2021 and 1Q22 results miss our forecasts

Jiecang Linear Motion Technology announced its 2021 and 1Q22 results. In 2021, revenue rose 41% YoY to Rmb2.64bn and attributable net profit fell 33% YoY to Rmb270mn. In 1Q22, revenue rose 57% YoY to Rmb708mn and attributable net profit rose 18% YoY to Rmb76mn. The 2021 and 1Q22 results missed our forecasts mainly due to the larger-than-expected impact of rising raw material and shipping costs.

Consolidation of LEG influenced results; organic business revenue grew steadily. The consolidation of Logic Endeavor Group (LEG) in July 2021 contributed revenue of Rmb225mn and a net loss of Rmb54mn to the firm. Excluding the impact of LEG consolidation, we estimate that the firm’s organic business revenue grew 29% YoY to Rmb2.41bn in 2021. Overseas home office demand declined, while corporate demand recovery was relatively strong. Excluding one-time M&A intermediary fees, we estimate that the net margin of the organic business in 2021 dropped 7.8ppt YoY to about 14%.

Multiple factors put pressure on profit margin. The firm’s overall gross margin in 2021 fell 12.4ppt YoY to 27%, mainly due to the US’s resumption of 25% tariffs on Chinese products, rise in prices of raw materials such as chips and commodities, increase in shipping costs, and low profit margin of LEG. The firm’s operating costs in 2021 included tariffs of Rmb159mn, which accounted for 6% of its revenue, up 3.5ppt YoY. The ratio of direct material costs to revenue rose 9ppt YoY to 55.4% due to higher raw material prices.

Trends to watch

We expect profit margin to recover thanks to the firm’s proactive measures. The firm faced multiple challenges in 2021, and we expect its profit margin to recover gradually going forward. We believe that the production capacity of the firm’s factory in Malaysia will account for more than 25% of the firm’s exports to the US, and it will partially offset the impact of tariffs on the firm’s gross margin. For LEG, we believe that the firm will reduce its proportion of the OEM business and enhance its manufacturing capacity by building new factories in Europe and integrating the domestic supply chain, thereby narrowing its losses.

We expect efforts to develop new application scenarios to pay off. The firm has continued to increase investment in R&D, and its R&D expenses in 2021 increased 82% YoY to Rmb186mn. The firm has actively developed new application scenarios for linear motion systems, and established a presence in the medical, photovoltaic, and automotive industries. Looking ahead, we believe that new application scenarios will enhance the firm’s growth potential with the development of customers and implementation of projects.

Financials and valuation

Considering the uncertainty of tariff exemption, we cut our 2022 net profit forecast by 21.6% to Rmb420mn; we introduce our 2023 net profit forecast of Rmb542mn. The stock is trading at 20.5x 2022e and 15.9x 2023e P/E. We maintain OUTPERFORM rating, but considering the decline in sector valuation, we lower TP by 45.3% to Rmb32.8, which implies 29.8x 2022e and 23.1x 2023e P/E and offers 45.2% upside.

Risks

Disappointing tariff exemption; raw material and shipping costs rise by more than expected; disappointing development of new applications.