1H22 results in line with our forecast

Shandong Weida Machinery (SWMC) announced its 1H22 results: Revenue fell 1.9% YoY to Rmb1.37bn and attributable net profit decreased 6.5% YoY to Rmb167mn; recurring net profit fell 4.6% YoY to Rmb158mn. In 2Q22, revenue declined 25.3% YoY or 22.1% QoQ to Rmb598mn but attributable net profit rose 21.5% YoY or 59.4% QoQ to Rmb102mn; recurring net profit rose 20.2% YoY or 54.9% QoQ to Rmb96mn. The 1H22 results are in line with our forecast.

Trends to watch

Financial losses at machine tool business expanded; earnings from power tools business under pressure; forex income boosted profit. In 1H22, revenue from the firm’s high-end equipment business fell 13.8% YoY to Rmb82mn, with gross margin (GM) of the machine tool segment down 0.2ppt YoY to -2.5%; the GM turned negative mainly due to intensifying industry competition, client demand upgrading, and COVID-19 resurgence. Revenue from power tool components fell 23.3% YoY to Rmb505mn, with GM of power tools down 3.7ppt YoY to 22.2%; the GM kept declining due to COVID-19 resurgence and client demand contraction. However, the renminbi depreciation brought clear forex income for the company in 2Q22, as the firm’s overseas business covers various segments. In 1H22, forex income increased the firm’s profit by Rmb58mn. Looking forward, we think the demand in the power tool industry will likely remain sluggish until 1Q23 and maintain negative YoY growth. As a result, revenue and profit of the firm’s power tool business will likely decline YoY in 2H22, in our view.

Battery-swapping station business saw robust growth; earnings kept improving. In 1H22, revenue from the new-energy segment increased 27.25% YoY to Rmb729mn, accounting for 53.4% of the total. Specifically, revenue from battery-swapping stations for new-energy vehicles (NEV) surged 123.2% YoY to Rmb374mn, implying an increase of 300 battery swapping stations. Revenue from this segment is in line with our forecast despite the COVID-19 resurgence that disrupted production and sales. Profit margin of the firm’s battery-swapping station business rose HoH to more than 5% in 1H22. We expect orders for power-swapping stations will likely maintain growth as the firm explores more OEM or operator clients, fueling steady growth of profit margin.

Policy tailwinds boost robust growth of battery swapping model; SWMC enjoys first-mover advantages. The Ministry of Industry and Information Technology of the People’s Republic of China released policies urging the improvement of standards for electric vehicles’ battery swapping in March. In August, the executive meeting of the State Council announced that it will let a series of policies offering tax exemptions to NEV purchases stand and will step up efforts in building charging piles. We believe policy tailwinds will likely accelerate the commercial and scale development of the power swapping model. We expect the firm to benefit from such policies on the back of leading technology and production scale.

Financials and valuation

We lower our 2022 earnings forecast by 14% to Rmb345mn, based on a relatively conservative forecast of the market demand for power tools in 2H22. We leave our 2023 earnings forecast unchanged and maintain OUTPERFORM. We roll valuation over to 2023e and raise our SOTP-based target price 33.3% to Rmb16, as we expect a sector boom amid preferential policies. Our TP implies 20.6x 2022e and 14.7x 2023e P/E, offering 10.2% upside. The stock is trading at 18.7x 2022e and 13.3x 2023e P/E.

Risks

Disappointing penetration of battery swapping stations; FX rate volatility affecting earnings.