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Concerns over impact of potential stakes on Tianneng Power overblown: OSK

Sales tax will actually benefit players like Tianneng.

 Wang Jin Liang, Vice Chairman of the China Battery Industry Association, recently revealed that the State Administration of Taxation and Ministry of Finance are currently in preliminary discussions on imposing a 5% sales tax on lead-related battery products. As such, to be prudent and assuming that Tianneng will pass on a portion of the tax, OSK have lowered its ASP assumptions per battery for FY13F and FY14F by 2% each to RMB113.7 and RMB117.6 respectively. As a result, OSK have trimmed earnings estimates for FY13F and FY14F by 2% and 3% to RMB914.7m and RMB1.13bn, respectively.

"In our view, the sales tax will quicken the pace of industry consolidation and benefit players like Tianneng, which has a i) dominant market share, ii) unique lead recycling capabilities and iii) an extensive distribution network, We trim our TP by 2% to HKD7.39, implying 7.3x FY13F PE (previously 8.2x FY12F PE). The counter also offers an attractive 5.7% FY12F yield. Maintain BUY," it said in a research note.

Here's more from OSK: 

Short term pain for long term gain. The potential sales tax, if implemented, is likely to squeeze profit margins of industry players in the short term. We believe Tianneng will raise prices to pass on a portion of the sales tax to its customers. In the long run, however, we anticipate the tax will be beneficial to the larger players as it is likely to accelerate the pace of the on-going industry consolidation.

Key supplier of low-speed EV lead-acid battery. In a recent meeting with Management, Tianneng has formed close ties in R&D with Chinese low-speed electric vehicle (EV) makers such as Shifeng. Through establishing these links, we believe Tianneng is well positioned to become a key supplier of lead-acid battery to the low-speed EV market. According to the State Council, the overall EV market is set to grow at a 5yr CAGR of 58% from end-2015 to end-2020 and achieve an annual sales target of 5m units by end-2020.

Maintain BUY on slightly lower TP of HKD7.39. The counter is currently trading at 5.3x FY12F PE and offers an attractive 5.7% FY12F dividend yield. As we rolled forward our DCF valuation to end-FY12 (from end-FY11) and factor in the lower earnings from FY13, our TP edges down to HKD7.39 (from HKD7.55). Our new TP implies 7.3x FY13F PE, equal to 1 SD above its past 5-yr forward PE mean. Maintain BUY.

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