Preannounced attributable net profit up 26-57% YoY in 2021

Shandong Weida Machinery (SWMC) has preannounced its 2021 results: Attributable net profit rose 25.8-57.2% YoY to Rmb320-400mn, and recurring net profit increased 26-62.9% YoY to Rmb270-350mn, in line with our and market expectations.

Trends to watch

Drill chuck business remains solid; battery swapping business boosts revenue. According to SWMC’s preannouncement, 4Q21 attributable net profit was Rmb36-116mn (down 0-59% or up 0-32% YoY; down 0-66% or up 0-10% QoQ) and recurring net profit was Rmb11-91mn (down 0-85% or up 0-24% YoY; down5-88% QoQ), largely in line with our expectation. Assuming that 4Q21 earnings were similar to 3Q21 levels, we estimate a median full-year attributable net profit of Rmb380mn in 2021. As a result, we estimate full-year revenue to grow 47.8% YoY to Rmb3.2bn, and attribute and rapid growth to sound sales of battery swapping facilities in 2021. In our opinion, the company’s market share in drill chucks expanded slightly while profitability remained solid in 2021. In contrast, earnings from the battery swapping business were relatively low in 2021 as the business was in the phase of rapid ramp-up. We expect earnings from this business to improve as capacity expansion dilutes cost.

Cooperation with NIO to drive growth of battery swapping business. Kunshan Siwopu, a joint venture between SWMC and NIO, is a supplier of second-generation battery swapping stations to NIO. NIO had over 700 battery swapping stations in 2021, of which around 500 were second-generation stations. Most of NIO’s second-generation stations are provided by SWMC. Therefore, we expect the cooperation between NIO and SWMC to contribute over Rmb600mn to SWMC’s revenue. NIO plans to build 600 new battery swapping stations annually in China over 2022-2025, and expects the total number of its worldwide stations to exceed 4,000 (including around 1,000 overseas) in 2025. We see strong support from the cooperation to SWMC’s future battery swapping revenue.

New entrants to accelerate the commercialization of battery swapping model. On January 18, 2022, Contemporary Amperex Technology launched a new brand, EVOGO, to offer integrated battery swapping solutions. Meanwhile, auto makers BAIC Motor and Dongfeng are also expanding to this sector. As more players enter this business, we believe the commercialization of battery swapping model will likely accelerate and the production of related facilities will likely scale up. We are upbeat on SWMC’s first mover advantage and expect the company to expand its customer base on the back of leading technology and production scale and increase its revenue moving forward.

Valuation and recommendation

We leave our earnings forecasts unchanged for 2021 and 2022, and introduce our 2023 earnings forecast of Rmb509mn. The stock is trading at 20.8x 2022e P/E. We maintain OUTPERFORM and our target price of Rmb24.5, implying 24x 2022e P/E with 15.7% upside.

Risks

Widening losses from the machine tool business; disappointing penetration of battery swapping stations; forex changes affecting earnings.