China’s cold chain logistics infrastructure is set to develop continuously and may consequently drive Weiguang Electronic’s revenue to grow steadily. Considering the increased support from energy efficiency policies and the secular trend for electronically commutated motors (ECMs) to replace inefficient motors, we expect Weiguang Electronic to maintain high growth in its ECM business. The ECM’s rising share in the revenue mix will boost its overall gross profit margin (GPM). As its capacity expands, Weiguang Electronic’s capacity structure will be optimized continuously, further bolstering its global market share and strengthening its position as a “single champion enterprise in manufacturing.” Weiguang preannounced its operating revenue/ attributable net profit at Rmb653mn/162mn (+24.6%/57.7% YoY) in 1H22.

We expect its revenue and net profit to grow at a CAGR of 32.7% and 31.8% in 2022-24, respectively. We maintain the 2022E/23E/24E EPS forecast at Rmb1.52/1.95/2.54 and reiterate the "BUY" rating along with the target price of Rmb36.

Earnings came in line with expectations in 1H22, and the revenue structure continued to be optimized.

In 1H22, the Company guided revenue/attributable net profit (ANP) of Rmb653mn/162mn (+24.6%/+57.7% YoY), including revenue/ANP of Rmb323mn/85mn (+9.7%/+35.3% YoY) in 2Q22. The revenue structure has been continuously optimized, the ECM revenue grew by more than 100% YoY in 1H22 and the revenue share increased from 12.8% in 2020 to 14.0% in 2021 and further to 21.2% in 1H22. Thanks to the continuous optimization of revenue structure, the Company's net profit maintained a high growth rate.

Overseas operations also grew rapidly with the operating revenue up more than 50% in 1H22.

With the orderly expansion of production capacity, the proportion of ECM capacity is likely to increase significantly.

On Jun 30, 2022, Weiguang Electronic issued an announcement about the construction of projects with an additional annual capacity of 6.7mn units (sets) of motors, fans and automation equipment, with a total fixed asset investment of Rmb420mn funded by own funds and self-financing, and a construction area of 70 mu (equivalent to 46,669 square meters). In 2021, the Company's production of cold cabinet motors, external rotor fans, ECMs, and servo motors was about 10,650k, 2,700k, 1,520k and 160k units, with the GPM at 25.0%, 31.8%, 38.9%, and 21.3%, respectively. After the capacity expansion, the Company's capacity structure will be further optimized, and the capacity proportion of external rotor fans and ECMs with wider downstream applications and higher GPMs will greatly increase.

Domestic ECM penetration will pick up at a faster pace amid stronger energy-saving policies.

The Company’s domestic sales of ECMs accounted for 31% and 25% of its sales mix in 2021 and 1Q22, respectively, and the domestic penetration rate of ECM is significantly lower than that in Europe and the US. According to the China Industry News, the penetration rate of domestic high-efficiency and energy-saving motors in 2021 was less than 10%. In Jun 2021, China’s new national standard for motor energy efficiency officially entered into force. In Oct 2021, the Ministry of Industry and Information Technology (MIIT) issued the “Motor Energy Efficiency Improvement Plan (2021-2023)”, proposing that the proportion of high-efficiency and energy-saving motors in service should reach more than 20% by 2023. In Jun 2022, the MIIT and other five departments jointly issued the “Industrial Energy Efficiency Improvement Action Plan”, which further proposed that by 2025, the proportion of newly added high-efficiency and energy-saving motors will reach more than 70%.

The Company's ECM and servo motors are high-efficiency and energy-saving motors that are poised to fully enjoy the policy dividends.

ECM and external rotor fans may bolster the blended GPM.

Weiguang Electronic has accumulated more than 10 years of independent R&D and production experience in ECMs, with leading brand awareness, technology, cost competitiveness, and global sales. Firstly, it is a long-term trend to replace inefficient motors with high-efficiency and energy-saving ECMs. Compared to traditional freezer motors, the Company's ECM freezer motors can save electricity bills of Rmb135 per set in 1 year of full-load operation, which is sufficient to cover the installation cost. With the increase in the penetration rate of ECMs in the domestic market, we figure its ECM revenue may maintain high growth going forward. Secondly, the Company's external rotor fans and its upgraded ECM version have wider downstream applications across cold chain, fresh air systems, industrial temperature control, energy storage temperature control and data centers, and may therefore further expand the Company's growth headroom. Thirdly, the Company’s ECM and external rotor fans’ GPM are much higher than that of traditional cold chain motors. We expect that the increase in the revenue contribution of ECMs and external rotor fans will drive its blended GPM to improve continuously.

Overseas revenue maintained high growth, and Weiguang Electronic’s invisible champion position of cold chain motors was strengthened.

The Company’s export growth was 54.5% YoY in 2021 and more than 50% YoY in 1H22. The proportion of export sales in the revenue mix increased from 44.1% in 2020 to 48.9% in 2021, and further to 54% in 1H22. In particular, the growth rates of domestic sales and export sales of ECMs in 1Q22 were 112.6% YoY and 140.8% YoY, respectively. With the expansion of ECM production capacity and the establishment of the Thailand subsidiary, the Company's global market share of ECMs is likely to improve continuously. In its export revenue, the proportion of major customers and large orders has increased, and the export structure is also continuously optimized. We are optimistic about Weiguang Electronic's huge export potential, and its position as a single champion enterprise in manufacturing is likely to be further strengthened.

Potential risks Operational disruptions due to Covid resurgences; international trade frictions exceeding expectations; prolonged project construction cycles; failure to obtain land for proposed projects; operational risks of overseas subsidiaries.

Investment recommendation China’s cold chain logistics infrastructure is set to develop continuously and may consequently drive Weiguang Electronic’s revenue to grow steadily.

Considering the increased support from energy efficiency policies and the secular trend for ECMs to replace inefficient motors, we expect Weiguang Electronic to maintain high growth in its ECM business. The ECM’s rising share in the revenue mix will boost its overall GPM. Under the trend of industrial automation and import substitution, the Company's servo motor revenue will likely create a second growth curve. We believe that Weiguang Electronic’s capacity structure will be optimized continuously, further bolstering its global market share and strengthening its position as a “single champion enterprise in manufacturing.” We maintain the 2022E/23E/24E EPS forecast at Rmb1.52/1.95/2.54 and estimate the 2022E-24E revenue/net profit CAGR at 32.7%/31.8%, respectively. Considering the average Wind consensus valuation of 26x 2022E PE of comparable companies-Hiron Commercial Cold Chain (603187.SH), Keli Motor (002892.SZ), Moons'

Electric (603728.SH) and Leili Motor (300660.SZ)-and the rapid earnings growth momentum of Weiguang Electronic, we reiterate the target price of Rmb36 on 24x 2022E PE and the "BUY" rating.