2021 results slightly beat our expectations

Shenzhen Kaifa Technology (Kaifa) announced its 2021 results: Revenue grew 10.2% YoY to Rmb16.49bn; attributable net profit fell 9.5% YoY to Rmb775mn, slightly beating our expectations, mainly due to higher-than-expected fair value gains from derivatives and investment property. In 4Q21, the firm’s revenue fell 4.0% YoY to Rmb4.22bn; attributable net profit declined 37.1% YoY to Rmb259mn.

Trends to watch

Semiconductor memory and high-end manufacturing businesses as dual growth engine to boost revenue. In 2021, revenue from semiconductor memory business grew 22.19% YoY to Rmb2.89bn, with its gross margin (GM) up 1.18ppt YoY to 16.16%. Kaifa stepped up efforts to expand its semiconductor memory packaging and testing capacity. In June 2021, the firm finished construction of its Hefei Payton Phase-I project, which came on-stream in December. The firm’s subsidiary, Payton Technology, recorded Rmb2.20bn in revenue and Rmb144mn in net profit in 2021. We expect Kaifa’s packaging and testing capacity expansion to facilitate more cooperation with CXMT (a Chinese memory chip manufacturer), driving growth in the firm’s packaging and testing business. We are upbeat on the business bringing incremental earnings. In addition, demand for ventilators, virus detectors and blood glucose monitors remained strong. This, coupled with rising sales volume of EV batteries and supercapacitors, pushed the firm’s high-end manufacturing businesses’ revenue up 18.84% YoY to Rmb12.14bn and GM up 0.41ppt YoY to 6.52%. We expect Kaifa, as a world-leading electronics manufacture service (EMS) provider, to benefit from the uptrend of import substitution. The firm divested its consumer electronics business in April 2022, which will likely further enhance its profitability. Revenue from its intelligent measuring system business dropped 37.41% to Rmb1.33bn; however, we expect the business to grow steadily amid improving global energy management.

G&A expense up on short-term factors; R&D expense maintains rapid growth. In 2021, Kaifa’s G&A expense rose 32.6% YoY to Rmb628mn mainly due to personnel settling-in allowance generated by divestiture and integration of the firm’s consumer electronics business, and expenses incurred by the commissioning of Hefei Payton projects. We expect G&A expense ratio to improve as Kaifa finishes the above-mentioned business integration and capacity construction. In addition, the firm’s R&D expense grew 21.6% YoY to Rmb310mn, mainly due to investment in high-performance chip wire bonding and flip chip packaging technologies, which will likely enhance the firm’s long-term competitive advantage in memory chip packaging and testing industry. Kaifa’s selling expense dropped 15.33% YoY as “transportation costs to fulfill a sales contract” was recategorized into operating costs according to latest accounting standards.

Financials and valuation

We keep our 2022 net profit forecast unchanged at Rmb862mn, and introduce our 2023 earnings forecast at Rmb1.09bn. The stock is trading at 19.3x 2022e and 15.3x 2023e P/E. Given lower sectoral median valuation, we cut our TP 20% to Rmb14.90 (implying 27.0x 2022e and 21.3x 2023e P/E), offering 40% upside. We maintain an OUTPERFORM rating.

Risks

Disappointing memory chip import substitution and/or demand.