1H22 earnings roughly in line with our expectation

Bafang Electric announced 1H22 results: Revenue grew 25.19% YoY to Rmb1.542bn; net profit attributable to shareholders rose 13.22% YoY to Rmb0.35bn; recurring net profit attributable to shareholders grew 13.94% YoY to Rmb348mn, roughly in line with our expectations.

Profit margin under pressure due to changes in revenue structure and rising expenses. In 1H22, Bafang Electric’s gross profit margin fell 2.7ppt YoY to 33.56%, mainly due to a rising proportion of revenue from subsidiary Bafang (Tianjin) with a relatively low gross profit margin and changes in revenue structure. In 1H22, Bafang Electric's selling expenses, G&A expenses, and R&D expenses increased by 61%, 48%, and 70% YoY, growing faster than the company’s revenue. Rising expense ratios weighed on the company’s net profit margin, and its net profit margin decreased by 2.4ppt YoY to 22.72%. The company’s R&D expenses grew considerably mainly due to increases in salaries of R&D employees and growing investment in an electric motorcycle project.

Trends to watch

Penetration rate of pedelecs in Europe at 23%; US market to contribute to incremental earnings. Bafang Electric's profit growth was mainly driven by rising penetration rate of pedelecs in overseas markets and its growing market share of electric motors for pedelecs. In the European market, the sales volume of pedelecs exceeded 5mn units in 2021 with penetration rate at 23%. The high sales growth of such products amid the COVID-19 pandemic is displaying a trend of slowdown. In the US market, we estimate that the sales volume of pedelecs exceeded 1.2mn units in 2021 with penetration rate at about 8%. We expect the US pedelec market to maintain a growth rate of more than 30% in 2022 driven by factors such as tax credits and commuter subsidies, and the US market to become a new growth driver for the global pedelec market.

Construction gradually begins for production capacity expansion projects; competitiveness to improve further. During 1H22, construction gradually commenced for some projects at the company's subsidiaries. In particular, the electric vehicle drive system manufacturing project of Bafang (Tianjin) is located near customers (e.g., Giant and Aima) with floor area of the first phase of the project at about 30,000sqm. The project is likely to become a major production site for the company's domestic business in the future. The first phase of Bafang’s new-energy lithium-ion battery pack and high-end drive system manufacturing project has a floor area of about 100,000sqm. We think such efforts show that the company is striving to improve penetration rates of its products and provide optimal solutions to customers. If the company’s production capacity expansion projects are put into operation, we believe they could help to improve the overall competitiveness of the company.

Financials and valuation

Considering the long-term growth trend of the pedelec market, we keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 24.2x 2022e and 17.7x 2023e P/E. We maintain OUTPERFORM rating and target price of Rmb218 (34.9x 2022e and 25.5x 2023e P/E), offering 44.15% upside.

Risks

Intensified competition in domestic market; unexpected declines in demand for pedelecs in overseas markets.