DEYE TECHNOLOGY(605117)：INVERTER BUSINESS BOOSTS OVERALL EARNINGS GROWTH;1Q22 RESULTS IN LINE

　　1Q22 results in line with our forecast

    　　Deye Technology announced 1Q22 results: Revenue slid 2.7% YoY to Rmb841mn, and net profit attributable to shareholders grew 31.8% YoY to Rmb132mn. Results are largely in line with the firm's previous preannouncement and our expectation.

    　　Heat exchanger business erodes earnings. In 1Q22: 1) Revenue from the heat exchanger business dropped 41.3% YoY, while revenue from the dehumidifier business rose 38.0% YoY. Heat exchanger revenue declined, as the business climate of the downstream air conditioning industry weakened and demand from large clients decreased. 2) We believe the heat exchanger business will remain under pressure, given weakening air conditioning demand and high prices of copper pipes, aluminum foil and other raw materials.

    　　Inverter business continues to grow rapidly, boosting overall earnings growth. 1) The firm's inverter revenue jumped 102.3% YoY in 1Q22. 2) The rapid growth of the high-GM inverter business offset the impact of decreased heat exchanger revenue. We estimate that profit of the inverter business as a percentage of total profit exceeded 50% in 1Q22.

    　　Financial analysis: 1) The firm's gross margin (GM) rose 5.0ppt YoY to 24.3% in 1Q22, and net profit margin increased 4.1ppt YoY to 15.7%. Against the backdrop of higher raw material prices, the firm's earnings remained solid thanks to the rising contribution of the high-GM inverter business. 2) The firm's contract liability jumped 71% QoQ in 1Q22, driven by the advance from inverter customers.

    　　Trends to watch

    　　Demand from the global PV industry is strong; penetration rate of China-made inverters increases at a faster pace. We believe the world's incremental installed capacity of photovoltaic (PV) units will continue to increase rapidly in 2022. The penetration rate of China-made inverters in overseas markets may increase at a faster pace, as domestic companies continue to improve inverter technologies and maintain cost advantages. Inverter demand in the country has increased, thanks to the sustained growth of installed capacity of distributed PV units, boding well for Deye Technology's domestic business, in our opinion.

    　　The firm's product advantage is notable; domestic production of IGBT accelerates. Deye Technology has gained decided competitive advantages in energy storage and micro inverters, in our view. Its overseas sales exceed those of other domestic companies. The firm continues to increase its production capacity, rolling out multiple new products. In 2021, it stocked up on products to control costs, accelerated domestic production of insulated-gate bipolar transistors (IGBT), and improved its supply chain management capability. We think that in 2022, the domestic production rate of IGBT will continue to increase, and the firm will keep removing production capacity related bottlenecks. Shipment of its inverters should keep rising rapidly, in our view, thanks to capacity expansion.

    　　Financials and valuation

    　　We maintain our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 42.2x 2022 and 31.6x 2023 P/E. We maintain an OUTPERFORM rating and a target price of Rmb281.83. Our TP implies 56.3x 2022 P/E and 42.8x 2023 P/E, offering 34% upside.

    　　Risks

    　　Fluctuations in downstream industries; overreliance on largest customer; volatile prices of major raw materials.