WENCAN DIE CASTING(603348)：3Q21 REVENUE AND PROFIT UNDER PRESSURE;INTEGRATED DIE-CASTING BUSINESS IS RESILIENT

3Q21 results miss our expectations

    Wencan Die Casting announced 3Q21 results: Revenue rose 14.9% YoY (-5% QoQ) to Rmb933mn, and attributable net profit fell 111.2% YoY (-119.3% QoQ) to -Rmb4.46mn, missing our expectations. The impact of rising prices for raw materials on the firm’s net profit was greater than expected.

    Trends to watch

    Pressures from microchip shortage persist; sales volume of downstream customers diverges; upbeat on future growth outlook. Revenue in 3Q21 dropped QoQ due to the global chip shortage, and the performance of downstream automakers diverged. The volume of sales at NIO rose 11.6% QoQ to 240,000 units, but sales volume at FAW Volkswagen and SAIC Volkswagen fell 12.2% QoQ in 3Q21. As wholesale volume in the automobile industry grew more than 10% both YoY and QoQ in September, we think chip supply has improved marginally. As chip pressures continue to ease, the auto industry will likely enter a restocking period. This, together with higher penetration rate of alternative fuel vehicles (AFV), will likely push up sales volume of AFV in 4Q21. We expect the firm’s revenue to recover moving forward.

    Earnings under pressure; capacity expansion continues. Due to rising aluminum prices and problems with production schedules of downstream customers, Wencan Die Cast’s gross margin dropped to 15.9% in 3Q21, down 7.67ppt YoY and -1.91ppt QoQ. The firm’s overall expense ratio was stable (+0.4ppt QoQ). However, its attributable net profit margin turned negative to -0.5% due to pressure on GM and larger impairment losses in 3Q21. The firm continued to invest in factory construction. 3Q21 capex reached Rmb125mn. In addition, the firm’s inventory turnover days and account receivable turnover days increased slightly, reflecting reduced operating efficiency. Looking ahead, we expect the firm’s earnings to rebound as its revenue increases and raw material prices stabilize or fall.

    Competition landscape for integrated die-casting structural parts suppliers clearer; Wencan to acquire new customers and new orders on first-mover advantages. In October 2021, Tesla announced that the Model Y could be produced using integrated die-casting. Also, XPeng has applied for land to build its integrated die-casting factory. We think the competition landscape in the die-casting market has become clearer. Wencan has technical layouts in three major die-casting roadmaps (high-pressure die-casting, low-pressure die-casting, and gravity die-casting). It also has rich experience in the production of medium and large structural parts, in our view. The firm has also managed to apply large die-casting equipment to its manufacturing. We think the firm has first-mover advantages in terms of mold design, and experience in using die-casting equipment. We expect the firm to acquire customers and orders rapidly amid the development of integrated die-casting structural parts.

    Financials and valuation

    Considering that raw material prices are soaring and pressure from the chip shortage continues, we lower our 2021 net profit forecast 59.9% to Rmb120mn. We keep our 2022 net profit forecast unchanged. The stock is trading at 17.1x 2022e P/E. We maintain an OUTPERFORM rating and our target price of Rmb42, implying 23.1x 2022e P/E with 35% upside.

    Risks

    Further rise in raw material prices; slower-than-expected easing of global chip shortage.