1H22 results in line with our forecast

Holystar Information Technology (Holystar) announced its 1H22 results: Revenue grew 25.19% YoY to Rmb593mn in 1H22, net profit attributable to shareholders edged up 0.06% YoY to Rmb210mn, and recurring net profit attributable to shareholders grew 13.52% YoY to Rmb185mn. In 2Q22, revenue grew 8.97% YoY and 1.89% QoQ to Rmb299mn, net profit attributable to shareholders fell 30.54% YoY and 13.80% QoQ to Rmb97mn, and recurring net profit attributable to shareholders declined 17.33% YoY and 13.16% QoQ to Rmb86mn. The firm’s results are largely in line with our expectations.

Trends to watch

Installation decelerates amid COVID-19 resurgence in 2Q22; shipped products reflect strong orders and market demand. We remain optimistic about results growth driven by “exploration of national market and expansion of product lines”. As of end-2021, the company’s products that had been shipped but not installed (mainly switches for smart poles that had been shipped but not installed) had a total value of Rmb365mn, up 83.15% YoY, indicating strong demand and order acquisition. The installation of switches for smart poles generally takes about 6 months, and there is a strong correlation between the value of the company’s products shipped as of the end of a year and the operating cost in the first half of the next year. In 2Q22, product installation slowed down due to COVID-19 resurgence (end-market customers mainly in Jiangsu and Zhejiang). Revenue increased 8.97% YoY in 2Q22, narrowing 39ppt vs. in 1Q22, and there was a 22% gap between 1H22 operating cost and value of products shipped at end-2021. As at end-June, book value of products that had been shipped but not installed reached Rmb365mn, still at a high level. According to our calculation, the firm’s new shipments reached Rmb265mn in 1H22, up 16% YoY, indicative of strong order backlog.

Looking ahead, we believe full year growth will remain solid amid strong shipments, normalization of product installation in 2H22, and ramp-up of new order acquisition. From a medium-to-long term perspective, the market for primary and secondary fusion switchgears remains in the introduction stage, and Holystar will accelerate expansion nationwide as it enjoys strong competitive edges backed by advanced technologies and first-mover advantages. In addition, the firm attaches importance to R&D. Besides upgrading of existing products, expansion of its product lines could also generate new sources of growth.

Earnings remain stable, recurring net profit margin down 3.20ppt YoY in 1H22. In 1H22, gross margin slid 3.86ppt YoY to 51.94%. In 2Q22, gross margin fell 4.44ppt YoY and 1.62ppt QoQ to 51.14%, mainly due to rising raw material prices. In 1H22, selling, G&A, R&D, and financial expense ratios changed -1.57ppt, -1.51ppt, -1.64ppt, and +0.12ppt YoY to +3.97%, +3.77%, +3.79%, and -0.26%, with overall expense ratio down 4.6ppt YoY, indicating steady improvement in operational efficiency. Besides falling gross margin, other income (mainly government subsidies) decreased Rmb23.73mn vs. 1 year ago, negatively affecting net margin by 4.00ppt. In 1H22, recurring net profit margin fell 3.20ppt YoY to 31.12%, staying largely stable.

Financials and valuation

We lower our 2022 and 2023 earnings forecasts 4.9% and 4.6% to Rmb509mn and Rmb636mn as product installation and revenue recognition were adversely affected by COVID-19 resurgence in 2Q22. The stock is trading at 16.1x 2022 and 12.9x 2023 P/E. We maintain OUTPERFORM but lower our TP 8.4% to Rmb117.00 (23.0x 2022 P/E and 18.4x 2023 P/E), offering 42.5% upside from the current price.

Risks

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