Impro: Share price of U.S. peer up nearly 300% in three years. Impro issues positive profit alert with extremely low comparable valuation
U.S. peer Howmet’s share price has risen by over 300% in the last three years
For well-managed companies, there is never a shortage of capital and opportunity in the capital market. The stock price of Howmet Aerospace (US stock code: HWM) has been on an upward trajectory, hitting new all-time highs. It has increased from a low of US$9.87 in May 2020 to a closing price of US$40.55 on 10 January this year, representing a surge of close to 300% in three years and nearly 30% in the last six months. Howmet is a global leader in engineered metal castings and precision machining products. It is the second largest in the industry in terms of investment casting sales (the market leader is Precision Castparts Corp., which Warren Buffett took private in 2015) with a current market capitalization of US$16.8 billion. Its price-to-earning (P/E) ratio is estimated at 38.6 times, and its price-to-book (P/B) ratio and price-to-sales (P/S) ratio is 5.1 times and 3.0 times, respectively.
Impro’s valuation is extremely low compared with Howmet
Impro (01286.HK) is a company listed on the Hong Kong capital market and is engaged in the same investment casting business as Howmet. It is a world-leading manufacturer of high-precision, high-complexity and mission-critical casting and machined components, and the sixth largest investment casting manufacturer in the world and the largest in China. Compared with Howmet, Impro’s current market capitalization is only US$620 million (HK$4.9 billion), with a P/E ratio of approximately 8 times, a P/B ratio of 1.1 times and a P/S ratio of 0.9 time. It is evident that the Company is significantly undervalued.
Impro Precision issues positive profit alert Results is set for further growth
As one of the world’s top ten manufacturers of high-precision castings and machined components, Impro Precision is underestimated and has huge scope for further growth. The Company recently issued a positive profit alert. Its sales revenue for 2022 is expected to increase by 15% to HK$4.35 billion, with net profit of HK$550-600 million, a year-on-year increase of 43-56%. Like Howmet, Impro Precision has also benefited from the recovery of its aerospace business after the pandemic. With the market for aircraft parts in short supply, the Company’s future performance has great potential. Despite the Company’s record net profit and sales revenue, its share price closed at only HK$2.65, still below its all-time high and in the bottom range. Compared with the historical high of HK$5.20, there is still considerable room for upward movement.
Leading stock in high-precision parts industry in Hong Kong Aerospace and Hydraulics businesses will become its new growth engine
As one of the few leading high-precision component companies in the Hong Kong stock market, with strong economies of scale, the Company’s sales exceeded HK$4.3 billion in 2022, and it has established a global presence. To date, the Company has 21 plants, 10 sales offices and eight logistics and warehousing centers in North America, Europe and Asia. It also completed the acquisition of Foshan Ameriforge at a consideration of nearly RMB59 million and the hydraulic orbital motor business of Danfoss Power Solutions (Jiangsu) Co., Ltd., a subsidiary of Danfoss Group, for EUR65 million, on 15 August and 31 October 2022, respectively, to strengthen the Company’s presence in the aerospace and hydraulics industries.
One of the revaluation targets under a valuation system with Chinese characteristics
On 21 November 2022, at the Annual Conference of Financial Street Forum 2022, Yi Huiman, Chairman of the China Securities Regulatory Commission, speaking on the structure and valuation of listed companies, said that there was a need to explore ways to build a valuation system with Chinese characteristics, so as to promote better functioning of the market’s resource allocation.
Obviously, the regulator has clearly recognized that it is very unreasonable for a number of listed companies, including Hong Kong stocks and A-shares, to be extremely undervalued by the market. The regulator has pointed out that it is necessary to conduct an in-depth study on the application scenarios of valuation theories in mature markets and grasp the valuation logic of different types of listed companies. It is believed that the signal from the regulator to explore the establishment of a valuation system with Chinese characteristics will be gradually developed and implemented at the level of investment banks and institutional investors. Compared with overseas benchmarking companies, the valuation of Impro is extremely unreasonable. The history of the development of the US stock market shows that a reasonable revaluation of the value of a listed company may be late, but it is never missed.
Moreover, the market capitalization of Impro will soon exceed HK$5 billion, and it is likely to be included in the Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect in the second half of this year, giving mainland investors the opportunity to invest in Impro. As a rare leader in the high-precision components industry, the Company has maintained continuous growth in its business performance. It is believed that, under the catalyst of multiple factors, Impro will move further along the new capital market curve.
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