Landai’s earnings in 1-3Q22 were slightly lower than expected. It has accelerated deployment in new energy vehicle (NEV) transmission business. Factors such as the decline of touch display business, the pandemic, and power cut in Chongqing in Aug weighed on the growth of overall revenue and attributable net profit (ANP) in 1-3Q22. With the easing of the pandemic, the steady business expansion of NEV parts, and smooth progress of its private placement, we expect it to continuously expand the production capability of decelerators and maintain our previous profit estimates. We expect that the 2022E-2024E EPS will be Rmb0.44/0.72/0.92.

We assign 30x 2022E PE and maintain the target price of Rmb13. Reiterate our “BUY” rating.

The 1-3Q22 earnings narrowly missed expectations; the decline in revenue was mainly dragged by touch display business.

Landai recorded revenue of Rmb2,070mn (-9.0% YoY), ANP of Rmb150mn (-17.7% YoY), and ex-one-off ANP of Rmb120mn (+8.5% YoY) 1-3Q22, including 3Q22 revenue of Rmb720mn (+9.5% YoY), ANP of Rmb50mn (-4.8% YoY), and ex-one-off ANP of Rmb40mn (+16.1% YoY). The performance was slightly lower than expected. We believe that decrease of revenue and ANP in 1-3Q22 mainly comes from factors such as the decline of touch display business, the pandemic, and the power cut in Chongqing in Aug.

With the easing of the pandemic, the recovery of touch-control demand and the business expansion of NEV parts, we expect that the Company’s revenue and ANP may recover and resume rapid growth.

Rebound of GPM in 3Q22.

Landai’s gross profit margin (GPM) was 18.1% in 3Q22, an increase of 0.8ppts YoY and 1.3ppts QoQ. The 1-3Q22 GPM was 17.4% (-0.6ppts YoY), mainly affected by touchscreen business which occupies a big share in its revenue. We believe it benefits from the decreasing price of raw materials, and higher proportion of high-margin shaft balance box and new products such as NEV decelerators and the scale effect. The overall expense ratio decreased in 3Q22, and the selling/administrative/financial/R&D expense ratio was +0.75/+0.88/+0.37/-3.12ppts YoY, respectively. With the decreasing price of raw materials, constant production of new products such as automobile touchscreen and NEV parts, we expect that its GPM will keep rising.

Smooth progress of private placement, accelerated NEV business.

On Oct 13, 2022, Landai obtained the approval of the CSRC for its private placement to raise nearly Rmb600mn for its manufacturing project of high-precision transmission gears and motor shafts for NEVs and the production-expansion project of on-board and industrial touchscreen cover glass. The Company has set up a wholly-owned subsidiary Ma'anshan Landai Transmission in Ma'anshan Economic and Technological Development Zone, Anhui Province. On Oct 28, 2022, the Company signed an investment agreement with the management committee of the development zone over the high precision transmission gear production and manufacturing project. The overall planned investment is Rmb2.3bn, the first phase of which includes an investment of Rmb0.6bn to build a production base for high precision transmission gears of NEVs with an annual output of 2.4mn pieces. We believe that the private placement and the establishment of the subsidiary will accelerate its deployment in the NEV business and expand its market share, bringing sustainable growth to its revenue and ANP going forward.

Potential risks: Intensive competition in the touchscreen display market; price fluctuations and rising costs of raw materials; touch-control technology updates and fast product upgrades; setbacks in merger integration and goodwill impairments; capacity buildout missing expectations.

Investment recommendation: Landai’s earnings in 1-3Q22 were slightly lower than expected, as it accelerates deployment in the NEV transmission business. Factors such as the decline of touch display business, the pandemic, and power cut in Chongqing in Aug weighed on the overall revenue and ANP growth in the first three quarters. With the easing of the pandemic, the steady business expansion of NEV parts, and smooth progress of its private placement, we expect it to continuously expand the production capability of decelerators and maintain our previous profit estimates. We expect that the 2022E-2024E EPS will be Rmb0.44/0.72/0.92, with a three-year CAGR of 37%. With Shuanghuan Driveline (002472.SZ), Tianma Microelectronics (000050.SZ) and Token Sciences (300088.SZ) trading at 29.4x 2022E PE and 1.5x PEG on average based on Wind consensus estimates, and considering the Company’s expected CAGR, we assign it 0.8x PEG and 30x 2022E PE out of prudence, maintain the target price of Rmb13 and reiterating the “BUY” rating.