What's new

On June 22, Zhenyu Technology’s major client Contemporary Amperex Technology (CATL) announced a private placement plan. It plans to issue 109,756,097 shares at Rmb410/sh to raise Rmb45bn. Since 2022, CATL continues to increase capital and capacity, and another major client, BYD Company Limited, saw its output and sales double. We believe the abovementioned items illustrate the strength of Zhenyu’s major clients, which provide solid support to the Zhenyu’s orders.

Comments

LiB structural parts: Large client CATL is increasing capital and expanding capacity; launch of Qilin battery may increase value of structural parts used per vehicle. With CATL's in-depth cooperation, Zhenyu’s lithium-ion battery (LiB) structural parts business has risen to the second largest in China. Since 2022, CATL has announced several battery production base projects, including some in Sichuan (Phase 7-10), Xiamen, and a second overseas production base. On June 22, CATL announced an Rmb45bn private placement plan, maintaining a fast pace in capital increases and capacity expansion. On June 16, CATL announced the Qilin battery would be released soon. We believe this poses a higher requirement on structural parts’ safety components and may increase the value of LiB structural parts used per vehicle. We expect Zhenyu to benefit from CATL’s expansion and gain market share in LiB structural parts.

Motor core: High sales growth of large client BYD boosts demand. According to BYD, its alternative fuel passenger vehicle sales reached 114,183 vehicles in May, increasing 260% YoY and 8% QoQ. From January-May, BYD’s sales totaled 504,395 vehicles, an increase of 358.15% YoY. BYD had announced its 2022 sales target of 1.2mn units (up 60.8% YoY). We estimate Zhenyu provided nearly 70% of BYD’s motor cores in 2021. We believe Zhenyu’s motor core business will expand rapidly, driven by increasing demand generated by the AFV market’s strong growth, BYD’s soaring sales, and new clients such as Inovance and UMC.

Raw material prices improve marginally; economies of scale increasing; optimistic about rebound in profitability. In 2021, Zhenyu’s net margin fell 5.31ppt to 5.61% YoY due to capacity expansion and raw material price hikes. The price of non-oriented silicon steel has stabilized since 2022, and aluminum (a raw material of LiB structural parts) prices trended downward but remained high. Moreover, the firm’s pricing negotiation for structural parts with large clients changed from annually to quarterly, enabling the firm to pass on costs more smoothly. The firm has also been optimizing its client structure. We expect the share of other clients to grow to 30% in 2022. We believe Zhenyu’s profitability may significantly improve due to falling raw material prices, increasing economies of scale, and the introduction of structural parts to tier-2 clients.

Financials and valuation

Given the soaring downstream demand and marginal improvement of raw material prices, we raise our 2022 and 2023 earnings forecasts by 3.2% and 13.1% to Rmb390mn and Rmb687mn. The stock is trading at 36.8x 2022e and 20.9x 2023e P/E. We maintain OUTPERFORM. As we expect the increased certainty of high earnings growth to boost the firm’s valuation, we raise our target price 50% to Rmb180 (42.9x 2022e and 24.4x 2023e P/E), offering a 16.6% upside.

Risks

Raw material prices increase; disappointing expansion of LiB structural parts and motor core businesses; reliance on large clients.