Desay Battery is a core supplier of battery management system (BMS)/pack for domestic consumer lithium battery, with high quality customer resources. Its products are mainly used in smartphones, smart wearable devices, laptops, tablets, power tools, smart home appliances and other fields. At present, the Company continues to enrich the product mix of small-/medium-sized lithium battery, and strengthen its presence in system in a package (SiP) segment. For large-sized lithium battery products, Desay focuses on energy storage sector and marches into the energy storage battery cells field strategically. Considering the Company’s sustained leading position in the consumer lithium battery sector and its active efforts to seize the development opportunity in the energy storage industry, Desay will likely continue to grow. We expect its EPS to be Rmb3.01/3.60/4.55 in 2022E/23E/24E and initiate coverage with a “BUY” rating.

Company profile: A domestic lithium battery manufacturing pioneer.

Desay Battery is one of the earliest enterprises engaged in lithium battery BMS/pack in China. At present, the Company is developing BMS SiP business based on its BMS/pack business and building its presence in the energy storage battery cell field. In 1H22, it achieved operating revenue of Rmb9.478bn (+23.34% YoY) and ANP of Rmb307mn (+14.32% YoY) with positive growth in all segments of the business.

Small-/medium-sized lithium battery business: The core supplier of consumer lithium BMS/pack is strengthening its buildup of SiP business.

Desay provides small-sized lithium products for smartphones, wearable devices, etc., and medium-sized lithium products for laptops, tablet PCs, smart home appliances, power tools and other application scenarios. As for the small-sized lithium batteries, we estimate the Company’s share of smartphone lithium pack for a leading smart consumer electronics manufacturer (A customer) to be about 40% in 2021. Since then, Desay proceeds to obtain orders from domestic mobile phone manufacturers, including Huawei, OPPO, Vivo, Honor, Xiaomi, etc., and has covered the mainstream Android manufacturers at home and abroad. In terms of medium-sized lithium battery, the Company’s main customers including A customer, Huawei, etc. The Company also focuses on the development of power tool business, and has become the supplier of Black+Decker, Bosch, Positec and other first-class power tool manufacturers. We expect the revenue growth rate of power tools, smart home appliances and travel business to reach about 30% in 2022. In addition, it is actively developing SiP business and expanding new business in energy management system (EMS) field and currently has Roborock as its customer. The Company set up a subsidiary Desay SiP and announced investment of Rmb2.1bn in BMS SiP projects. It also plans to extend to other module packaging businesses in the future. We believe that with the strong technical capabilities, the high-quality customer base, the strategy of active expansion into emerging consumer electronics field and cultivating revenue growth by developing new businesses, Desay’s leading position and market shares are consolidated in BMS/pack of the consumer lithium battery sector.

Large-sized lithium battery business: Revenue of energy storage pack business grows at a fast speed.

Traditional battery producers are entering the energy storage market and the new energy vehicle (NEV) market successively as both markets boast promising prosperity. 1) Energy storage battery business: Under the carbon peak and carbon neutrality strategy (the “dual carbon goals”), Desay actively seizes the development trend of energy storage industry and focuses on expanding energy storage business related to 5G communication base stations, home energy storage and power supply to uninterruptible power supply (UPS) data center, with customers including Huawei, Growatt, Hello Tech, AlphaESS and other energy storage service providers. In addition, the Company is building presence in energy storage cells based on its original energy storage BMS/pack business, and has planned three phases of 20GWh cell capacity, and we expect the first phase of 4GWh to be put into production in 2023. We are optimistic about its integrated cell/pack strategy for energy storage battery, which may start to contribute to revenue in 2023. 2) Power battery business: Desay has optimized its business structure and focused on the power battery BMS business. Currently, it has supplied products for Volkswagen and achieved profitability. We expect more first-tier carmakers to become the Company’s consumers in the future.

Potential risks: Pressure on sales of large customers due to weakening demand; intensified competition in the industry; disappointing energy storage business expansion; less-than-expected SiP business expansion; high customer concentration; exchange rate loss.

Investment strategy: Desay Battery is a core supplier of BMS/pack for domestic consumer lithium battery. We put the 2022E/23E/24E net profit forecasts at Rmb903mn/108mn/ 1.365bn, corresponding to EPS of Rmb3.01/3.60/4.55. Considering the Company’s leading position in the field of BMS/pack for consumer lithium batteries and its development strategy and growth in SiP business and energy storage cells field, we expect the Company’s revenue and net profit to resume high growth in the next two years. In terms of PE valuation, since 2012, the Company’s historical average PE was 25x, and the current PE (FY1) valuation is 17x, at a lower level of the historical range. A-share comparable companies, including Sunwoda (300207.SZ), CosMX Battery (688772.SH), EVE Energy (300014.SZ) and Great Power Energy (300438.SZ) are trading at an average 45x 2022E PE based on Wind consensus estimate, while the Company is trading at 17x 2022E PE, which is lower than that of its peers’. We believe the main reason is that the Company’s consumer electronics business accounts for a relatively high proportion and the core business is still in the early stages of development. Based on the valuation of the comparable companies, we assign 22x 2022E PE to derive a target price of Rmb66 to the Company. In the view of PEG, the average forecast PEG of comparable companies in 2022E is 0.64, we forecast the Company’s net CAGR to be 23% in 2022E-2024E and PEG to be 0.74 in 2022E at the current price, higher than the average valuation level of comparable companies. Given the high growth potential of the Company’s energy storage business in the future, we assign it 0.7x 2023E PEG, corresponding to a target price of Rmb48. Taking into account Desay’s leading position, excellent customer resources and expansion of new business, we combine the PE and PEG valuation methods and assign 20x 2022E PE to derive a target price of Rmb60 under prudent considerations.

Initiate coverage with a “BUY” rating.