2021 results in line with our expectations

IAT Automobile Technology (IAT) announced 2021 results: Revenue grew 54.96% YoY to Rmb1.27bn, and attributable net profit rose 85.12% YoY to Rmb205mn. In 4Q21, revenue increased 25.79% YoY or 81.01% QoQ to Rmb425mn, and attributable net profit was up 91.96% YoY or 66.71% QoQ to Rmb64mn. The firm’s 2021 results are close to the upper end of the preannounced range and our expectations.

Trends to watch

AFV design business robust; 4Q21 net profit hit record high. In 2021, revenue from IAT’s alternative-fuel vehicle (AFV) business rose 63.7% YoY to Rmb1.01bn, pushing its revenue contribution up to 79.4%. The firm’s revenue and net profit hit record highs thanks to accelerated revenue recognition of its design business. Meanwhile, the firm’s per capita income in 2021 also reached a record high of Rmb697,000 on the back of its platform development capabilities. In 2021, revenue from the component business surged 364% YoY to Rmb64.48mn. The firm made steady progress in the mass production of V6 engines and AFV decelerators by leveraging its powertrain technology. We believe IAT continues to establish itself as an independent automotive design leader. We expect its core component business to create a new growth driver on the back of its R&D strength and mass production capabilities.

R&D ramp-up to strengthen competitive advantage; operational efficiency steadily improved. IAT’s profitability improved steadily thanks to rising proportion of its high-gross margin (GM) AFV design business. In 2021, the firm’s operations remained resilient, posting a GM of 37.32% (up 3.64ppt YoY, business tax and surcharges are excluded). Selling and G&A expense ratios dropped 1.5ppt and 2.0ppt YoY on economies of scale. Moreover, IAT was among the first to venture into frontier automotive technologies such as AFV electric motor, controller and battery systems, modular platform and electrical/electronic architecture (EEA) and domain controllers. This has driven its R&D expense up to Rmb122.7mn, with its R&D expense ratio up 5.8ppt YoY to 9.7%. By end-2021, IAT held 875 patents (up 28.3% YoY).

Expansion into innovative businesses such as skateboard chassis and ODM; R&D and manufacturing as dual growth engines to boost growth. IAT boasts strong expertise in engine systems, car body structures and chassis systems thanks to its extensive experience in automotive design services, laying a foundation for its foray into the skateboard chassis market. In addition, the firm revealed that some clients have showed willingness to place orders for its whole-body original design manufacturing (ODM) services. We believe IAT’s expansion into skateboard chassis and ODM businesses marks a significant step towards its technology industrialization goal and could create a new growth driver for the firm on the back of its design business.

Financials and valuation

Considering COVID-19 resurgence dragging project progress, we lower our 2022 net profit forecast 23.3% to Rmb299mn, and introduce our 2023 net profit forecast at Rmb409mn. The stock is trading at 20.2x 2022e and 14.7x 2023e P/E. We maintain an OUTPERFORM rating and cut our TP 39.0% to Rmb25.00 (implying 27.8x 2022e and 20.3x 2023e P/E), offering 37.4% upside.

Risks

Disappointing business expansion or delivery of new orders; COVID-19 resurgence.