What's new

Changying Xinzhi Technology has seen marginal changes in the alternative-fuel vehicle (AFV) drive business: It entered BYD’s supply chain and secured its first batch of sentinel procurement projects in 2Q22. Some Huawei car models, including the Wenjie and AVATR series, have been equipped with the firm’s products since May 2022. For models already launched, their sales are increasing. We believe that new models unveiled at the Chongqing International Auto Exhibition will soon enter mass production and sales.

Comments

Main business developing steadily; declines in raw material prices led to rebound in GM. Automotive electric motors are the firm's main business. It is the largest supplier of stator cores for automotive generators globally and occupies over 70% of the Chinese two-wheeled vehicle motor stator and rotor market. The firm is a major automotive electric motor supplier to many tier-1 international companies, including Valeo and Bosch. Raw material price hikes starting in early 2021 resulted in big declines in the gross margin (GM) of the firm’s main business. We believe that as the prices of raw materials fall, the firm’s blended GM may pick up and its earnings could rebound.

AFV electric drive business growing rapidly; ASP of stator and rotor assembly may rise to Rmb5,000. The firm has expanded from providing stator cores to stator and rotor assembly, increasing the value of its products per motor from Rmb500-800 to Rmb2,300-3,000. Due to increasing requirements for AFV power performance, the proportion of dual-motor models is rising. We think ASPs of stator and rotor assembly for dual-motor vehicles may double to around Rmb5,000. We expect the per-vehicle value of stator and rotors to increase as motors use more power and feature higher rotation speeds.

Solid cooperation with Huawei and BYD; new models and accelerated mass production bring high earnings elasticity. The firm is the core automotive electric drive system supplier of Huawei. Its products are used by Sokon, Changan Auto, BAIC, and additional Huawei business partners. Wenjie and AVATAR series also use the firm’s products. Changying is also the exclusive supplier of multiple models of Wenjie and AVATAR. According to the company’s corporate filings, the firm announced in 2Q22 that it became a designated supplier of BYD's stator and rotor business, with the first project amounting to Rmb229mn. With its penetration of BYD’s supply chain, the firm may see rapid market share growth as a new supplier, in our view. We believe the firm’s AFV electric drive business will develop rapidly with high visibility and elasticity. We believe this is due to several factors, including higher-than-expected AFV sales volume, rapid upgrading of electric drive technologies, the launch and sales of well-known models such as Wenjie and AVATAR, and the increasing sales of BYD’s AFV models.

Financials and valuation

Given declines in raw material prices, better-than-expected development of the AFV electric drive business, and progress in new businesses, we raise our 2022 and 2023 net profit forecasts by 15.1% and 16.0% to Rmb236mn and Rmb304mn. The stock is trading at 32.1x 2022e and 24.8x 2023e P/E. We maintain OUTPERFORM. As its sales have beat market expectations and sector valuation is rising, we raise our target price 63.8% to Rmb26.20 (45.0x 2022e and 34.7x 2023e P/E), offering 40.1% upside.

Risks

Disappointing development of AFV business; disappointing cost control.