1H22 results in line with our expectations

Jiecang Linear Motion Technology (Jiecang) announced its 1H22 results: Revenue rose 42.8% YoY to Rmb1.44bn, attributable net profit grew 22% YoY to Rmb188mn, and recurring attributable net profit increased 10% YoY to Rmb151mn. The 1H22 results were in line with our expectations. In 2Q22, revenue rose 32% YoY to Rmb732mn, and attributable net profit grew 25% YoY to Rmb112mn.

Stable growth in endogenic business; LEG earnings under short-term pressure. In 1H22, we estimate that endogenic business revenue grew about 20% YoY to Rmb1.21bn, as demand from corporate clients in height adjustable desks partially offset falling retail demand in the US, while new client acquisitions continued in Europe. In 1H22, Jiecang acquisition, Logic Endeavor Group (LEG), reported Rmb228mn revenue with a net loss of Rmb32mn. We attribute the losses to its low-profit original equipment manufacturer (OEM) model and delayed overseas plant construction due to COVID-19.

Blended GM fell YoY; net profit margin of endogenic business improved YoY. In 1H22, blended gross margin (GM) dropped 3.9ppt YoY to 25.8%, mainly due to rising raw material prices and ocean freight, as well as a lower-than-average profit margin under the OEM model. In 1H22, the selling and G&A expense ratio rose 0.5ppt and 2.1ppt YoY to 4.9% and 6.5%, while the R&D and financial expense ratio dropped 1.2ppt and 2.9ppt YoY to 6.0% and -5.0%. In particular, we attribute the G&A expense ratio increase to the consolidation of LEG’s G&A expenses. The significant decline in the financial expense ratio was due to high foreign exchange gains from renminbi depreciation, which totaled Rmb71mn in 1H22 vs. Rmb6mn of loss in 1H21). Overall, the net profit margin dropped 2.2ppt to 13% in 1H22. Excluding LEG’s loss, we estimate that the firm’s net margin would come to around 18%, rising 3ppt YoY.

Trends to watch

Cultivation of new application scenarios is underway, likely contributing to long-term growth momentum. Linear actuators have mature applications in the smart office, medical care, smart home, and industrial control. Apart from its main product, height-adjustable office desks, the firm is investing in the R&D and new client acquisition of medical care, photovoltaic (solar tracker), automotive parts, and other fields. In our view, new businesses will remain under cultivation in the short term. Photovoltaic and auto parts business may contribute revenue amounting to Rmb10mn. In the long run, if product validation and client introduction proceed smoothly, new businesses may see rapid volume ramp-up, and their earnings may double.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 25.8x 2022e and 20.0x 2023e P/E. We maintain OUTPERFORM and a TP of Rmb32.80 (30.0x 2022e and 23.3x 2023e P/E), offering 16.4% upside.

Risks

Disappointing tariff exemptions; higher-than-expected raw material prices and ocean freight; disappointing new applications.