1H22 results in line with our forecast

Changying Xinzhi Technology (Changying) announced 1H22 earnings: Revenue grew 3.28% YoY to Rmb1,695mn, and net profit attributable to shareholders fell 39.23% YoY to Rmb70mn. This is in line with our forecast.

Trends to watch

The second quarter performance was affected by the short-term impact of the epidemic, the company's overall business bottomed out and is expected to continue to improve. Affected by COVID-19 in Shanghai and elsewhere in China, the company's Q2 production had been hindered for more than a month seriously affecting 1H22; however, it still achieved positive growth in 2Q22 revenue and profit, demonstrating strong downstream demand and rebound in performance following bottoming out. Gross margin (GM) in 2Q22 saw a rapid recovery. GM in 2Q21, 3Q21, 4Q21, 1Q22, and 2Q22 were 15.3%, 12.6%, 10.5%, 10.1%, and 12.34% respectively. We are optimistic about the gradual recovery of GM following the company's expected strong performance in 2H22.

New energy electric motor business high growth rate, but dependent on key clients including Huawei and BYD; highest ASP exceeds Rmb5,000, mass production results in rapid growth in performance. At the product level, the company has extended its business from supplying motor stator core to assembling stator. The value of a single motor has increased from Rmb500-800 to Rmb2,300-3,000, and the ASP of dual-motor models has exceeded Rmb5,000. The company is the core supplier of Huawei's automotive electric drive system, covering Xiaokang, Changan, BAIC and other Huawei JV car companies, and is the exclusive stator assembly supplier of best-selling mass-production models such as Wenjie and AVATR; the company is a new supplier of BYD with orders in hand are climbing rapidly. Changying is also a major supplier to Geely, UMC, Schaeffler and other OEMs and Tier-1 companies. As new energy vehicle sales continue to exceed expectations coupled with the rapid iteration of electric motor technology, we believe that the company's electric motor business will be driven by growth of Huawei, BYD and other major clients.

Enters the battery precision structural parts business, and ensured production capacity deployment around core customers. Based on the strategic planning and actual operation requirements, the company's holding sub-subsidiary company set up a wholly-owned subsidiary in Ningde City, Fujian Province to run the battery precision structural parts business. We believe that the company has accumulated significant advantages in the field of metal stamping process and tooling, and the company may take this advantage to entry into the battery precision structural parts while focusing on the production capacity around core customers to continue deepening the partnership. We believe that the company's battery structural parts business expansion is the beginning of supporting core customers, the subsequent development will likely to obtain strong support and usher in rapid growth, or become the second growth curve of the company after the electric motor business.

Financials and valuation

We maintain our net profit forecast of Rmb240mn for 2022 and Rmb300mn in 2023. The stock is trading at 30.3x 2022e and 23.5x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb26.20 (44.9x 2022e P/E and 34.8x 2023e P/E), offering 47.9% upside.

Risks

Disappointing development of AFV business; disappointing cost control.