1H22 earnings in line with preannounced earnings

Desay Battery announced 1H22 results: Revenue grew 23.34% YoY to Rmb9.48bn and net profit attributable to shareholders rose 14.32% YoY to Rmb307mn, in line with the company’s preannounced earnings (Rmb285–315mn). In 2Q22, the company’s revenue rose 19.1% YoY to Rmb4.58bn and its net profit attributable to shareholders grew 14.3% YoY to Rmb153mn.

Trends to watch

Revenue from smartphone and power-tool battery products grew rapidly; gross profit margin rose steadily. Despite sluggish demand for consumer electronics, Desay's revenue still grew more than 20% YoY in 1H22, and its smartphone and power-tool battery products reported impressive performance. In 1H22, the company’s revenue from products for smartphones increased by 30.03% YoY to Rmb4.23bn, mainly because steadily growing demand from major international customers partially offset impacts of the sluggish demand from customers focusing on Android devices, in our view. Revenue from products for power tools increased by 44.73% YoY to Rmb1.9bn, and we attribute this mainly to the company’s steadily rising market share for such products sold to customers. Revenue from products for smart wearable devices grew 3.86% YoY and revenue from products for laptops rose 8.95% YoY. We believe that the company’s solid revenue growth in 1H22 indicates that high-quality top customers could help it reduce impacts from fluctuations in downstream demand, showing resilience in business operations. The gross profit margin of Desay’s laptop-related products fell slightly, but gross profit margins for its products related to mobile phones, power tools, and smart wearable devices rose steadily. The company’s overall gross profit margin rose slightly by 0.09ppt YoY to 9.40% in 1H22.

R&D expenses grew due to spending on new businesses; higher short-term cash payments for business operations weighed on operating cash flow. In 1H22, Desay’s R&D expenses increased by 53.15% YoY to Rmb262mn and we attribute this mainly to its spending on new businesses (e.g., BMS SIP and energy storage battery businesses). In addition, the company’s net operating cash flow fell 95.82% YoY to Rmb0.51mn in 1H22 due to prolonged restocking period caused by the COVID-19 pandemic (inventories growing by Rmb772mn YoY) and growing borrowings for the energy storage battery business. As the peak season for major customers’ new product launches is coming in 2H22, we believe that the change in the company’s operating cash flow is a normal fluctuation and we expect its major businesses to maintain solid performance over the long term. Meanwhile, we think spending on new businesses may affect the company to some extent in the near term but it is likely to create room for the company’s growth over the long term.

Construction of energy storage battery project progressing steadily; energy storage battery production capacity to be put into operation in 1H23; to generate incremental revenue. In 2023, we think the company's major consumer electronics-related businesses may remain stable or grow further. Meanwhile, the company expects the production capacity for the first phase of its energy storage battery project (4GWh) to be put into operation in 1H23, which we expect to generate considerable incremental revenue. Over the long term, if the second and third phases of the project are put into operation, we believe that energy storage battery products will boost long-term growth and create a new growth driver for the company.

Financials and valuation

We keep our 2022 earnings forecast unchanged. Considering possible incremental revenue from the energy storage battery business, we raise our 2023 revenue forecast by 4.2% to Rmb26.70bn. However, due to early-stage spending on the energy storage battery business, we lower our 2023 net profit forecast by 6.8% to Rmb901mn. The stock is trading at 21x 2022e and 20x 2023e P/E. We maintain OUTPERFORM rating. As we are optimistic about the future growth prospects of the energy storage battery business, we raise our TP by 36.0% to Rmb68 (24x 2022e and 23x 2023e P/E), offering 16.1% upside.

Risks

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