2021 and 1Q22 results slightly miss our forecast

ActBlue announced its 2021 results: Revenue rose 27.9% YoY to Rmb866mn and net profit attributable to shareholders declined 44.4% YoY to Rmb70mn; recurring net profit fell 68.0% YoY to Rmb36mn. In 4Q21, revenue grew 14.9% YoY to Rmb266mn (+25.8% QoQ) and attributable net profit dropped 63.3% YoY to Rmb13mn (+108.2% QoQ). In 1Q22, revenue rose 22.6% YoY to Rmb230mn (-13.4% QoQ) and attributable net profit dropped 58.2% YoY to Rmb13mn (-3.3% QoQ).

The firm's revenue grew while earnings declined, due to the following factors. First, diesel engine after-treatment products that meet the China VI emission standard have not yet created economies of scale following the launch of these products. Second, the proportion of low-GM gasoline engine aftertreatment products in total sales volume increased. Third, the firm's expense ratio rose 3.6ppt and 6.5ppt YoY to 21.8% and 21.4% in 4Q21 and 1Q22, due to the acquisition of ActBlue France. Forth, the firm scrapped some products that meet China V emission standard, and made provisions for impairment losses of other products meeting this standard.

Trends to watch

Multiple actors weigh on profitability; cash flow to improve. The firm’s attributable net margin was 16.6% in 1Q21, 9.3% in 2Q21, 3.1% in 3Q21, 5.1% in 4Q21, and 5.6% in 1Q22, bottoming out and starting to rebound in 3Q21. Its operating cash flow turned positive to Rmb2mn in 2021, and cash reached Rmb289mn, up 62.6% YoY. We note that the firm's capital improved markedly. We believe its profitability and financial status will continue to improve notably in the future, as: 1) economies of scale increase following higher sales volume; 2) the firm's efforts to reduce costs and improve efficiency pay off; and 3) the impact of non-recurring factors such as M&A and asset impairment ease.

Revenue maintains positive growth and market share expands despite the industry downturn. Data from China Association of Automobile Manufacturers shows that in the slack season for the heavy-duty truck (HDT) industry, the domestic sales of light-duty trucks declined 20.0% YoY to 481,746 units in 4Q21 (up 14.3% QoQ) and dropped 19.6% YoY to around 467,197 units in 1Q22 (or 3.0% QoQ), and that of HDT declined 57.6% YoY to 162,132 units in 4Q21 (or 13.2% QoQ) and declined 56.5% YoY to around 231,444 units in 1Q22 (up 42.8% QoQ). The firm's revenue grew 14.9% and 22.6% YoY in 4Q21 and 1Q22. In 2021, it acquired several new clients and saw its share in the light-duty diesel truck market rise by 1.40ppt YoY to 12.91%.

After-treatment market is sizable thanks to the implementation of the China VI emission standard; ActBlue to gain market share amid domestic production. The value of aftertreatment catalysts per vehicle has increased markedly due to the implementation of the China VI emission standard. We think the implementation of the China IV emission standard for non-road diesel vehicles will boost downstream market demand for ActBlue's products. We expect China-made products to replace imported catalysts. The firm will likely gain share in the aftertreatment catalyst market for HDT that meet the VI standard by leveraging its extensive experience in the light-weight vehicle market and its related technologies. We think ActBlue's market share may increase and earnings are likely to improve.

Financials and valuation

Considering the COVID-19 resurgence and the slack season for the commercial vehicle market, we cut our 2022 earnings forecast by 31.3% to Rmb160mn, and introduce a 2023 earnings forecast of Rmb250mn. The stock is trading at 13.7x 2022e and 8.7x 2023e P/E. We maintain an OUTPERFORM rating, but cut our target price by 36.3% to Rmb40. Our TP implies 20.1x 2022e and 12.8x 2023e P/E, offering 47.0% upside.

Risks

Raw material prices fluctuate; cash flow risks; over dependency on a small number of key clients.