1H22 results in line with our forecast

Jiangsu Olive Sensors High-Tech (Olive Sensors) announced 1H22 results: Revenue grew 12.5% YoY to Rmb415mn, attributable net profit fell 10.3% YoY to Rmb44mn, and recurring net profit dropped 15.0% YoY to Rmb32mn. For 2Q22, the firm’s revenue declined 8.0% YoY or 5.8% QoQ to Rmb201mn, attributable net profit decreased 31.9% YoY or 22.3% QoQ to Rmb19mn, and recurring net profit dropped 26.1% YoY but rose 31.6% QoQ to Rmb18mn.

Trends to watch

Multiple factors weigh on 2Q22 results; ramp-up of sensor business driving revenue growth. Olive Sensors’ 2Q22 revenue and earnings declined sharply YoY due to disruptions to logistics as a result of the COVID-19 resurgence, labor shortage, rising raw material prices and delayed deliveries. However, the firm’s revenue grew YoY despite headwinds in 1H22, underscoring its success in implementing strategies such as product development, in our view. By business, Olive Sensors’ 1H22 revenue from sensor and fuel system accessory businesses rose 19.3% YoY to Rmb104mn and 4.3% YoY to Rmb223mn. We believe the sensor business is the key driver of the firm’s revenue growth.

Rising raw material prices drag gross margin; ramp-up of new products to boost profitability. Olive Sensors’ 1H22 gross margin (GM) fell 0.5ppt YoY to 25.4%, and net profit margin dropped 2.7ppt YoY to 10.6%. In 2Q22, GM rose 1.4ppt YoY or 4.5ppt QoQ to 27.7%, and net profit margin declined 3.4ppt YoY and 2.0ppt QoQ to 9.5%. We attribute the decline in the firm’s 1H22 GM to the price hikes of raw materials such as precious metal clay pastes (gold, palladium and platinum). We expect GM to improve as raw material prices stabilize, sales proportion of high-GM new products increases, and the ramp-up of new products brings economies of scale. Olive Sensors’ 1H22 expense ratio edged down 0.2ppt YoY to 12.1%, thanks to foreign exchange gains due to the depreciation of renminbi.

Expanding product lines of sensors; chip business in upstream building competitive advantages. In addition to liquid level sensors and electric rotary sensors, the firm has made key breakthroughs in pressure sensors, covering low-, medium- and high-pressure ranges. We believe these products can largely meet the needs of various types of fuel vehicles. We believe the firm’s technologies can rival those of benchmark foreign companies. We expect its low-pressure products to benefit from the localization, while medium- and high-pressure products likely will ramp up due to industry expansion due to the penetration of technologies such as the heat pump, air and hydraulic suspensions, and brake-by-wire systems, among others. We believe the firm made breakthroughs in pressure sensors, as it gained a stake in Long Way Technology, which features the independent design, packaging and testing of the micro-electro-mechanical system (MEMS) for sensor chips. We expect the firm to enhance its long-term competitive advantages along the value chain through investments to consolidate technical barriers.

Financials and valuation

We lower our 2022 and 2023 earnings forecasts by 32.5% to Rmb110mn and by 31.5% to Rmb162mn, due to negatives such as the COVID-19 resurgence. The stock is trading at 36.1x 2023e P/E. We maintain an OUTPERFORM rating but cut TP 25% to Rmb9, implying 42.9x 2023e P/E with 21.5% upside.

Risks

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