Preannounced 1H22 earnings up 50-80% YoY

Shenzhen Kaifa Technology preannounced its 1H22 results: Attributable net profit may rise 50-80% YoY to Rmb410-492mn, and recurring net profit may grow 210-260% YoY to Rmb213mn-248bn. In 2Q22, its attributable net profit may increase 129-242% YoY to Rmb167-249mn. Its 1H22 results are in line with market expectations.

According to the preannouncement, the high growth in attributable net profit should be attributable to cash dividends of Rmb106mn from China Electronics Dongguan Industrial Park, a firm partly owned by Shenzhen Kaifa Technology. As Shenzhen Kaifa Technology did not record investment gains in 1H21, its investment income increased sharply YoY in 1H22.

Trends to watch

Expanding memory chip packaging and testing capacity; second growth engine to boost revenue. The firm expanded its semiconductor memory packaging and testing capacity. In June 2021, the firm completed the construction of its Payton Phase I project in Hefei, which came on stream in December 2021. As of May 2022, the capacity of the new project reached 15,000 chips. We expect the firm’s packaging and testing capacity expansion to facilitate its cooperation with CXMT （a Chinese memory chip manufacturer） and drive its growth in the packaging and testing segment. We expect the firm’s packaging and testing business to generate additional earnings.

Disposal of consumer electronics business completed; intelligent measuring system business in China undergoes breakthrough. In terms of consumer electronics business, Guilin Kaifa Technology, a professional firm in the cell phone business, was acquired by Guilin Bosheng Technology in April 2022 and is no longer included in Shenzhen Kaifa Technology’s financials. According to Shenzhen Kaifa Technology’s preannouncement, the equity transfer will generate Rmb16.36mn attributable net profit in 2022. In our view, the disposal of low value-added consumer electronics business can help the firm improve its profitability. In terms of intelligent measuring system business, the firm has made breakthroughs in the domestic market. Chengdu Kaifa Technology, which is mainly engaged in the intelligent measuring system business, announced that for the first time it had won the preliminary bid for the A-level intelligent single-phase energy meter project during State Grid Corporation of China’s （SGCC） 30th batch of procurement in 2022 of energy meters in June 2022. SGCC will purchase150,000 energy meters with Rmb31.88mn. We expect the firm’s revenue from intelligent measuring system business to grow. The firm's R&D and production project for intelligent measuring products in Chengdu was completed in December 2021 and was put into operation in January 2022. We believe that the firm's R&D and production capacity in the intelligent measuring segment will further improve.

Financials and valuation

We are upbeat on the expansion of the firm’s packaging and testing capacity for wafer-level semiconductor memory chips. We keep our 2022 and 2023 net profit forecasts at Rmb862mn and Rmb1.09bn. The stock is trading at 22.0x 2022e and 17.4x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb14 （implying 25.3x 2022e and 20.0x 2023e P/E）， offering 15% upside.

Risks

Disappointing import substitution and demand in the memory chip market.