2021 results miss our expectations

Changying Xinzhi Technology announced its 2021 results: Revenue grew 16.58% YoY to Rmb3.36bn; attributable net profit reached Rmb204mn, implying EPS of Rmb0.51 (down 35.5% YoY). In 4Q21, revenue fell 11.85% YoY to Rmb791mn and attributable net profit slid 79.8% YoY to Rmb31mn. The firm’s 2021 results missed our expectations.

We attribute the decline in 4Q21 revenue to a slowdown in new orders from downstream OEM clients and a traditional slack season for two-wheeled vehicles.

Trends to watch

Supply bottleneck in downstream auto market gradually eased; motor parts business likely to recover. Automotive motor iron core is the firm’s main business. In 2021, chip shortage and raw material price hikes weighed heavily on revenue and net profit growth of the business. Over the long term, we believe the chip shortage will gradually ease and earnings will improve as the overall auto industry trends up despite short-term pressure from raw material price hikes and supply shortage. We expect the firm’s motor parts business to rebound, driven by recovery in auto production and sales and alleviation of chip shortage and commodity price pressure.

AFV business continued to grow rapidly, boosting revenue growth. We believe Changying’s leading advantage in the traditional motor parts business is a foundation for earnings growth, and the alternative fuel vehicle (AFV) business will be a key revenue driver in the future. The AFV electric drive system market is undergoing major changes. We believe the firm has clear advantages in stator & rotor assembly of AFVs thanks to its extensive experience in the motor industry and its well-established customer resources and technologies. In addition, the firm continued to expand and deepen collaboration with leading automakers and top-tier auto parts suppliers and technology firms. As the penetration rate of AFVs increases, electric drive systems transition towards higher power systems and the proportion of dual motor vehicle models rises, we expect the firm to upgrade its iron core stator & rotor to stator & rotor assembly by leveraging its leading technological advantage in the motor industry. In addition, we believe the firm will grow into a high-quality supplier in the AFV electric drive system industry and see its market share increase rapidly.

Financials and valuation

Considering upstream raw material price hikes and chip shortage, we lower our 2022 net profit forecast 31.8% to Rmb260mn and introduce our 2023 net profit forecast of Rmb310mn. The stock is trading at 22.1x 2022e and 18.5x 2023e P/E. Considering auto market gradually recovered and the firm’s AFV business sales growth, we maintain an OUTPERFORM rating and cut our TP 12.20% to Rmb18 (28.0x 2022e and 23.4x 2023e P/E), offering 26.49% upside.

Risks

Disappointing AFV business expansion and/or cost control.