Initial Coverage

Investment positives

We initiate coverage on Jiangsu Olive Sensors High-Tech (Olive Sensors) with an OUTPERFORM rating and a target price of Rmb16.91, implying 41.6x 2022e P/E.

Why OUTPERFORM rating?

A leading manufacturer of fuel level sensors (FLS) expanding to high-end sensors market to capitalize on trends of vehicle electrification and intelligence. We estimate Olive Sensors has a　market share of more than 30% in the domestic FLS market. We believe the company will expand its product categories to meet new opportunities brought by vehicle electrification and intelligence.

Sales volume of resolvers to rise rapidly; acquisition of Changzhou Huaxuan fits move toward import substitution.Thanks to the rising penetration rate of alternative fuel vehicles (AFV) and upgrading from single-motor to double- and triple-motor models, we believe that sales volume of resolvers will grow rapidly. We estimate that the global market of resolvers for AFV may reach Rmb1.4bn in 2025. The global resolver market is dominated by Japanese Tamagawa and MinebeaMitsumi. Changzhou Huaxuan, the resolver unit of Olive Sensors, is one of just a few Chinese suppliers with mass production capability. This subsidiary has become a supplier to Xpeng and Bosch. We believe the company’s products will become a viable substitute for imports through construction of automated production lines, and timely and flexible services.

Independent design, packaging and testing capabilities of MEMS sensor chips through equity investment. MEMS sensors are the　mainstream of the automotive sensor market. The number of MEMS sensors exceeds 50 per vehicle. The global market is being monopolized by international manufacturers, and Chinese players still lag behind in core chip capabilities. In 2020, the company made an equity investment (9.57%) in Longwei Technology to obtain the independent design, packaging and testing capabilities of MEMS chips. We believe Olive Sensors can help Longwei Technology improve corporate governance and provide customer resources.

How do we differ from the market? The market is concerned about　whether sales volume of high-end sensors may rise as strongly as expected. We believe the company will continue to expand its shares in the domestic and European resolver market thanks to its technology and production capacity advantages. We believe the MEMS sensor business may be promising thanks to the independent supply of chips.

Potential catalysts: We expect Olive Sensors to obtain more orders from AFV manufacturers now that it is a resolver supplier of Xpeng and Bosch.

Valuation and recommendation

Our EPS forecast is Rmb0.25, Rmb0.41, and Rmb0.54 in 2021, 2022 and 2023, a CAGR of 46.9%. We initiate our coverage with an OUTPERFORM rating. We assign a target valuation of 28x 2022e P/E for the fuel system accessories and interior trims businesses, and a 70x 2022e P/E (0.98x PEG) for the automotive sensors business. We derive a target price of Rmb16.91, offering 24% upside.

Risks

Disappointing business integration after M&A and development of new businesses; over-reliance on individual clients; sharp increase in prices of raw materials.