2021 results miss our forecast

Zhenyu Technology announced its 2021 results: Revenue rose 154.4% YoY to Rmb3.03bn and net profit attributable to shareholders increased 30.7% YoY to around Rmb170mn. In 4Q21, revenue rose 124.8% YoY or 30.0% QoQ to about Rmb1.1bn, while attributable net profit declined 15.7% YoY to Rmb52.6mn （+17.9% QoQ）。 The results miss our forecast, mainly due to rising raw material prices that weighed on gross margin （GM）。

Trends to watch

Motor cores and LiB structural parts businesses grew rapidly thanks to a booming alternative-fuel vehicle （AFV） sector. In 2021, sales volume of precision structural parts at Zhengyu Technology surged 151.32% YoY to about 460mn units. Revenue from motor cores jumped 188.7% YoY to about Rmb720mn, accounting for 23.6% of the overall revenue. Revenue from lithium-ion battery （LiB） structural parts soared 189.6% YoY to Rmb1.65bn, accounting for 54.5% of the overall revenue, driving rapid growth in 2021 results. Meanwhile, CATL, one of the firm’s largest clients, contributed 96.9% of the firm’s LiB structural parts orders. Data from China Battery Union shows that the installation price of structural parts supplied to CATL stood at Rmb40mn/GWh. Based on the installation volume, we estimate the proportion of CATL’s LiB structural parts purchase from Zhenyu Technology reached 45.9% in 2021.

Adjustments in business structure and higher raw material prices weighed on GM; impact of raw material price fluctuations increased due to the low-price strategy. In 2021, Zhenyu Technology's GM declined 7.6ppt YoY to 18.0% and its attributable net margin dropped 5.3ppt YoY to 5.6%. We attribute lower profit margins to the following reasons. First, the proportion of low-GM precision structural parts business increased. In 2021, GM of the firm's LiB structural parts business slid 4.5ppt YoY to 17.5%. GM of the motor cores business rose 1.5ppt YoY to 18.7%. GM of the stamping dies business came in at 53.5%. Second, raw material prices climbed 10-30% in 2021. It takes time for the company to pass on rising costs to downstream customers. Silicon steel sheets, aluminum and copper are raw materials of precision structural parts. Costs of these materials account for over 60% of the firm's total costs. In addition, the impact of raw material price fluctuations increased due to the low-price strategy. We estimate that in 2021, rising raw material prices reduced the GM of the firm's precision structural parts business by 5.4ppt.

Marginal easing of raw material price hikes and robust downstream demand to support LiB structural parts business in the long term. In terms of demand, the firm has built close ties with CATL, with the order contribution from CATL continuing to rise. In 2022, we think orders from CATL for the firm's structural parts will double YoY, driven by soaring demand for LiBs and faster capacity expansion at CATL. Meanwhile, stronger economies of scale may partially offset the impact of rising raw materials. In terms of cost, prices of silicon steel sheets, copper and plastic have stabilized since early 2022, and the rise of aluminum prices has notably narrowed. We are upbeat on the firm's earnings growth in 2022, backed by a higher market share and a marginal easing of raw material price hikes.

Financials and valuation

Considering higher raw material prices, we cut our 2022 net profit forecast 9.9% to Rmb378mn, and introduce a 2023 earnings forecast of Rmb607mn. The stock is trading at 27.7x 2022e and 17.3x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb120. Our TP implies 29.5x 2022e and 18.4x 2023e P/E, offering 6.4% upside.

Risks

Raw material prices continue to rise; disappointing expansion of LiB structural parts and motor cores businesses.