1H22 net profit attributable to shareholders to grow 5.98-17.13% YoY

Desay Battery preannounced its 1H22 earnings, estimating that its revenue grew 23.3% YoY to Rmb9.48bn and net profit attributable to shareholders rose about 6.0-17.1% YoY to Rmb285-315mn in 1H22. Based on the company’s preannounced 1H22 earnings, its revenue should grow 19.1% YoY to Rmb4.576bn, its net profit attributable to shareholders should be in a range between Rmb131mn (-2.3% YoY) and Rmb161mn (+20.0% YoY), and its recurring net profit should rise 2.0-25.3% YoY to Rmb131-161mn in 2Q22. The company's preannounced 2Q22 earnings slightly beat market expectations, mainly due to the strong performance of mobile phone-related businesses and an increase in foreign exchange gains.

Trends to watch

Performance of mobile phone and power tool battery businesses impressive, showing resilience in operations. Despite relatively weak demand for consumer electronics in 2Q22, the company's preannounced 2Q22 revenue still grew nearly 20% YoY. We attribute the growth of the company’s smartphone-related products mainly to strong sales of some older products at major customers in North America. We think this also indicates the impact of fluctuations in downstream demand on the company are limited due to its high-quality leading customers. We see this as an example of Desay showing resilience in operations. Meanwhile, data from the company shows its power tool battery business achieved solid growth, and we attribute this mainly to the continuous growth of its older customers’ product shipments. Looking into 2H22, as peak demand season for consumer electronics is approaching, we think the company’s consumer battery business should improve sequentially as major customers in North America begin to increase inventories for new products. Moreover, we believe product shipments of the company’s power tool-related businesses will maintain solid growth thanks to growing upstream supply of battery cells. In addition, as the company’s exported products are priced in US dollars, fluctuations in the exchange rate of the renminbi against the US dollar in 1H22 generated positive foreign exchange gains for the company, boosting its profits in 2Q22.

New businesses progress steadily; optimistic about SIP and energy storage battery businesses. According to the company, its SIP and energy storage battery businesses progressed steadily in 1H22, although we think investments for new businesses in 2Q22 might weigh on the company’s net profit in the short term. However, we expect the company’s SIP business to gradually contribute earnings in 2H22 as major customers begin to increase inventories in the peak demand season for consumer electronics. Meanwhile, the company plans to put 4GWh production capacity into operation in 1H23 in the first phase of its energy storage battery project, which we expect to generate incremental revenue for the company. In the long run, as the second and third phases of the company’s energy storage battery project are put into production, we believe it may boost the company's long-term growth potential and create a new growth driver for the company.

Financials and valuation

We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 16.7x 2022e and 14.6x 2023e P/E. We maintain an OUTPERFORM rating. Given rising sector-wide average valuation, we raise our target price by 16.3% to Rmb50 (17.8x 2022e and 15.5x 2023e P/E), offering 6.3% upside.

Risks

Disappointing development of battery management system and SIP businesses; sluggish demand from consumer electronics; slower-than-expected growth of energy storage battery business.