2021 results in line; 1Q22 results miss

United Science and Technology (UniTTEC) announced its 2021 and 1Q22 results: Revenue fell 0.7% YoY to Rmb2.91bn and attributable net profit rose 256% YoY to Rmb201mn in 2021, in line with the firm’s preannouncement. In 1Q22, revenue fell 15% YoY to Rmb405mn, and attributable net profit decreased 38% YoY to Rmb20mn, missing our expectation, as COVID-19 resurgence weighed on the demand and delivery for rail transit projects.

Rail transit and semiconductor businesses maintained high growth; semiconductor gross margin increased steadily. In 2021, revenue from rail transit signal systems and automatic ticketing systems reached Rmb2.14bn and Rmb419mn, up 31% YoY and down 22% YoY; revenue from the semiconductor business reached Rmb327mn, up 51% YoY. In 2021, blended gross margin increased 3.1ppt YoY to 32.8%, while gross margin of the rail transit signal systems, automatic ticketing systems, and semiconductor business increased 1.3ppt, 3.2ppt and 3.3ppt YoY to 32.2%, 31.1%, and 40.1%. We mainly attribute the increase to economies of scale, improving product yield, and better product structure. The gross margin of the semiconductor business has increased for five consecutive years.

Expense ratio and net profit margin improving. In 2021, the company's expense ratio decreased YoY, with sales, G&A, R&D, and financial expense ratios down 0.7ppt, 0.1ppt, 0.3ppt, and 2.0ppt YoY. Its net margin rose 5ppt YoY to 6.9% in 2021. Net cash operating inflow totaled Rmb337mn in 2021 (vs. Rmb43mn in 2020), improving significantly YoY.

Trends to watch

Semiconductor materials demand exceeding supply; watch capacity expansion. In 2021, Japan’s Matsuzaki and Zhejiang Haina contributed Rmb102mn and Rmb225mn to revenue of the semiconductor materials business. Specifically, silicon grinding wafers and polished wafers contributed Rmb158mn and Rmb87mn, with rising contribution from the higher-value polished wafers. Zhejiang Haina has an annual production capacity of 2mnt of monocrystalline silicon. The company expects its new project to start operation in end-2022 or early-2023. We expect this project to add 7.5mnt of 6-8 inch monocrystalline silicon production capacity to the firm, which we expect will effectively expand production capacity.

COVID-19 weighs on the short-term demand for rail transit. In 2021, new orders for rail transit decreased 9% YoY to Rmb1.73bn, and orders in hand also decreased YoY. Due to the resurgence of COVID-19, the bidding and delivery of urban rail projects have been delayed, and the 1Q22 rail delivery delay affected short-term results. We expect that during the 14th Five-Year Plan period, the domestic urban rail transit systems will maintain about 1,000km/yr expansion, and the overall demand will remain high.

Financials and valuation

We leave our 2022 EPS forecast unchanged at Rmb0.40 and introduce our 2023 EPS forecast of Rmb0.47. The stock is trading at 17.2x 2022e P/E and 14.8x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb9.23. Our TP implies 29x 2022e and 20x 2023e P/E, offering 34% upside.

Risks

Downstream demand and delivery of rail transit projects, as well as expansion of semiconductor capacity disappoint