1H22 results in line with our forecast

CWB Automotive Electronics (CWB) announced its 1H22 results: Revenue fell 4.03% YoY to Rmb644mn and attributable net profit fell 31.86% YoY to Rmb72mn. In 2Q22, revenue was Rmb300mn (down 15.37% YoY and 12.66% QoQ) and attributable net profit was Rmb39mn (down 29.78% YoY and up 18.3% QoQ). 1H22 results were in line with our expectations.

Trends to watch

Automotive electronics business grew rapidly, though profit margin was slightly squeezed by the downstream market downturn. The firm’s revenue in 1H22 fell 4.03% YoY to Rmb644mn, of which revenue from the automotive electronics business was Rmb448mn and revenue from the consumer electronics business was Rmb147mn. Gross margins of the two businesses dropped 1.87ppt and 0.51ppt compared with 2021 to 29.27% and 38.16%, affected by the decline in the sales volume of the downstream automobile industry in 2Q22 and the transfer of the price pressure by the home appliance industry. The revenue proportion of the automotive electronics business increased 2.95ppt compared with 2021 to 69.54%, due to the rapid growth in alternative-fuel vehicle (AFV) related products. We believe the revenue proportion of automotive electronics business will likely further increase as AFV related products grow rapidly.

Rise in commodity prices put pressure on gross margin in the short term; obvious increase in R&D investment accelerated technological breakthroughs. The firm’s gross margin in 1H22 dropped 5.28ppt YoY to 29.79%, and gross margin in 2Q22 dropped 4.43ppt YoY to 30.73% (up 1.76ppt QoQ). We attribute the YoY decline in gross margin to the following: 1) prices of raw materials such as copper and plastic parts have risen considerably since 3Q21; 2) with new projects coming on stream fast, equipment depreciation pressure was high and capacity utilization rate was yet to increase. Recently, as commodity prices fell, gross margin has picked up slightly. In terms of R&D expenses, the firm’s new projects in hand continued to increase. In 1H22, new automotive electronics projects increased 50% YoY and projects under research increased 63% YoY to 98; new consumer electronics projects doubled YoY. The firm’s R&D expense ratio in 2Q22 rose 1.8ppt YoY and 1.7ppt QoQ to 7%. Increased investment in R&D enhanced technological strengths. The firm’s net operating cash flow in 2Q22 increased 84.18% YoY and 793.26% QoQ to Rmb5mn, thanks to government subsidies and cash received from other operating activities.

Accelerating R&D and mass production of AFV and intelligent vehicle related products to increase growth potential. The firm accelerated the development of AFV and intelligent driving related businesses. In 1H22, the firm launched 48 new projects, of which AFV related projects accounted for 31.25% and intelligent driving and intelligent cockpit related projects accounted for 33.33%. In addition, a wholly-owned subsidiary plans to invest Rmb310mn to build key electric and intelligent vehicle parts. We believe the firm is making fast progress in the development of electric and intelligent vehicle related products, and its product structure may be further improved. We expect the firm to continue expanding its customer matrix and create new growth drivers.

Financials and valuation

We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 35.5x 2022e and 27.5x 2023e P/E. We maintain the OUTPERFORM rating. Considering the industry upturn and the smooth progress of the firm’s new projects, we lift our target price by 29.4% to Rmb22, which implies 38.8x 2022e and 30x 2023e P/E and offers 9.2% upside.

Risks

COVID-19 resurgence affects production capacity of automakers; raw material prices fall by less than expected; new projects progress more slowly than expected.