What's new

On February 6, 2022, Jiangsu Olive Sensors High-Tech (Olive Sensors) announced that it had signed an acquisition agreement with the major shareholders of Long Way Technology to acquire in cash no less than a 42% stake in the firm, which will then become a subsidiary. On February 7, 65.93mn of Olive Sensors’ restricted shares were unlocked, accounting for 13.33% of its equity base.

Comments

Olive Sensors strengthening control over Long Way Technology through transition from equity investment to acquisition. In China, Long Way Technology is one of only a few companies that can mass-produce vehicle-grade micro-electro-mechanical systems (MEMS) sensor chips. Long Way Technology possesses independent design, packaging and testing capabilities for MEMS chips. In 2020, following the completion of the equity investment giving Olive Sensors a 9.57% stake in Long Way Technology, an agreement was signed in which Long Way Technology become Olive Senor’s exclusive supplier. In 2022, Olive Sensors intends to acquire no less than 42% stake which should strengthen its control over the firm and its key MEMS sensor chips technologies.

Expanding presence in upstream sensor chip industry chain to improve competitiveness. We think that securing a sufficient supply of high-quality chips requires excellent chip design, packaging and testing capabilities. Most domestic companies produce MEMS sensors with chips procured externally, while Olive Sensors has successfully integrated sensor chip chains covering independent design, manufacturing, packaging and testing following the acquisition of Long Way Technology. Olive Sensors has also expanded in the upstream sensor chip industry chain, which greatly improved its sensor chip self-sufficiency and which we believe will improve its competitive advantages.

Automotive sensors to continue to benefit from transition towards intelligent and electric vehicles; import substitution underway. We think that along with the shift towards electric vehicles, automotive electrical systems will need extra sensors, and performance requirement for sensors of structural parts such as batteries will be higher. In addition, the transition to intelligent vehicles will also likely raise market demand for sensors used in smart chassis, brakes and thermal management systems. Amid these trends, we think the market will need a larger number of high-performance automotive sensors, which will likely boost the industry expansion. Meanwhile, the State Council issued a circular to promote the development of digital economy during the 14th Five-Year Plan (FYP) period (“the circular”). The circular encourages companies involved in sensor, quantum information, and integrated circuit industries to innovate. We expect Olive Sensors to realize import substitution backed by its competence in supply chain, clients and services.

Valuation and recommendation

We leave our 2021-2023 earnings forecasts unchanged. The stock is trading at 24.3x 2022e and17.0x 2023e P/E. As the unlocking of large volume of restricted shares may weigh on share prices, we cut TP 17.2% to Rmb14.0 (34.3x and 24.0x 2022-2023e P/E with 41.4% upside).

Risks

Disappointing M&A integration and development of new businesses; sharp increase in prices of raw materials.