Investment positives

We initiate coverage of Ningbo Zhenyu Technology Co., Ltd (Zhenyu) with an OUTPERFORM rating and a target price of Rmb120.00.

Why an OUTPERFORM rating?

Business expansion based on precision metal stamping dies business likely to boost growth. Zhenyu has been engaged in the production of stamping parts for years. According to its IPO prospectus, the firm’s market share was around 25% and its gross margin (GM) was higher than that of its peers as of 2019. The firm has expanded into the downstream precision structural parts segment, hoping to capitalize on its advanced stamping technology and large client base. Its precision structural parts are used in home appliances, alternative-fuel vehicles (AFV), and various other sectors.

Structural parts business to boom thanks to cooperation with CATL. The AFV market is growing quickly in China. We estimate China’s market for structural parts for square batteries will be Rmb24.51bn in 2025 and will continue to grow in the long term. As this market expands, we believe the firms competing in it will face growing requirements in terms of capex and technological strength. As a result, structural parts manufacturers with large client bases and economies of scale should gain market share. Considering Zhenyu has technological strengths, industrialization capability, and a close relationship with leading LIB manufacturer Contemporary Amperex Technology (CATL), we expect its LIB structural part sales volume to reach 480mn and 770mn in 2022 and 2023, corresponding to revenue of Rmb3.16bn and Rmb4.66bn. We compare Zhenyu with leading LIB structural parts supplier Kedali and note orders growth at Zhenyu is visible. As its capacity expands, the firm’s unit cost will likely drop, and its GM will likely improve marginally, in our view. We expect its future revenue to grow rapidly.

Strong synergies between stamping dies and motor core business; mature technologies and high-quality clients help enhance competitiveness. As the sales volume of AFVs and the penetration rate of the dual-motor model increase in downstream markets, we estimate China’s motor core market will be Rmb6.27bn in 2025, implying a CAGR of 48.8%. Zhenyu is penetrating into the motor core market by leveraging its technological advantage in the stamping dies market. It has cooperated with high-quality firms such as Tesla, BYD, Valeo Seimens, and Siemens. In 1H21, its motor core revenue soared 204% YoY. We expect the motor core business to become a new earnings growth driver on the back of Zhenyu’s mature technology, high-quality clients, and business synergies.

How do we differ from the market? In the market there are different opinions about the profitability of Zhenyu’s structural parts business. In our view, the firm has strong cost control and a close relationship with CATL, and will likely develop new clients. We expect earnings in its structural parts business to increase.

Potential catalysts: Accelerating penetration of AFVs has bolstered the growth of the battery industry. As a result, structural parts demand is robust. Sales volume of the firm’s motor cores will likely ramp up, in our view.

Financials and valuation

Our EPS forecast is Rmb2.63 for 2021, Rmb4.51 for 2022, and Rmb6.48 for 2023, implying a CAGR of 57%. We adopt the SOTP valuation method, and believe the firm’s structural parts, motor core, and stamping dies businesses should be valued at 30x, 23x, and 20x 2022e P/E. Our target price is Rmb120, implying 26.6x 2022e P/E with 11.9% upside.

Risks

Operations of major clients fluctuate; raw material cost increases; firm fails to develop new technologies; business expansion disappoints.