2021 and 1Q22 results beat our forecast

Bafang Electric (Bafang) announced 2021 and 1Q22 results: In 2021, revenue rose 89.5% YoY to Rmb2.65bn, and attributable net profit increased 50.8% YoY to Rmb607mn. As for 1Q22, revenue grew 44.5% YoY to Rmb762mn, and attributable net profit increased 19.5% YoY to Rmb180mn. The company’s 2021 and 1Q22 results beat our expectations. We attribute this to the strong cost control which offset the expected impact of raw material price hikes on the profit.

High demand drove 2021 revenue growth; domestic market experienced rapid revenue ramp-up. Revenue from pedelec motors grew 59% YoY to Rmb1.54bn, with gross margin (GM) rising 3.1ppt YoY to 47.6%. The sales volume of center motors and hub motors grew 39% and 82% YoY. We attribute this growth to the increasing penetration rates in Europe and the rapid demand growth in the US driven by subsidies. Revenue from integrated motors was Rmb476mn, mainly contributed by the Tianjin-produced direct-drive motors for conventional electric vehicles for the domestic market. In 2021, revenue increased rapidly. Due to the intense competition in the domestic market and production capacity ramp-up, the GM was only 4.1%. Revenue from parts and components rose 54% YoY to Rmb521mn. Revenue from batteries grew 38% YoY to Rmb106mn.

Product structural changes and raw material price hikes weighed on profit margin; product price hikes partially offset the cost pressure. The 2021 GM dropped 9ppt to 34.3% YoY mainly due to product structural changes and increased prices of raw materials and shipping rates. However, the company has reduced costs and increased efficiency by seeking alternative raw materials and improving techniques. Moreover, it raised the price for some products in 3Q21 to ease the pressure of rising costs. In 1Q22, GM dropped 3.2ppt YoY and rose 1.5ppt QoQ to 35.7%. Its profitability improved QoQ.

Trends to watch

European demand growth slowed; the US demand will likely remain strong. According to Taiwan Bike Association, from 3Q21 to 1Q22, Taiwan’s electric bicycle export volume to the EU increased by 14% in 3Q21 but fell 6% and 2% QoQ in 4Q21 and 1Q22. Exports to the US increased 79%, 72%, and 70% YoY in the same period. We believe that the European electric bicycle demand may undergo a marginal slowdown. At the same time, the US market may continue its prosperity due to the low base effect and stimulation from subsidy policy, in our opinion.

Bafang broke the bottleneck of production capacity; maintains sufficient growth momentum. The company's private placement was recently approved by the Issuance Appraisal Committee. The proceeds will be used to improve the capacity of motors for electric bikes, traditional electric bikes, and electric motorcycles, adding an annual capacity of 900,000 center motors, 1.65mn hub motors, 4.5mn conventional electric vehicles, and 80,000 electric motors after reaching design capacity. We believe that the company's current capacity utilization rate is high and new capacity could unlock its growth potential. In addition, the proceeds will be used for the construction of the R&D and testing center. We believe that the company could continue to expand its overseas market share with its technological advantages. Through capacity expansion, it will be able to capitalize on the transformation and development opportunities in the domestic electric vehicle and electric motorcycle markets.

Financials and valuation

We leave our 2022e earnings forecast unchanged and introduce our 2023 net profit forecasts of Rmb1.03bn. The stock is trading at 24.7x 2022e and 18.1x 2023e P/E. We maintain OUTPERFORM. However, due to a lower section value, we cut our TP 19% to Rmb218 (34.9x 2022e and 25.5x 2023e), offering a 41% upside.

Risks

Unexpected declines in overseas bicycle demand; raw material shortage delays order delivery.