Core views:

The Company started with the traditional valve business and has realized business diversification to keep pace with the times through organic growth and M&As. At present, the Company has mastered multiple core technologies in the fields of tire pressure monitoring systems (TPMS), decoupling pipeline systems and the Internet of Vehicles (IoV), which has translated into a moat for its earnings. Considering the vast downstream potential and the Company's enriched product advantages, we are optimistic about the medium- and long-term prospects of its passenger car TPMS and IoV businesses. We forecast 2022E/23E/24E attributable net profit (ANP) of Rmb154mn/247mn/361mn, equivalent to EPS estimates of Rmb0.67/1.07/1.57. We assign 25x 2023E PE to derive a target price of Rmb27 and initiate coverage with a "BUY" rating.

Abstract:

Valve business: Multi-dimensional advantages accumulated in the past 50 years to facilitate transformation and upgrading. After 50 years of development, the Company’s valve business has realized multi-dimensional advantages in cost control, product quality and customer resources, which build the foundation and confidence for the Company’s transformation and upgrading. Many years of operation in the valve industry equips the Company with an in-depth accumulation in the fields of tires, which is the key to the success of the Company's subsequent TPMS product research and development (R&D). At present, commercial tire pressure sensors need co-design with valve to ensure the stability of structure and communication. The bundle sale of the two will further strengthen the Company's product power and customer stickiness, and the basic business role of valve will continue.

TPMS business: The update cycle is approaching, and product upgrades help to gain market shares. The US has entered a stable stage of TPMS after-sales replacement, and Europe is in the peak of TPMS replacement. Coupled with the incremental demand brought by the replacement of winter tires in some regions, we estimate that the overall scale of aftermarket TPMS will likely reach Rmb4.8bn in the US and European markets in 2025. China’s TPMS is currently in the early stage of replacement. We forecast the domestic market space of aftermarket TPMS will be Rmb2bn in 2025, with a CAGR of 48% in 2021-25. The Company has been deeply involved in the TPMS industry for 15 years, and has continued to iteratively upgrade its products. At present, it has developed a low-power Bluetooth TPMS sensor to meet the needs of new energy vehicles (NEVs), and innovatively developed an NFC-based TPMS sensor. The product has significant advantages and is likely to further boost market share in the future, and has started to develop cloud-programmed TPMS sensors aimed at the Chinese aftermarket. In the future, the TPMS business will continue to grow rapidly with the continued growth of the European and Chinese aftermarket markets.

IoV business: Entering the high-growth channel, building an IoV service platform in the long run. The demand for pre-installation of heavy-duty truck TPMS-related products in the US is strong, and we expect the market size to exceed Rmb1bn in the next five years. The European market is currently in the policy introduction period. In Jul 2024, the mandatory installation of TPMS for commercial vehicles will cover all new commercial vehicles in Europe, driving the rapid growth of market demand and creating a Rmb1bn-level incremental market. The Company’s commercial vehicle PPM sensor has both miniaturization and low power consumption, and the co-design with the valve enables customers to install with high efficiency and low cost. At present, the Company’s IoV related products have been used in bulk by the commercial fleet of renowned companies such as Coca-Cola and Amazon. The strong demand for heavy truck in the US will likely drive the rapid ramp-up in volume of IoV business. In addition, the Company builds a commercial vehicle fleet management system based on sensors and with communication protocols as the core, and aims to become an IoV platform service provider going forward.

Decoupling pipeline business: Profound strength and synergy, and multiple policies bring new opportunities. The acquisition of WMHG not only brings cash flow and technological advantages to the Company, but also opens a channel for its commercial vehicle TPMS and remote information control systems to enter world-renowned car factories. Under the background of the transmission from China V emission standards to China VI standards, the value of a single hose has increased from Rmb100 to about Rmb300. The airtight metal hose of the subsidiary WMHG has a long history, and the advantages of technical barriers are gradually released, which will help the Company to expand its market share. At the same time, it has become a trend for foreign auto companies to independently build factories in China. The Company is likely to provide assembly solutions with its technological advantages and the content per vehicle may increase to Rmb1,500.

Potential risks: Less-than-expected products and technology innovation failing to meet market needs; disappointing new passenger vehicle (PV) TPMS market expansion; increased upstream chips; future domestic PV TPMS sensor market development; intensified competition.

Investment recommendation: We forecast 2022E/23E/24E ANP of Rmb154mn/247mn/361mn, corresponding to EPS of Rmb0.67/1.07/1.57. Considering the average valuation of 27x 2023E PE for comparable companies (Wind consensus estimates), the Company's product and technology advantages and the high growth expectation of performance, We assign 25x 2023E PE to derive a target price of Rmb27 for the Company, and initiate coverage with a "BUY" rating.