1H22 results in line with our expectations

Shenzhen Kaifa Technology announced its 1H22 results: Revenue fell 5.07% YoY to Rmb7.55bn, attributable net profit grew 66.86% YoY to Rmb456mn, and recurring net profit rose 233.30% YoY to Rmb229mn, largely in line with our expectations. The firm attributed its rapid net profit growth to the Rmb106mn in dividends from Dongguan Industrial Park and the disposal of the loss-making consumer electronics manufacturing business (in 1H22, it suffered a Rmb72.69mn loss; it contributed Rmb16.09mn in net profit before the disposal in April 2022). In 2Q22, revenue fell 5.51% YoY to Rmb3.90bn, and attributable net profit grew 192.50% YoY to Rmb213mn.

In 1H22, revenue from the memory chip business grew 9.18% YoY to Rmb1.53bn; intelligent measuring system revenue fell 24.75% YoY to Rmb639mn, and revenue of the high-end manufacturing business dropped 5.20% YoY to Rmb5.31bn.

Trends to watch

Capacity expansion of memory chip packaging and testing is proceeding well; we expect it to become the main growth driver. The firm is actively expanding its memory chip packaging and testing capacity. The Payton project in Hefei commenced production in December 2021 and passed existing clients' mass production review of packaging products in 1H22. As of May 2022, it had an annual memory wafer packaging and testing capacity of 15,000 units. The firm plans to build a Bumping project to support 5G technology and achieve the packaging of high-end large-capacity memory chips. Cleanroom construction and equipment procurement for the first production line are underway. Furthermore, the firm plans to introduce new clients in 2H22. With the smooth construction and operation of its new packaging and testing capacity, we expect the firm's packaging and testing business to grow rapidly with the development of domestic memory chip manufacturers, including Hefei Changxin.

Focuses on high-end manufacturing; the firm made breakthroughs in intelligent measuring systems in China. High-end manufacturing: The firm completed the disposal of its consumer electronics manufacturing business in April 2022. Medical devices, printers, intelligent mowing robots, and other manufacturing business orders have been increasing. However, manufacturing orders in some sectors have slowed due to geopolitical tensions and COVID-19. Intelligent measuring system: The firm made breakthroughs in the smart meter business in China. Shenzhen Kaifa Technology Chengdu, specializing in intelligent measuring systems, pre-won a Class A single-phase smart meter project for the first time in June 2022 as part of the State Grid's 30th batch of electric meter procurement in 2022. The firm also won smart meter projects in Southern Europe. Shenzhen Kaifa Technology and Pinggao Group jointly signed an engineering procurement construction (EPC) project for the distribution network and metering system in Tajikistan. We believe that with the effective control of COVID-19, demand for high-end manufacturing will recover. The firm's ample intelligent measuring system orders on hand will likely support its 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 23.4x 2022e and 18.5x 2023e P/E. Maintain OUTPERFORM and TP of Rmb14.0 (25.3x 2022e and 20.0x 2023e P/E), offering 9% upside.

Risks

Disappointing import substitution and demand in the memory chip market.