1Q22 results in line with our forecast

Jiangsu Olive Sensors High-Tech (Olive Sensors) announced 1Q22 results: Revenue rose 42.36% YoY and declined 27.11% QoQ to Rmb214mn. Net profit attributable to shareholders increased 19.16% YoY and fell 11.84% QoQ to Rmb25mn, in line with our forecast.

Trends to watch

Multiple factors cause disruptions to profitability; the firm bucks the overall trend to record earnings growth in 1Q22. According to China Passenger Car Association (CPCA), China’s passenger vehicle (PV) output, wholesale sales and retail sales reached 5.36mn, 5.44mn and 4.92mn units in 1Q22, changing +11.0%, +8.3% and -4.5% YoY. Wholesale sales volume of new energy vehicles (NEV) reached 1.19mn units, up 145.4% YoY, and corresponding to a penetration rate of 22%. Olive Sensors’ gross margin (GM) was 23.2% in 1Q22, down 2.1ppt YoY and 1.0ppt QoQ, mainly dragged by high raw material prices. Affected by the COVID-19 pandemic’s disruptions to logistics and increase in transit inventories, the firm’s expense ratio fell 2.1ppt YoY to 13.2%. In 1Q22, net profit margin was 11.6%, up 2.0ppt YoY, indicating profitability improved. Olive Sensors registered earnings growth despite the impact from multiple headwinds, which highlights its product strength, strong management capability and profitability, in our view. We expect its earnings to keep growing after the pandemic subsides and raw materials to gradually trend lower.

NEV components fuel earnings growth; IoV business promising. Regarding NEV, the company focuses on the EIC system (motor control unit, battery, and vehicle control unit), covering motor distribution rings, voltage control filter components in the electronic control unit, battery pack structural parts, and positive temperature coefficient heaters. Integrated filter products are under design and development, and the NEV component business has achieved faster growth. With regards to internet of vehicles (IoV), the firm raised funds in 2021 to build a commercial vehicle IoV system project and set up a special business unit to develop products such as 4G/5G T-Box, millimeter-wave radar, and camera. We believe the NEV components business will ramp up and boost earnings due to its high-quality client resources and ample orders. Olive Sensors has won orders for IoV products for commercial vehicles and is exploring this market. We believe the IoV business will become a new growth driver for the firm.

Automotive sensor market sees ample upside; import substitution to gain traction. We think that along with upgrades in vehicle electrification and the EIC system will need extra sensors, batteries and other components, and it imposes higher performance requirements on sensors. In addition, the transition to smart vehicles may boost demand for sensors used in smart chassis, brakes, and thermal management systems. We believe the market will need a more significant number of high-performance automotive sensors, which will likely boost the industry's expansion. The company has a wide range of automotive sensor products, including liquid level sensors, pressure sensors based on micro-electro-mechanical system (MEMS) and MSG technology, electric rotary sensors, and exhaust temperature sensors, which can be widely used in fuel, pure electric, and hybrid models. Olive Sensors obtained related core technologies by acquiring Changzhou Huaxuan and purchasing a stake in Long Way Technology, creating synergies with existing businesses and subsidiaries. We expect the firm to realize import substitution by leveraging its competence in self-sufficiency, client resources, and services.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 27.5x 2022e and 19.0x 2023e P/E. We maintain an OUTPERFORM rating and TP of Rmb12 (36.6x 2022 P/E and 25.2x 2023 P/E), offering 33.0% upside from the current price.

Risks

Disappointing development of IoV and new businesses; continued increase in raw material prices.