1H22 results miss our expectations

United Science and Technology （UniTTEC） announced its 1H22 results: Revenue fell 20.7% YoY to Rmb980mn and attributable net profit dropped 28.1% YoY to Rmb48mn in 1H22, missing our expectations due to tepid rail transit demand. In 2Q22, revenue fell 24.5% YoY to Rmb575mn and attributable net profit decreased 19.2% YoY to Rmb28mn.

Semiconductor manufacturing business grew steadily; profitability improved. Revenue from the rail transit business dropped 35.4% YoY to Rmb700mn in 1H22 as COVID-19 resurgence weighed on delivery. Revenue from the semiconductor manufacturing business increased 24.2% YoY to Rmb186mn and revenue from the digitalization business stood at Rmb92mn in 1H22. In 1H22, blended GM grew 1.2ppt YoY to 34.5%. GM of the rail transit business edged up 0.2ppt YoY to 32.4% in 1H22. GM of semiconductor business grew steadily in 1H22, up 1.4ppt YoY to 43.1% thanks to economies of scale, upgrading of product portfolio, and increased yield rate.

Expense rate increased; net profit margin dropped. In 1H22, selling, G amp;A, and R amp;D expense ratios grew 0.4ppt, 2ppt, and 2.4ppt YoY. Net profit margin dropped 0.5ppt YoY to 4.9%. In 1H22, net operating cash outflow dropped Rmb89mn YoY to Rmb56mn.

Trends to watch

Rail transit revenue dropped as COVID-19 resurgence weighed on demand in the short term. In 1H22, revenue from rail transit signal systems and automatic ticketing systems dropped 34.0% and 43.5% YoY to Rmb611mn and Rmb89mn. COVID-19 resurgence in 1H22 delayed bidding and delivery of urban rail transit projects and the firm’s project delivery, dragging down the firm’s short-term performance,Structural upgrading of semiconductor business continues; outlook remains rosy. The revenue contribution of a high-value product, polished wafers, increased to 71.7% in 1H22 from 4% in 2017. The firm’s competitiveness in the semiconductor market improved. Its share of the monosilicon wafers for diodes and triodes market was 10% in 1H22. Specifically, its market share of monosilicon wafers for transient voltage suppressor diodes was 60%. We think that the implementation of technological upgrading projects for polished wafers and increasing economies of scale will likely help the firm increase profit margin. We are upbeat on the long-term growth of its semiconductor business.

Financials and valuation

Given that COVID-19 resurgence impacted the firm’s rail transit business, we cut our 2022 and 2023 EPS forecasts 15% and 16% to Rmb0.34 and Rmb0.39. The stock is trading at 23.4x 2022e and 20.4x 2023e P/E. Given the lower earnings forecasts and rosy outlook for the semiconductor business, we cut our TP 6% to Rmb8.66, implying 25x 2022e and 22x 2023e P/E with 8% upside. We maintain OUTPERFORM.

Risks

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