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On August 2, Zhenyu Technology (Zhenyu) announced its plans to build an alternative fuel vehicle (AFV) powertrain core component project in Taicang, Jiangsu province, and a structural parts production base for electric vehicle (EV) batteries in Zhaoqing, Guangdong, with total investment of Rmb1bn for each project. The Taicang project consists of two phases, and the firm aims to complete quotation for the land use right of the Phase I project by March 31, 2023 and for Phase II by March 31, 2024. Zhenyu plans to set up a wholly-owned subsidiary to take charge of the following project implementation in Taicang. The firm’s subsidiary, Guangdong Zhenyu, will manage the project in Zhaoqing, and has been granted land use rights. The firm expects the Zhaoqing project to reach full production capacity within 36 months of starting operations.

Comments

Cooperation with CATL to deepen; LiB structural parts business to continue expansion. Zhenyu closely cooperates with Contemporary Amperex Technology (CATL) in its lithium-ion battery (LiB) structural parts business. Zhenyu supplied about 45% of CATL’s LiB structural parts in 1Q22. On May 30, CATL announced on its WeChat Official Account that its Phase I project in Zhaoqing went online with a planned capacity of 25GWh. We think Zhenyu may secure orders from its core client CATL’s Zhaoqing production base, as the firm plans to expand capacity for LiB structural parts in Zhaoqing, which we think will boost the order contribution from CATL. In addition, thanks to a booming AFV market, LiB manufacturers may obtain ample orders from downstream segments while accelerating capacity expansion. We believe Zhenyu is able to meet growing downstream demand by expanding capacity, and think that its LiB structural parts business will continue securing market share.

Capacity expansion for motor cores to satisfy rising demand from clients; market share likely to further improve. We estimate Zhenyu accounted for nearly 70% of BYD’s motor cores in 2021. According to BYD, its alternative fuel passenger vehicle sales surged 314.9% in 1H22, leading to doubling demand for motor cores. Meanwhile, Zhenyu has been expanding its client base to include new clients such as Inovance and UMC. We think the firm’s planned project in Taicang enjoys geographical advantages, which may help it cater to the needs of clients like BYD and UMC more efficiently and enhance service responses, so as to boost its supply to clients and grow its market share.

Private placement plan approved by SZSE to provide financial support for capacity expansion. On July 27, Zhenyu announced that its plan to issue 9,702,900 shares at Rmb82.45/sh to raise Rmb800mn through private placement has been approved by Shenzhen Stock Exchange (SZSE). Zhenyu’s actual controllers and their controlled companies will subscribe all the new shares by cash. The firm estimates the shareholding ratio of the actual controllers may rise from 51.03% to 55.65% once the subscription is completed. We believe this private placement plan will provide financial support for the firm’s capacity expansion in Taicang and Zhaoqing. Through the two projects, Zhenyu may effectively meet clients’ needs and improve market share, and it may also give play to economies of scale and strengthen profitability, thus consolidating the firm’s long-term competitiveness. The actual controllers’ higher stake in Zhenyu also demonstrates the management’s confidence in the firm’s future prospects, in our view.

Financials and valuation

We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 31.4x 2022e and 17.9x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb180, implying 42.9x 2022e and 24.4x 2023e P/E, offering 36.5% upside.

Risks

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