Preannounced 2021 earnings up 71.3-89.3% YoY

IAT Automobile Technology has preannounced its 2021 earnings: net profit attributable to shareholders grew 71.3-89.3% YoY to Rmb190-210mn; recurring net profit rose 79.9-99.7% YoY to Rmb180-200mn, largely in line with market consensus.

Trends to watch

Net profit grows QoQ in 4Q21 driven by accelerated recognition of revenue from design services. According to the preannouncement, net profit attributable to shareholders in 4Q21 grew 46-106% YoY and 26-79% QoQ to Rmb48-68mn. We think that the market is paying more attention to revenue. Based on its preannounced median profit and average net profit margin of 15%, we estimated that IAT’s revenue in 4Q21 expanded 15% YoY or 65% QoQ to Rmb388mn, bringing annual revenue to over Rmb1.2bn in 2021. In addition, recognition of revenue from design services accelerated QoQ in 4Q21 thanks to a gradual delivery of new orders for alternative fuel vehicle （AFV） design business. The adoption of phased recognition of revenue could not only mitigate the risks of bad debt, but would also ensure a timely reporting of the delivery timelines for new orders, in our view. We believe the company’s gradual delivery of new orders will boost its revenue.

Focusing on AFV powertrain technologies to grow auto parts business. IAT Automobile Technology has completed R&D, prototyping and testing processes and plans to begin mass production for its two major clients Shanghai General Motors Wuling （SGMW） and Continental. While establishing a leading position in the independent automotive design service market, we believe the company will gradually improve its R&D and manufacturing capabilities for core auto parts, and it may expand its presence in various market segments （e.g. DHT gearboxes, speed reducers and domain controllers）。 Over the long term, we expect the company’s design services and auto parts businesses to grow together, further boosting its growth.

Striving to grow into a leading third-party automotive design company in China; poised to benefit from the shift towards electric and smart vehicles. In the auto industry, the shift towards electric and intelligent vehicles is becoming increasingly clear, driving an expansion of the automotive design industry. On the one hand, emerging automakers and leaders in other industries are expanding their presence in the auto industry, while traditional automakers are boosting their presence in the electric vehicle sector, accelerating the iteration of automotive models. On the other hand, the shift towards electric and intelligent vehicles is fueling demand for diversified and personalized design and further boosting consumption of automotive design services. We think emerging automakers （e.g. Li ONE and Xpeng G3） and IAT are complementary to each other, which may pave the way for wider cooperation. Over the long term, the company will likely benefit significantly from intensive R&D and specialization in auto design amid intensifying competition, in our view.

Valuation and recommendation

We cut our net profit forecast by 9.0% to Rmb204mn due to uncertainties with regards to the timing of revenue recognition. We keep our 2022 earnings forecast unchanged given the company’s ample orders on hand and introduce a 2023 forecast of Rmb494mn. The stock is trading at 23.1x2022e P/E. We maintain our OUTPERFORM rating and target price of Rmb41.0 （35.2x 2022e P/E）， offering 51% upside.

Risks

Disappointing delivery of new orders.