Investment positives

We initiate coverage of CWB Automotive Electronics (CWB) with an OUTPERFORM rating and a target price of Rmb36.70, implying 46x 2022e P/E.

Why OUTPERFORM rating?

Focus on connectors for automotive electronics and consumer electronics: In addition to connector products, CWB leverages connector technology to develop integrated products, including modular components for transmission management systems and steering systems. CWB’s per vehicle content has increased substantially. In 2020, CWB’s automotive electronics business and consumer electronics business reported revenue of Rmb837mn and Rmb269mn, accounting for 69.6% and 22.4% of its total revenue

Products are highly customized; CWB has close partnerships with international giants given its competitive advantage in mold development and automation of production lines. CWB mainly offers customized automotive electronics to international leading automotive electronics manufacturers such as Bosch, BorgWarner, and UAES. The company has established competitive advantages in mold development, automation of production lines, and partnerships with downstream clients.

CWB has strong technology in high-voltage connectors; sales volume of products for alternative fuel vehicle (AFV) is growing rapidly. Demand for high-voltage connectors is rising strongly.

According to our estimations, the domestic automotive-connector market size may reach Rmb39.5bn in 2021 and Rmb83bn in 2025, implying a CAGR of 20.4%. CWB has become an electric drive system supplier of VW MEB platform value chain, and supplies products in batches to new models of GWM and Chang’an Auto. In addition, a number of AFV connector projects are under development.

We believe that high-voltage products will serve as new growth drivers.

How do we differ from the market? While the market is concerned that CWB has limited motivation to develop clients, we believe that partnerships with international leading tier-1 auto parts suppliers can help support customer development in the medium and long term.

Potential catalysts: We expect the auto sector to restock, and monthly sales volume of AFV has increased notably compared with early 2021. We believe that output of traditional connectors and system components will rise rapidly, and sales volume of products for AFV will continue to increase.

Valuation and recommendation

We forecast 2021, 2022, and 2023 EPS at Rmb0.55, Rmb0.80, and Rmb1.04, a CAGR of 37.7%. The stock is trading at 34.0x 2022e P/E.

Initiate with OUTPERFORM rating and TP of Rmb36.70 (46x 2022eP/E), offering 35.3% upside.

Risks

Intensifying competition; over-reliance on large customers; sharper-than- expected increase in prices of raw materials; high equity interest of majority shareholder.