What's new

IAT Automobile Technology officially launched its service-oriented architecture (SOA) developer platform on August 10. IAT has also announced Phase II of its share repurchase proposal.

Comments

Increasing investment in smart technologies; launching SOA developer platform. The top-level design of electrical/electronic architecture and the upgrade of essential hardware and software products are the keys to adopting intelligent technologies in automobiles. IAT is advancing R&D and developing new products. In 2021, the firm's self-developed vehicle control unit was trialed successfully. We believe the launch of the SOA developer platform demonstrates the firm’s strong output capability. SOA is a software design paradigm more in line with the needs of software-defined vehicles. It can realize the decoupling of hardware and software, provide more powerful over-the-air technology (OTA) upgrades, and offer more personalized software services. It is widely used by mainstream automakers. Unlike the signal-oriented architecture in typical automotive electrical and electronic architecture, SOA has high requirements for the software development processes, methods, and tools. The SOA developer platform is mainly for original equipment manufacturers (OEM). It can provide corresponding development tools and modules that improve the efficiency of development, shorten the iteration cycle, and improve IAT's automotive digital full-stack solution services.

Auto parts business improving; expanding innovative businesses and ODM to turn R&D and manufacturing into growth drivers. By leveraging its powertrain technology, IAT has made steady progress in R&D and mass production of V6 engines, AFV decelerators, couplers, range extenders, and dedicated hybrid transmissions (DHT) assembly. Since July, IAT has been supplying DHT assemblies for SAIC-GM-Wuling Automobile. We believe IAT has established a comprehensive AFV system product matrix, and has entered the supply chain system of Continental, Guangqi Honda Automobile, Dongfeng Honda Automobile, and SAIC-GM-Wuling Automobile. We see promising growth for IAT’s auto parts business. Shenzhen Gecko Innovation Technology’s skateboard chassis business is advancing smoothly. The company has orders on hand for its original design manufacturing (ODM) business. We believe that the innovation business is essential for IAT’s technology industrialization, and that it will become a new growth driver.

Ample orders on hand from R&D and design business boosting short-term earnings; Phase II share buyback builds confidence. The company has ample orders on hand. Given that most orders can be delivered within a year, we think delivery of existing orders will accelerate as automakers resumed work in 2Q22, bolstering its revenue recognition. IAT announced on August 9 that it plans to conduct a second share buyback. The proposal states that such shares would be used for equity incentive or an ESOP, with a repurchase price of up to Rmb25.26/sh. We believe that the firm has ample orders on hand for its design business, and that the auto parts business is progressing smoothly. We see no need to be overly concerned about 2Q22 earnings. The Phase II share buyback plan shows executives’ confidence in long-term development, in our view.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 24x 2022e and 18x 2023e P/E. We maintain OUTPERFORM, but given the downstream off-season, we cut our TP 8% to Rmb23.00 (implying 38x 2022e and 28x 2023e P/E) offering 60% upside.

Risks

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