1H22 results in line with our expectation

Zhenyu Technology announced its 1H22 results: Revenue rose 131.0% YoY to Rmb2.51bn, and attributable net profit grew 43.3% YoY to Rmb105mn, while recurring attributable net profit increased 33.0% YoY to Rmb98mn. In 2Q22, revenue soared 118.2% YoY and remained flat QoQ to Rmb1.26bn; attributable net profit rose 53.5% YoY to Rmb49mn(-13.5% QoQ), and recurring net profit grew 38.2% YoY to Rmb44mn(-17.0% QoQ). Its 1H22 results were in line with our expectation.

Trends to watch

Robust downstream client demand; doubled revenue growth in battery structural parts and motor cores. In 1H22, revenue from power lithium-ion battery (LiB) precision structural parts and motor cores soared 130.1% and 142.9% YoY to Rmb1.39bn and Rmb589mn. The doubled growth in these two businesses drove the increase in revenue and earnings. Zhenyu Technology’s core clients are Contemporary Amperex Technology (CATL) and BYD, accounting for 45% and 70% of their structural part and motor core supply in 2021, according to our estimates. Data from China Battery Union shows that the installed capacity of CATL rose 103.8% YoY to 52.5GWh in 1H22. According to BYD’s corporate filings, sales of BYD’s vehicles totaled 646,399 units in 1H22, increasing 162.03% YoY. We believe Zhenyu Technology’s revenue in 1H22 grew rapidly, driven by BYD’s soaring sales, and new clients such as Inovance and UMC.

Fluctuating raw material prices weighed on GM while effective management paid off. In 1H22, the firm’s gross margin (GM) declined 8.1pct YoY to 14.0%, and attributable net margin dropped 2.5pct YoY to 4.2%. In 2Q22, GM fell 7.1ppt YoY to 14.1% (+0.2ppt QoQ), and attributable net margin decreased 1.6ppt YoY or 0.6ppt QoQ to 3.9%. Due to COVID-19 and fluctuations in raw material prices, GM in 1H22 slid YoY. To motivate employees, the firm released its equity incentive plan, leading to a 1.6ppt QoQ growth of the G&A expense ratio in 2Q22. Overall, the refined management paid off. In 1H22, the expenses ratio dropped 4.3ppt YoY to 9.3%, notably mitigating the decline of net profit margin.

Capital increase and production capacity underway; upbeat on long-term market share improvement and results elasticity. On August 2, Zhenyu Technology announced its plans to build a motor core production project in Taicang, Jiangsu province, and a structural parts production base in Zhaoqing, Guangdong. On August 24, the firm announced that the China Securities Regulatory Commission approved the private placement application of Rmb800mn. We believe this private placement would provide capital support to the capacity expansion. The factory in Zhaoqing will take orders from CATL’s Zhaoqing factory, and the factory in Taicang will take orders from existing clients, such as BYD and UMC, and new clients. The firm expands its production capacity near its core clients to improve its supply and market share. We are upbeat on the results elasticity with economies of scale paying off and the cost of raw materials marginally improving.

Financials and valuation

Given the impact of COVID-19 and high raw material prices, we cut our 2022 and 2023 net profit forecasts by 17.2% and 8.8% to Rmb324mn and Rmb626mn. The stock is trading at 32.5x 2022e and 16.8x 2023e P/E. Maintain OUTPERFORM. We also cut our TP by 16.7% to Rmb150 (43.1x 2022e and 22.3x 2023e P/E), offering 32.7% upside.

Risks

Raw material prices increase; disappointing business expansion; reliance on large clients.