Weiguang Electronic posted revenue/attributable net profit (ANP) of Rmb933mn/249mn (+17.4%/+47.2% YoY) in 1-3Q22, in line with expectations. The Company increased its holdings in UAH Battery Materials, enhancing investment in the new energy field, which may bring new growth point for its earnings. It is a long-term trend to replace outdated and inefficient motors with electronically commutated motors (ECMs), and we expect Weiguang Electronic to maintain high growth in its ECM business. The Company's external rotor centrifugal fans are likely to continue market expansion in energy storage temperature control and other fields. The revenue share of high gross profit margin (GPM) products such as ECMs and external rotor fans may continue to increase, driving up the Company's overall GPM level. With the expansion of production capacity, the Company is likely to further increase its global market share and strengthen its position as the “single champion of manufacturing”. We expect its revenue and net profit to record a 35.3% and 28.1% CAGR in 2022E-2024E. We reiterate the target price of Rmb39 on 21x 2023E PE and the "BUY" rating.

Earnings came in line with expectations in 3Q22, and the revenue structure continued to be optimized.

In 1-3Q22, the Company’s revenue/ANP was Rmb933mn/249mn (+17.4%/+47.2% YoY), including revenue/ANP of Rmb279mn/87mn (+3.5%/+31.3% YoY) in 3Q22. The revenue structure has been continuously optimized, the ECM revenue grew by more than 80% YoY in 1-3Q22 and the revenue share had increased from 12.8% in 2020 to 14.0% in 2021 and further to 22.2% in 1H22. The Company's revenue structure continued to be optimized, and combined with the decline in raw material prices, the depreciation of the RMB and other factors, its net profit margin (NPM) in 2021, 1Q22, 2Q22, 3Q22 was 22.9%, 23.4%, 26.3%, 31.0%, respectively, which maintained a high growth rate.

Enhanced presence in new energy, with increased investment in UAH Battery Materials.

In Aug 2022, the dry process lithium iron phosphate production line of UAH was completed and started trial production, and samples were sent to customers that brought about small-scale sales. On Oct 26, 2022, the Company announced that it increased its investment in UAH by Rmb40mn with its own capital, lifting its stake in the entity from 20% to 52% and making it a controlling subsidiary, which was also included in the consolidated statements. It is likely to boost large-scale production of UAH, bringing a new growth point for the Company's performance.

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 sqm). 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. 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 by Rmb135 per set after one 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 overseas sales revenue posted annualized growth of 54.5%, 58.5% and 45.0% in 2021, 1H22 and 1-3Q22, respectively. Although the growth slowed in 3Q22, the sales proportion increased from 44.1% in 2020 to 48.9% in 2021 and further to over 54% in 1H22. The proportion of large customers and orders in the Company's overseas sales revenue is increasing, and the structure is also continuously optimized. With the expansion of the Company's production capacity, the establishment of a subsidiary in Thailand and the restraints on the production capacity of its overseas competitors under rising energy costs, Weiguang's global market share is likely to continue to increase.

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 advice: ECM motors to replace outdated and inefficient motors is a long-term trend, and the Company's ECM motor revenue is likely to maintain a high growth.

Meanwhile, its external rotor centrifugal fans may continue market expansion in the field of energy storage and temperature control, new air system, etc.

The revenue ratio of ECM motors, external rotor fans and other high GPM products is likely to further increase, boosting the Company’s overall GPM.

With the expansion of production capacity, it is likely to further expand global market share and strengthen its position as a “single champion enterprise in manufacturing”. The Company also increased its investment in UAH to enhance presence in the new energy field, a likely new growth point. We adjust the 2022E-24E EPS forecasts to Rmb1.46/1.84/2.33 (from the original forecasts of Rmb1.51/1.93/2.47) and estimate the 2022E-24E revenue/net profit CAGR at 35.3%/28.1%. The Company is in the stage of rapid earnings growth, and its high-margin ECM motors maintained a high growth rate of 80% in 1-3Q22. Considering the average Wind consensus valuation of 21x 2023E PE of comparable companies-Hiron Commercial Cold Chain (603187.SH), Keli Motor (002892.SZ), and Moons' Electric (603728.SH)-and the fact that Weiguang Electronic's GPM and NPM continue to outperform its peers, we reiterate the target price of Rmb39 on 21x 2023E PE and the "BUY" rating.