CWB AUTOMOTIVE ELECTRONICS(605005)：RISING RAW MATERIAL PRICES ERODE EARNINGS;SALES VOLUME OF AFV PRODUCTS RISES

　　2021 and 1Q22 results miss our forecast

    　　CWB Automotive Electronics (CWB) announced its 2021 results: Revenue rose 18.32% YoY to Rmb1.422bn and net profit attributable to shareholders increased 2.75% YoY to Rmb195mn. In 4Q21, revenue fell 3.10% YoY to Rmb411mn (+20.77% QoQ) and attributable net profit dropped 42.97% YoY to Rmb41mn (-13.14% QoQ). The firm also announced 1Q22 results: Revenue increased 8.68% YoY to Rmb344mn (-16.33% QoQ) and attributable net profit dropped 34.16% YoY to Rmb33mn (-19.60% QoQ). The firm's 2021 and 1Q22 results missed our expectations, as prices of copper, plastic components, and other raw materials increased.

    　　Trends to watch

    　　Consumer electronics business grows steadily; sales volume of AFV products increases rapidly. In 2021, revenue from the consumer electronics business increased 15.4% YoY to about Rmb310mn, and revenue from the auto electronics business rose 13.2% YoY to around Rmb950mn. Revenue from alternative-fuel vehicle (AFV) related products jumped 297.4% YoY in 2021 to Rmb59mn, and revenue from these products as a percentage of total revenue in the auto electronics business increased to 6.3%, as Volkswagen, Bosh, and CATL's AFV projects started mass-production. Looking ahead, we think the firm's AFV products will become a signification revenue source as the sales volume of AFVs rises.

    　　Rising raw material prices erode earnings in short term; increases R&D investment to improve technologies. Its gross margin (GM) dropped 13.35ppt YoY to 23% in 4Q21 (-9.36ppt QoQ). In addition to the new accounting standard, we think the following factors also eroded the firm's earnings. First, prices of copper, plastic components and other commodities began to increase in 3Q21. Given the firm's inventory cycle, we think higher raw material prices weighed on its earnings in 4Q21. Second, the AFV related product business was at a ramp-up stage. The utilization rate of manufacturing facilities remained relatively low, in our view. CWM increased R&D investment, as evidenced by its R&D expense ratio rising 0.6ppt YoY and 0.1ppt QoQ to 5.2% in 1Q22. We think in 2Q22 the firm's profitability will continue to face short-term headwinds, as the pandemic may weigh on customers' production capacity and raw material prices remain high.

    　　Adds high-voltage connectors and smart cockpits to its product portfolio. The high-voltage connector market is sizable. CWB has rolled out AFV battery, motor and control systems, and smart auto cockpit products. It has also won orders from multiple mass-production projects, such as the LG smart cockpit project, the UAES AFV motor system project and the GWM battery management system project. CWB has released plans to upgrade related manufacturing facilities. In our view, the company has advanced model technologies, and it should win additional high-voltage product orders and gain new growth engines going forward.

    　　Financials and valuation

    　　We cut our 2022 net profit forecast 28.3% to Rmb229mn to reflect the impact of higher raw material prices, and introduce our 2023 net profit forecast at Rmb296mn. The stock is trading at 23.9x 2022e and 18.5x 2023e P/E. We maintain an OUTPERFORM rating, but cut our target price 53.7% to Rmb17 to reflect the downturn in the sector. Our TP implies 30.0x 2022e and 23.2x 2023e P/E, offering 25.2% upside.

    　　Risks

    　　COVID-19 pandemic weighs on production capacity of automakers; raw material prices increase more sharply than we expected; new projects proceed more slowly than we expected.