1Q22 results largely in line with our expectations

Shenzhen Kaifa Technology announced its 1Q22 results: Revenue dropped 4.60% YoY to Rmb3.65bn, and attributable net profit rose 21.04% YoY to Rmb242mn. The results are largely in line with our expectations.

Trends to watch

Earnings under short-term pressure due to COVID-19; upbeat on both revenue resilience and packaging and testing business. In 1Q22, revenue dropped 4.60% YoY to Rmb3.651bn, and recurring net profit decreased Rmb85mn YoY to Rmb20.86mn. We believe the decrease is mainly due to the COVID-19 resurgence in 1Q22, which led to reduced output and profits of the firm’s main businesses.

Upbeat on expanding memory chip packaging and testing capacity; second growth engine to boost revenue. The firm 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 2021. Its subsidiary, Payton Technology recorded Rmb2.20bn in revenue and Rmb144mn in net profit in 2021. We expect the firm’s packaging and testing capacity expansion to facilitate more cooperation with CXMT (a Chinese memory chip manufacturer), driving growth in the packaging and testing business. We are upbeat on the business bringing incremental earnings.

G&A expense gradually returns to normal; R&D expense maintains YoY growth. In 2021, the firm’s G&A expenses rose 32.6% YoY, mainly due to a personnel settling-in allowance for employees generated by divestiture and integration of its consumer electronics business and expenses incurred by the commissioning of Hefei Payton projects. We expect the G&A expense ratio to return to normal once the firm completes the above-mentioned business integration and capacity construction in April. In 1Q22, the G&A expense ratio dropped 1.7ppt YoY to 3.4%. In addition, once the firm completes business integration and capacity construction in April, the G&A expense ratio should improve and boost profitability. In 1Q22, the company's R&D expense ratio increased 0.6ppt YoY to 2.3%. We believe continuous R&D investment is key to developing the memory chip packaging and testing business and should support the firm’s long-term earnings growth.

Financials and valuation

We maintain our 2022 and 2023 net profit forecasts of Rmb862mn and Rmb1.09bn. The stock is trading at 17.6x 2022e and 13.9x 2023e P/E. Considering the lower sector valuation, we maintain an OUTPERFORM rating but cut our target price 6% to Rmb14. Our TP implies 25.3x 2022e and 20.0x 2023e P/E, offering 44% upside.

Risks

Disappointing memory chip import substitution and demand.