2021 results in line with our forecast

Holystar Information Technology Co Ltd (Holystar) announced its 2021 results: Revenue rose 24.61% YoY to around Rmb1.13bn; net profit grew 29.76% YoY to Rmb413mn. In 4Q21, revenue and net profit rose 52.64% and 34.18% YoY to Rmb345mn and Rmb84mn, in line with our forecasts.

Trends to watch

Switches for smart poles: Sales volume and prices both increasing driven by product upgrading and sales channel expansion. Holystar’s revenue from intelligent equipment for power distribution networks rose 25.17% YoY to Rmb1.06bn in 2021, accounting for 93.7% of its total revenue, up 0.4ppt YoY, as sales volume and prices of switches for smart poles both increased.

Sales volume: Holystar sold 23,500 switches for smart poles in 2021, up 13.58% YoY, thanks to sales channel expansion. In addition to focusing on the market in Zhejiang, the company has also expanded its marketing and service network. It has made notable breakthroughs in Jiangsu, Shaanxi, Fujian, Shanxi, Shandong, and Henan provinces in 2021.

Prices: We estimate that the firm’s switches for smart poles had an average selling price (ASP) of about Rmb40,000 in 2021, up around 10% from Rmb36,500 in 2020, which we attribute to product upgrading. The firm’s intelligent equipment for power distribution networks had a gross margin of 54.24% in 2021, down only 2.15ppt. Its profitability remained largely stable, despite higher raw material prices.

Still upbeat on accelerating penetration of primary and secondary integration equipment, given strong demand and orders. Holystar produced 28,000 switches for smart poles in 2021, up 42.43% YoY, reflecting strong market demand. Inventories of these switches expanded 34.46% YoY to 12,600 units. The company balances production and product delivery by maintaining healthy inventor levels. As of end-2021, products that had been shipped but not been installed had a total value of Rmb365mn, up 83.15% YoY. The strong growth not only reflects the firm’s ample orders in 2021, but also notably reduces the risk of delivery delay due to recent pandemic resurgence. In our view, power distribution networks require a highly reliable, high-quality power supply. Primary and secondary integration equipment has notable advantages regarding the internet of things (IoT), its smart features and its compatibility. We still believe its penetration rate will increase more rapidly than previously.

Profitability stable; R&D pipeline and the efforts to build a product platform merit attention. Gross margin fell 2.1ppt YoY to 52% in 2021; expense rate expanded 0.5ppt YoY to 16.6%; net margin rose 1.4ppt YoY to 36.5%. The firm’s R&D expenses grew 16% YoY in 2021. In addition to upgrading intelligent switches, the company is also conducting R&D on big data analytical platforms for electricity companies and on communication network modules related to the internet of things (IoT), which the firm intends to develop into new growth drivers.

Financials and valuation

We maintain our 2021 and 2022 earnings forecasts. The stock is trading at 22x 2022e and 18x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb127.68 (25x 2022e P/E and 20x 2023e P/E), offering 11.3% upside from the current price.

Risks

Lower-than-expected power grid investment; excess reliance on several clients; fiercer competition.