In 2021, Jingda Special Magnet Wire recorded attributable net profit (ANP) of Rmb550mn, a growth of 31.1% YoY, in line with expectations. The production and sales of electromagnetic wires were 316.9kt and 314.4kt respectively, exceeding the targets. In the short term, the Company will benefit from the resumption of work and production. In the medium and long term, the deployment in new materials will consolidate its competitiveness. Considering the landing of the acquisition of more stakes in its joint ventures with Rea Magnet Wire in 2022 and cost reduction brought by localization of raw materials, we raise our profit forecasts for 2022E/2023E to Rmb809mn/1,082mn (previously Rmb768mn/952mn), and add 2024E profit forecast of Rmb1,331mn.

Considering the estimated CAGR of 25% in the next three years, we assign 1x PEG and 25x 2022E PE to derive a target market value of Rmb20.2bn, equivalent to a target price of Rmb10.1, and reiterate “BUY” rating.

2021 ANP at Rmb550mn, +31.1% YoY, in line with expectations.

Jingda released its 2021 annual report on Apr 18, posting annual revenue of Rmb18.33bn, +47.3% YoY, ANP of Rmb550mn, +31.1% YoY (margin of 3.0%, -0.4ppts YoY) and ex-one-off ANP of Rmb510mn, +39.9% YoY. By quarters, the 4Q21 revenue was Rmb4.67bn, +29.2% YoY and -1.9% QoQ, and ANP was Rmb130mn, +8.9% YoY and -12.9% QoQ (margin of 2.7%, -0.5ppts YoY). The QoQ decline in earnings was mainly due to rising raw material costs and a decrease in power tool shipments.

Beating the delivery target despite adversity.

Facing adverse factors such as rising material prices, freight constraints, double control policy on energy consumption and currency appreciation, Jingda still realized annual output and sales of 316.9kt and 314.4kt electromagnetic wires respectively, exceeding the delivery targets. By product category:

1) Special electromagnetic wire products: Output at 245kt (+16.8% YoY), and sales volume at 243kt (+16.5% YoY) in 2021. Among them, sales of flat electromagnetic wires and new energy flat electromagnetic wires were 10.5kt (+98.5% YoY) and ~6kt, respectively.

2) Subsidiary Hengfeng Special Conductor recorded sharp earnings growth (+78.1% YoY), with shipment of 40~50mt.

3) Jingda’s automotive electronics production line had output of 62kt (-2.4% YoY) and delivery of 61kt (-3.5% YoY) in 2021.

Period expense was well controlled, with greater investment in R&D.

In 2021, the Company's gross profit per tonne was Rmb4,416.7（-40.4% YoY), mainly due to the increase in raw material costs. The period cost was Rmb390mn, and cost per tonne was Rmb1,255.3 (-45.6% YoY); net profit per tonne was Rmb762.8 (-6.1% YoY). Good cost control may underpin the recovery of net profit per tonne. The selling/administrative/financial cost per tonne was Rmb258.4/512.2/484.6, -43.9%/-50.8%/-39.7% YoY, respectively.

The Company has increased investment in R&D, especially in the fields of new energy, motor, photovoltaic, etc., with total R&D expenses of Rmb180mn in 2021 (+20.7% YoY).

Stimulus from resumption of production and presence in new materials.

Jingda is the sole supplier of flat wire for Tesla’s Shanghai factory. Due to the shutdown of the factory under pandemic controls and the occurrence of Covid cases in its own aluminum wire factory in Tongling, Anhui, Jingda’s fundamentals were under pressure. At present, the Tongling factory has resumed production, and its major downstream customers has also expecting restart of production, which clear the negative factors. On the other hand, the Company has extended to the field of upstream materials such as insulating paint and copper rods required for magnet wire production and reduced cost via localized supply. Therefore, we expect it to gear up profit growth and further strengthen competitiveness.

Potential risks Sales to downstream customers miss expectations; the penetration of flat wire motors falls below expectations; aerospace and military orders are not up to expectations; industry competition intensifies.

Investment recommendation In 2021, Jingda recorded ANP of Rmb550mn, a growth of 31.1% YoY, in line with expectations. The production and sales of electromagnetic wires were 316.9kt and 314.4kt respectively, exceeding the targets. In the short term, the Company will benefit from the resumption of work and production. In the medium and long term, the deployment in new materials will consolidate its competitiveness. Considering the landing of the acquisition of more stakes in its joint ventures with Rea Magnet Wire in early 2022 and cost reduction brought by localization of raw materials, we raise our profit forecasts for 2022E/2023E to Rmb809mn/1,082mn (previously Rmb768mn/952mn), and add 2024E profit forecast of Rmb1,331mn. Considering the estimated profit CAGR of 25% in the next three years, the diversity of the Company’s businesses, and its dual-drive from EV flat wires and special magnet wires, we apply PEG valuation and assign 1x PEG, equivalent to 25x 2022E PE, to derive a target market value of Rmb20.2bn,equivalent to a target price of Rmb10.1, and reiterate the “BUY” rating.