 million/US$82 million market cap; HK$0.3 million total average daily value traded] reported a temporary decline in the revenues for the FY2019 ended December. The company’s revenues declined by 12.4% YoY to RMB8,363 mn. &nbsp;Revenue from the total Battery business segment amounted to RMB7,387 mn,&nbsp; a decline of 8.5% from RMB8,069 mn for the corresponding period in 2018.
The&nbsp; drop&nbsp; in&nbsp; revenue&nbsp; was&nbsp; partially&nbsp; contributed&nbsp; by&nbsp; the&nbsp; decrease&nbsp; in&nbsp; average&nbsp; lead&nbsp; price&nbsp; of&nbsp; 2019&nbsp; which&nbsp; resulted&nbsp; in&nbsp; lower&nbsp; average&nbsp; selling&nbsp; price&nbsp; per&nbsp; ton&nbsp; as&nbsp; compared&nbsp; to&nbsp; that in&nbsp; 2018.&nbsp; The&nbsp; volume&nbsp; delivered&nbsp; in&nbsp; terms&nbsp; of&nbsp; tons&nbsp; was&nbsp; similar&nbsp; as&nbsp; compared&nbsp; to&nbsp; the&nbsp; corresponding&nbsp; period&nbsp; last&nbsp; year. &nbsp;Macroeconomic headwinds in the form of the US-China trade war slowed down the implementation of 5G network in China and led to the decline in sales of reserve power batteries segment. &nbsp;Automobile sales also declined globally leading to a lower single digit decline in revenues for the SLI business segment of the company. &nbsp;
To capture tremendous opportunities arising from the 5G era and meet growing demands for compelling power solutions for the current and future market needs, Leoch has expanded its manufacturing capacity both locally and overseas, with a new lithium-ion plant in China and two new lead-acid plants in Vietnam in 2019. &nbsp;With all the capacity expansion undertaken in FY2019 along with rising gross profit margins (12.1% from 11.1% YoY) declining finance costs (2.3% lower YoY) and selling and distribution expenses trending lower (4.1% lower YoY), we believe with all the negatives behind the company is geared up to deliver on growth and is staring at an Inflection Point in 2020 to make the best of its opportunities.
Recycled Lead business amounted to RMB971 mn, a decline of 31.6% from RMB1,419 mn for the corresponding period in 2018.&nbsp; Production from the company’s lead recycling plant has not resumed full operation due to ongoing capacity expansion along with the process to adhere to the PRC Government’s lead-related heavy metal discharging enterprises compliance process (structural reform to enhance the factory’s environment protection facilities). &nbsp;The lead recycling plant is expected to resume operation in the first half of 2020 and the revenue is estimated to grow to approximately RMB1.5 bn in FY2020 [from RMB971 mn in FY2019] and grow subsequently in the next few years to full capacity.
With the issuance of 5G licenses for commercial use by China’s Ministry of Industry and Information Technology (MIIT) in June 2019, we believe revenue from the Reserve Power (especially in the Telecom and Data Center sub-segment – largest contribution to total revenues) would resume its upward growth momentum in FY2020 and beyond.
According to the management,&nbsp; since&nbsp; the&nbsp; outbreak&nbsp; of&nbsp; the&nbsp; pandemic&nbsp; in&nbsp; China,&nbsp; usage&nbsp; for&nbsp; online&nbsp; data&nbsp; &amp;&nbsp; services&nbsp; has&nbsp; substantially&nbsp; reduced and telecom companies such as China Mobile, China Unicom and China Telecom have scaled back capital expenditure in 5G base station infrastructure. Leoch will take this as a motivational challenge and continue to improve both its product quality and customer service to stay competitive in these revised 5G capex plans.
Maintain PT at HK$1.00; 113% Upside
We maintain a one year PT on Leoch at HK$1.00 per share implying an upside of 113% over the current stock price of HK$0.47. &nbsp;Our price target implies a P/E multiple of 12x on our FY2020 EPS estimate of RMB 7&nbsp; cents and a EV/ EBITDA multiple of 6X on our FY2020 EBITDA estimate of RMB495 mn. &nbsp;With all the negatives factored into the stock price along with secular tailwinds provided by the recent 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 5x P/E and 5x EV/EBITDA based on our FY2020 EPS and EBITDA estimates, respectively.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/554/original/image_33903743321585556805909.jpg?1585556804" width="1079" height="499" class="editor-image img-responsive" data-smartkarma-image-id="125554"></figure>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp; Source: Bloomberg
Marginal Uptick in Gross Profit Margin 
Gross profit slightly decreased by 3.8% from RMB1,055 mn in FY2018 to RMB1,015 mn for FY2019, mainly due to weakened demand in the Reserve Power sub-segment and the decline in the production output from the Recycled Lead business amid the planned expansion and enhancement of production facilities during the period. &nbsp;The gross profit margin increased for the Battery business segment while it decreased for the Recycled Lead business segment, resulting in marginal increase in the overall gross profit margin from 11.1% for FY2018 to 12.1% for FY2019. &nbsp;Higher gross profit margins were a result of lower production costs for the overall battery business segment.
The cost of sales declined by 13.5% from RMB 8,489.4 mn in FY2018 to RMB7,347.3 mn in FY2019. The decrease in cost&nbsp; of&nbsp; sales&nbsp; in &nbsp;recycled&nbsp; lead&nbsp; products&nbsp; was&nbsp; caused&nbsp; by&nbsp; the&nbsp; decline&nbsp; in&nbsp; sales while&nbsp; the&nbsp; decrease&nbsp; in&nbsp; battery&nbsp; business was mainly due to the drop in the average lead price in 2019 as compared to 2018.
EPS for the period came in at RMB10 cents [up 25% YoY], primarily due to gain on disposal of a subsidiary which was accounted in other income and gains. &nbsp;Finance costs declined by 2.3% while selling &amp; distribution expenses were lower by 4.1% on a YoY basis. &nbsp;The&nbsp; Board has recommended&nbsp; the&nbsp; payment&nbsp; of&nbsp; a&nbsp; final&nbsp; dividend&nbsp; of&nbsp; HK2.0&nbsp; cents&nbsp; per&nbsp; share subject to approval of the shareholders,&nbsp; for&nbsp; the year ended 31 December 2019 (2018: HK2.0 cents).
Expect Sharp Recovery in Recycled Lead Business in FY2020
Revenue of recycled lead products declined by 31.6% to RMB971 mn in FY2019 (FY2018: RMB1419 mn). The recycled lead business remained affected by the production disruption of its lead recycling facility amid the expansion project the construction of which was started in the third quarter of 2018. Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility will resume operation in the first half of 2020 after which revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
5G: A Big Market Opportunity for Leoch
Being a global supplier of power solutions for telecommunications and data center industries,&nbsp;we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years.
For further details and financial model, please see our attached Earnings Update Report.

Leoch [842_HK; HK$631 million/US$82 million market cap; HK$0.3 million total average daily value traded] reported a temporary decline in the revenues for the FY2019 ended December. The company’s revenues declined by 12.4% YoY to RMB8,363 mn. &nbsp;Revenue from the total Battery business segment amounted to RMB7,387 mn,&nbsp; a decline of 8.5% from RMB8,069 mn for the corresponding period in 2018.
The&nbsp; drop&nbsp; in&nbsp; revenue&nbsp; was&nbsp; partially&nbsp; contributed&nbsp; by&nbsp; the&nbsp; decrease&nbsp; in&nbsp; average&nbsp; lead&nbsp; price&nbsp; of&nbsp; 2019&nbsp; which&nbsp; resulted&nbsp; in&nbsp; lower&nbsp; average&nbsp; selling&nbsp; price&nbsp; per&nbsp; ton&nbsp; as&nbsp; compared&nbsp; to&nbsp; that in&nbsp; 2018.&nbsp; The&nbsp; volume&nbsp; delivered&nbsp; in&nbsp; terms&nbsp; of&nbsp; tons&nbsp; was&nbsp; similar&nbsp; as&nbsp; compared&nbsp; to&nbsp; the&nbsp; corresponding&nbsp; period&nbsp; last&nbsp; year. &nbsp;Macroeconomic headwinds in the form of the US-China trade war slowed down the implementation of 5G network in China and led to the decline in sales of reserve power batteries segment. &nbsp;Automobile sales also declined globally leading to a lower single digit decline in revenues for the SLI business segment of the company. &nbsp;
To capture tremendous opportunities arising from the 5G era and meet growing demands for compelling power solutions for the current and future market needs, Leoch has expanded its manufacturing capacity both locally and overseas, with a new lithium-ion plant in China and two new lead-acid plants in Vietnam in 2019. &nbsp;With all the capacity expansion undertaken in FY2019 along with rising gross profit margins (12.1% from 11.1% YoY) declining finance costs (2.3% lower YoY) and selling and distribution expenses trending lower (4.1% lower YoY), we believe with all the negatives behind the company is geared up to deliver on growth and is staring at an Inflection Point in 2020 to make the best of its opportunities.
Recycled Lead business amounted to RMB971 mn, a decline of 31.6% from RMB1,419 mn for the corresponding period in 2018.&nbsp; Production from the company’s lead recycling plant has not resumed full operation due to ongoing capacity expansion along with the process to adhere to the PRC Government’s lead-related heavy metal discharging enterprises compliance process (structural reform to enhance the factory’s environment protection facilities). &nbsp;The lead recycling plant is expected to resume operation in the first half of 2020 and the revenue is estimated to grow to approximately RMB1.5 bn in FY2020 [from RMB971 mn in FY2019] and grow subsequently in the next few years to full capacity.
With the issuance of 5G licenses for commercial use by China’s Ministry of Industry and Information Technology (MIIT) in June 2019, we believe revenue from the Reserve Power (especially in the Telecom and Data Center sub-segment – largest contribution to total revenues) would resume its upward growth momentum in FY2020 and beyond.
According to the management,&nbsp; since&nbsp; the&nbsp; outbreak&nbsp; of&nbsp; the&nbsp; pandemic&nbsp; in&nbsp; China,&nbsp; usage&nbsp; for&nbsp; online&nbsp; data&nbsp; &amp;&nbsp; services&nbsp; has&nbsp; substantially&nbsp; reduced and telecom companies such as China Mobile, China Unicom and China Telecom have scaled back capital expenditure in 5G base station infrastructure. Leoch will take this as a motivational challenge and continue to improve both its product quality and customer service to stay competitive in these revised 5G capex plans.
Maintain PT at HK$1.00; 113% Upside
We maintain a one year PT on Leoch at HK$1.00 per share implying an upside of 113% over the current stock price of HK$0.47. &nbsp;Our price target implies a P/E multiple of 12x on our FY2020 EPS estimate of RMB 7&nbsp; cents and a EV/ EBITDA multiple of 6X on our FY2020 EBITDA estimate of RMB495 mn. &nbsp;With all the negatives factored into the stock price along with secular tailwinds provided by the recent 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 5x P/E and 5x EV/EBITDA based on our FY2020 EPS and EBITDA estimates, respectively.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp; Source: Bloomberg
Marginal Uptick in Gross Profit Margin 
Gross profit slightly decreased by 3.8% from RMB1,055 mn in FY2018 to RMB1,015 mn for FY2019, mainly due to weakened demand in the Reserve Power sub-segment and the decline in the production output from the Recycled Lead business amid the planned expansion and enhancement of production facilities during the period. &nbsp;The gross profit margin increased for the Battery business segment while it decreased for the Recycled Lead business segment, resulting in marginal increase in the overall gross profit margin from 11.1% for FY2018 to 12.1% for FY2019. &nbsp;Higher gross profit margins were a result of lower production costs for the overall battery business segment.
The cost of sales declined by 13.5% from RMB 8,489.4 mn in FY2018 to RMB7,347.3 mn in FY2019. The decrease in cost&nbsp; of&nbsp; sales&nbsp; in &nbsp;recycled&nbsp; lead&nbsp; products&nbsp; was&nbsp; caused&nbsp; by&nbsp; the&nbsp; decline&nbsp; in&nbsp; sales while&nbsp; the&nbsp; decrease&nbsp; in&nbsp; battery&nbsp; business was mainly due to the drop in the average lead price in 2019 as compared to 2018.
EPS for the period came in at RMB10 cents [up 25% YoY], primarily due to gain on disposal of a subsidiary which was accounted in other income and gains. &nbsp;Finance costs declined by 2.3% while selling &amp; distribution expenses were lower by 4.1% on a YoY basis. &nbsp;The&nbsp; Board has recommended&nbsp; the&nbsp; payment&nbsp; of&nbsp; a&nbsp; final&nbsp; dividend&nbsp; of&nbsp; HK2.0&nbsp; cents&nbsp; per&nbsp; share subject to approval of the shareholders,&nbsp; for&nbsp; the year ended 31 December 2019 (2018: HK2.0 cents).
Expect Sharp Recovery in Recycled Lead Business in FY2020
Revenue of recycled lead products declined by 31.6% to RMB971 mn in FY2019 (FY2018: RMB1419 mn). The recycled lead business remained affected by the production disruption of its lead recycling facility amid the expansion project the construction of which was started in the third quarter of 2018. Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility will resume operation in the first half of 2020 after which revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
5G: A Big Market Opportunity for Leoch
Being a global supplier of power solutions for telecommunications and data center industries,&nbsp;we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years.
For further details and financial model, please see our attached Earnings Update Report.

Leoch [842]: 5G Play at 5x P/E, Inflection Point, 2019: Lower Revenues, Higher EPS