Company Update 25 January 2021 BUY Precision Tsugami 35% side BOCI Industrials Corporate Day takeaway Target price: HK$11.44 We hosted investor call with Tsugami China during our BOCI 1651 HK Price: HK$8.47 Industrials Corporate Day. The business updates were very TP basis: P/E encouraging, with great demand from downstream industries like Sector rating: NEUTRAL auto, 3C and construction machinery hydraulics. Total new order in January has already surged by over 100% YoY month-to-date, while Forecast Revisions (%) new order in 4Q20 also grew significantly at around 92% YoY. Outlook for Tsugami China’s 2HFY21 results would be very Year ended 31 Mar 21E 22E 23E promising, and the company guides that total revenue in FY21 would Revenue 0 0 0 likely reach RMB2.8bn, higher than the previous guidance of around Core EPS 0 0 0 RMB2.5bn. Tsugami China is also working to improve the liquidity of Source: BOCI Research estimates its shares. We retain our estimates and keep the TP of HK$11.44 intact. Reiterate BUY. Trading Summary HK$ Turnover (HK$ m) Key Factors for Rating 9.0 70 8.5 60  New order trend becomes more and more encouraging amid the gradual 8.0 50 recovery from the pandemic in 2020. Tsugami China’s new order grew by only 7.5 40 7% YoY in 1QFY20, but the trend gets better: +18% YoY in 2Q20, +58% YoY 7.0 30 in 3Q20 and +92% YoY in 4Q20. January 2021 new order up till now has 6.5 20 already surged by over 100% YoY, with demand mostly from the domestic 6.0 10 side. If looking at the demand from downstream sectors, the recovery of 5.5 0 demand from the auto sector has been strong starting from late 3Q20, especially from NEVs. New order from the auto sector amounted to RMB128m 22/01/20 22/02/20 22/03/20 22/04/20 22/05/20 22/06/20 22/07/20 22/08/20 22/09/20 22/10/20 22/11/20 22/12/20 22/01/21 in November and RMB140m in December 2020. Demand from 3C was also Turnover Tsugami China HSI strong, with new orders of over RMB80m and RMB130m in November and (%) YTD 1M 3M 12M December 2020. The third best performing sector would be construction Absolute 13.2 12.9 20.8 12.9 machinery hydraulics, with RMB45m of new orders in December 2020. Relative to HSI 4.7 0.2 1.7 8.7  Recently, Tsugami China also obtained some meaningful new orders from a Shares outstanding (m) 381 global leading 3C manufacturer. Confirmed order up to date is around 100-200 Free float (%) 28 units, and more are expected to come. The machines would be ordered for smart phone lens and small parts for watches. Overseas new order is Market cap. (HK$ m) 3,225 recovering slowly in recent months, with less than 100 units of new order in 3M avg. daily turnover (HK$ m) 1 October and November, around 130 units in December 2020, and 140 units in Net debt/equity (%) (2021E) Net cash January. The outlook for overseas new order would still depend on the Major shareholder (%) development of the overseas pandemic situation. Tsugami Corporation 72  Utilisation rate for Tsugami China’s factories has exceeded 100%, and the Source: Company data, FactSet, BOCI Research workers are all working overtime for the new orders. Labour is still the Closing prices are as of 22 January 2021 bottleneck for current production, and the company is expected to hire around 300 more workers after the Chinese New Year. Key Risks to Rating  Liquidity of Tsugami China’s shares might take some time to improve. Valuation  We keep our estimates as well as the TP intact. Our TP of HK$11.44 implies 35% upside. Reiterate BUY on Tsugami China.

Investment Summary Year ended 31 Mar 2019 2020 2021E 2022E 2023E Revenue (RMB m) 2,851 1,944 2,576 2,839 3,126 Reported net profit (RMB m) 368 156 250 284 320 Core EPS (RMB) 0.964 0.409 0.656 0.746 0.840 BOCI Research Limited Fully diluted EPS (RMB) 0.964 0.409 0.656 0.746 0.840 Industrials: Machinery Consensus EPS (RMB) - - 0.530 0.610 0.690 Core P/E (x) 7.3 17.3 10.8 9.5 8.4 Tina LI, CFA Fully diluted P/E (x) 7.3 17.3 10.8 9.5 8.4 (852) 3988 6431 EV/EBITDA (x) 5.0 7.5 5.8 5.0 4.3 [email protected] P/B (x) 1.9 1.8 1.7 1.5 1.3 DPS (RMB) 0.350 0.300 0.241 0.273 0.308 Lindsay CHEN Yield (%) 4.9 4.2 3.4 3.9 4.4 (852) 3988 6425 ROE (%) 26.0 10.6 15.3 15.7 15.9 [email protected] Source: Company data, BOCI Research estimates

Important disclosures and certifications are located at the back of this research report. BOCI research is available electronically on www.bociresearch.com. Figure 1. Peer Valuation Comparison Stock Closing Market P/E P/B ROE EV/EBITDA code Company price cap (x) (x) (%) (x) (local ccy) (US$ m) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E Precision Tsugami (China) 1651 HK 8.47 418 17.3 10.8 9.5 1.8 1.7 1.5 10.6 15.3 15.7 7.5 5.8 5.0 Corporation Ltd

2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 1882 HK Haitian International Hldgs 29.15 6,012 22.2 19.9 17.8 3.0 2.7 2.6 13.3 13.7 14.4 10.9 14.3 12.6 Average 19.8 15.4 13.6 2.4 2.2 2.0 12.0 14.5 15.0 9.2 10.0 8.8

China machinery FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E Precision Tsugami (China) 1651 HK 8.47 418 17.3 10.2 9.1 1.8 1.7 1.5 10.6 15.3 17.1 7.5 6.1 5.7 Corporation Ltd

2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 1882 HK Haitian International Hldgs 29.15 6,012 22.2 18.5 16.2 3.0 2.7 2.4 13.3 14.6 15.0 10.9 12.3 10.9 2398 HK Good Friend Int’l Hldgs Inc. 1.12 58 NA NA NA 0.6 NA NA NA NA NA NA NA NA 601882 CH Haitian Precision 10.44 823 46.5 37.9 26.9 4.0 NA NA NA NA NA NA NA NA 000410 CH Shenyang Machine Tool 3.29 831 NA NA NA 9.8 NA NA NA NA NA NA NA NA 000837 CH Qinchuan Machine Tool 6.98 735 NA NA NA 2.3 NA NA NA NA NA NA NA NA Average 28.7 22.2 17.4 3.6 2.2 2.0 12.0 15.0 16.0 9.2 9.2 8.3

Global peers 6101 JP Tsugami Corporation 1,797.00 983 48.4 NA 27.1 2.8 NA NA 14.1 NA 11.7 NA NA NA 6141 JP DMG Mori 1,623.00 1,961 120.9 105.8 21.9 3.2 1.2 1.2 17.0 1.3 4.8 7.1 12.8 9.3 6113 JP Amada Holdings 1,196.00 4,137 19.7 16.1 46.4 1.0 0.9 1.0 7.3 5.9 2.2 6.5 7.4 11.8 6103 JP Okuma Corp 6,170.00 2,019 38.4 19.9 67.0 1.2 1.2 1.2 11.1 6.0 2.0 5.3 8.1 15.8 6135 JP Makino Milling Machine 4,105.00 1,022 NA 430.3 NA 0.7 0.7 0.7 10.1 0.1 (2.8) 3.8 10.1 45.7 6134 JP Fuji Machine 2,870.00 2,701 17.5 17.7 19.3 1.5 1.5 1.5 10.7 8.7 8.3 8.3 9.3 8.9 6121 JP Takisawa Machine Tool 1,002.00 64 NA NA NA 0.4 NA NA NA NA NA NA NA NA 6155 JP Takamatsu Machinery 683.00 72 10.2 NA NA 0.5 NA NA NA NA NA NA NA NA 6473 JP JTEKT Corp 873.00 2,930 NA 19.1 NA 0.6 0.6 0.6 7.8 3.1 (0.2) 4.2 5.5 7.9 6954 JP FANUC Corp 27,070.00 52,333 84.2 72.9 68.5 3.8 3.7 3.7 9.9 5.3 5.6 24.8 36.8 35.6 6609 TT Taiwan Takisawa Technology 25.75 67 93.3 NA NA 0.9 NA NA NA NA NA NA NA NA 4513 TT Falcon Machine Tools 8.76 24 NA NA NA 0.9 NA NA NA NA NA NA NA NA Average 54.1 97.4 41.7 1.5 1.4 1.4 11.0 4.4 4.0 8.6 12.9 19.3 Source: Data of various companies, Bloomberg, BOCI Research estimates. Closing prices are as of 22 January 2021. Note: Tsugami China adopts a financial year ending 31 March, therefore FY21 for Tsugami China is equivalent to 2020 for Haitian.

Figure 2. P/E and P/B Ranges P/E P/B (x) (x) 17 3.5

15 3.0 13 2.5 11 2.0 9

7 1.5

5 1.0 7 8 8 8 8 8 8 9 9 9 9 9 9 0 0 0 0 0 0 1 7 7 8 8 8 8 8 8 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 3 5 7 9 1 1 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 1 0 Trading P/E Average Avg +1 SD Avg -1 SD Trading P/B Average Avg +1 SD Avg -1 SD

Source: Bloomberg, BOCI Research

25 January 2021 Precision Tsugami China 2 THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC. Income Statement (RMB m) Cash-flow Statement (RMB m) Year ended 31 Mar 2019 2020 2021E 2022E 2023E Year ended 31 Mar 2019 2020 2021E 2022E 2023E Revenue 2,851 1,944 2,576 2,839 3,126 Pre-tax profit 484 223 366 406 458 Cost of sales (2,138) (1,551) (1,976) (2,180) (2,407) Depr. & amortisation 43 46 57 64 69 Operating exp. (243) (184) (231) (252) (274) Net interest expenses 0 0 0 0 0 EBITDA 513 254 426 471 514 Chg. in working capital (121) (21) (92) (54) (100) Depr & amortisation 43 46 57 64 69 Tax paid (131) (72) (116) (122) (138) Operating profit (EBIT) 470 208 369 407 445 Other operating activ's (2) 0 3 0 1 Net interest inc./(exp.) 0 (0) 0 0 0 CF from operations 273 176 217 295 290 Other gains/(losses) 13 16 (3) (1) 13 CAPEX (67) (151) (100) (65) (65) Pre-tax profit 484 223 366 406 458 Decr./(incr.) in invest. (9) 1 0 0 0 Tax on profit (116) (68) (116) (122) (138) Other investing activ's 2 (116) 0 0 0 Min. int./others 0 0 0 0 0 CF from investing (74) (266) (100) (65) (65) Net profit 368 156 250 284 320 Net incr. in debt 0 0 0 0 0 Core net profit 368 156 250 284 320 Dividends paid (120) (102) (92) (104) (117) EPS (RMB) 0.964 0.409 0.656 0.746 0.840 Other financing activ's 0 (3) 0 0 0 Core EPS (RMB) 0.964 0.409 0.656 0.746 0.840 CF from financing (120) (105) (92) (104) (117) DPS (RMB) 0.350 0.300 0.241 0.273 0.308 Change in cash 79 (195) 26 126 108 Revenue YoY % 23.2 (31.8) 32.6 10.2 10.1 Cash at start of year 322 400 205 231 357 EBIT YoY % 55.5 (55.8) 77.5 10.2 9.3 Free cash flow to firm 202 (86) 117 230 225 EBITDA YoY % 48.9 (50.6) 67.9 10.6 9.1 Free cash flow to equity 202 (86) 117 230 225

Core net profit YoY% 89.4 (57.6) 60.5 13.6 12.7 Source: Company data, BOCI Research estimates Fully diluted EPS YoY% 68.2 (57.6) 60.7 13.6 12.7

Source: Company data, BOCI Research estimates Key Ratios Year ended 31 Mar 2019 2020 2021E 2022E 2023E Balance Sheet (RMB m) Profitability (%) As at 31 Mar 2019 2020 2021E 2022E 2023E EBITDA margin 18.0 13.1 16.5 16.6 16.4 Cash & cash equiv. 415 342 368 494 602 EBIT margin 16.5 10.7 14.3 14.3 14.2 Receivables 499 438 550 616 668 Pre-tax margin 17.0 11.5 14.2 14.3 14.7 Inventories 647 619 680 634 817 Net profit margin 12.9 8.0 9.7 10.0 10.2 Other current assets 14 19 19 19 19 Liquidity (x) Total current assets 1,576 1,418 1,617 1,763 2,106 Current ratio 2.9 3.2 3.1 3.6 3.3 Fixed assets 346 452 495 496 491 Interest coverage NM 2,734.7 NM NM NM Intangible assets 4 4 4 4 4 Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash Other long term assets 397 508 559 560 558 Quick ratio 1.7 1.8 1.8 2.3 2.0 Total long-term assets 401 512 562 564 562 Valuation (x) Total assets 1,977 1,929 2,180 2,326 2,668 P/E 7.3 17.3 10.8 9.5 8.4 Creditors 385 297 385 332 459 Core P/E 7.3 17.3 10.8 9.5 8.4 Short-term debt 0 0 0 0 0 Core P/E @ target price 9.9 23.4 14.6 12.8 11.4 Other current liabs. 161 142 145 164 175 P/B 1.9 1.8 1.7 1.5 1.3 Total current liabs. 546 439 530 496 634 P/FCF 13.1 109.4 23.0 11.7 12.0 Long-term borrowings 0 0 0 0 0 EV/EBITDA 5.0 7.5 5.8 5.0 4.3 Other long-term liabs. 15 21 18 18 19 Activity ratios Share capital 320 320 320 320 320 Inventory days 110.5 145.6 125.7 106.1 123.9 Reserves/others 1,096 1,149 1,313 1,493 1,695 Accounts 63.9 82.2 78.0 79.2 78.0 Shareholders' equity 1,416 1,470 1,633 1,813 2,016 receivables days Accounts payables days 49.3 55.8 54.5 42.7 53.6 M.I./Pref. shr/Oth 0 (1) (1) (1) (1) Returns (%) Total liabs. & equity 1,977 1,929 2,180 2,326 2,668 Dividend payout ratios 36.3 73.4 36.7 36.7 36.7 Per share (RMB) Return on equity 26.0 10.6 15.3 15.7 15.9 Book value 3.7 3.9 4.3 4.8 5.3 Return on assets 18.1 7.5 11.6 12.2 11.7 Tangible assets 3.7 3.8 4.3 4.7 5.3 Return on capital 33.2 14.1 22.6 22.4 22.1 Net debt/(cash) Net cash Net cash Net cash Net cash Net cash employed Source: Company data, BOCI Research estimates Source: Company data, BOCI Research estimates

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