What's new

On June 21, Zhenyu Technology’s major client Contemporary Amperex Technology (CATL) announced that it plans to build a new energy vehicle (NEV) battery production base in Jining, Shandong province to further develop its businesses and meet market demand. It intends to invest no more than Rmb14.0bn in the production lines of electric vehicle (EV) battery systems and energy-storage systems within 2 years.

Comments

CATL garners more global clients and keeps expanding its production capacity. On July 21, CATL announced the signing of a memorandum of understanding on cooperation with Ford, indicating the beginning of their strategic cooperation. The two companies will cooperate to provide EV batteries in China, Europe, and North America. Meanwhile, CATL will provide lithium iron phosphate battery packs based on CTP (cell to pack) technology to Ford’s two electric vehicle models (Mustang Mach-E, since 2023; and F-150 Lightning, since 2024). On the same day, international media reported that Hyundai Motor intends to use CATL-made batteries in all of its vehicle models and it is negotiating the matter with CATL. In terms of supply, CATL announced on July 21 that it will invest no more than Rmb14.0bn in building a NEV battery production base in Jining. We believe that CATL will further increase its presence in the global EV battery market by deepening cooperation with global clients and accelerating capacity expansion.

Market share of LiB structural parts business likely to further increase thanks to rising demand from CATL. The firm has built close ties with CATL in terms of LiB structural parts. Meanwhile, it has been increasing its supply to CATL backed by excellent product quality and competitive prices. The order contribution from CATL rose to about 45% in 1Q22. Considering that the firm is a major LiB structural parts supplier to CATL, we expect its business scale to expand with CATL’s EV battery shipment growing. This, combined with a stronger market presence, will likely unleash economies of scale moving forward, in our view.

High sales growth of large client BYD boosts expansion of motor core business. We estimate Zhenyu provided nearly 70% of BYD’s motor cores in 2021 as its main supplier of motor cores. According to BYD, its alternative fuel passenger vehicle sales reached 134,036 units in June, increasing 162.7% YoY and 17.39% QoQ. In 1H22, BYD’s vehicle sales surged 314.9% YoY to 641,350 units.

Financials and valuation

We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 33.6x 2022e and 19.1x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb180, implying 42.9x 2022e and 24.4x 2023e P/E, offering 27.8% upside.

Risks

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