Preannounced 1Q22 earnings up 10-30% YoY

On April 13, 2022, Jiangsu Olive Sensors High-Tech (Olive Sensors) preannounced its 1Q22 earnings, estimating attributable net profit reached Rmb22.8-26.95mn (up 10-30% YoY); recurring attributable net profit reached Rmb11.99-16.13mn (the YoY change is from -8.6% to 23.1%). The results beat market consensus slightly.

Trends to watch

Earnings grew in 1Q22 despite multiple negative factors. According to data from CPCA (China Passenger Car Association), in March, passenger cars’ output, wholesale, and retail volume totaled 1.82mn (-0.3% YoY), 1.81mn (-1.6% YoY), and 1.58mn units (-10.5% YoY). In 1Q22, passenger cars’ output reached 5.36mn units (+11% YoY), with wholesale volume at 5.44mn units (+8.3% YoY), and retail volume at 4.92mn units (-4.5% YoY). Specifically, alternative fuel vehicles (AFV) wholesale totaled 1.19mn units, up 145.4% YoY, with a penetration rate of 22%. In our view, the prices of raw materials remained high in 1Q22. Meanwhile, some car manufacturers partly halted production and cut output due to COVID-19 restrictions in Shanghai, Jilin, and Jiangsu provinces. The company overcame difficulties and achieved high growth YoY in attributable net profit, outperforming the car retail segment. We believe it shows the firm’s strong product power and profitability.

AFV components report rapid volume ramp-up; IoV business to be new growth driver. As for AFV, 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 AFV component business has achieved faster growth. As for internet of vehicles (IoV), the company 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 AFV 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 serve as a new growth driver for the company.

Demand for AFV sensors to grow thanks to trends in vehicle electrification and intelligence; expect localization. We think that along with upgrades in vehicle electrification, 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 think 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 MEMS (micro-electro-mechanical system) 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 leave our earnings forecasts for 2022 and 2023 unchanged. The stock is trading at 29.2x 2022e and 20.1x 2023e P/E. We maintain an OUTPERFORM rating and a target price of Rmb12, implying 36.6x 2022e and 25.2x 2023e P/E, offering 25.3% upside.

Risks

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