ROCKCHIP ELECTRONICS(603893)：1H22 RESULTS IN LINE;MASS PRODUCTION OF HIGH-END CHIPS TO BOOST EARNINGS

　　1H22 results in line with our expectations

    Rockchip Electronics (Rockchip) announced its 1H22 results: Revenue fell 9.91% YoY to Rmb1.24bn, and attributable net profit rose 2.81% YoY to Rmb272mn. In 2Q22, revenue declined 14.08% YoY to Rmb699mn, and attributable net profit grew 22.82% YoY to Rmb188mn. The firm’s 1H22 results are in line with our expectations but slightly beat market consensus. We maintain an OUTPERFORM rating and our TP at Rmb119.6.

    　　Trends to watch

    　　In 1Q22, COVID-19 resurgence weighed on Rockchip’s supply chain, dragging its revenue down 3.9% YoY. In 2Q22, supply chain disruptions have largely improved. However, demand from the downstream consumer electronics industry fell, leading to 14.08% YoY contraction in the firm’s revenue. We believe the firm’s 1H22 results slightly beat market expectations despite the market’s pessimism about consumer electronics, mainly because: 1) the mass production of the firm’s new generation of high-performance flagship processor RK3588 has partially offset the weak performance of its traditional business; and 2) the firm recorded solid attributable net profit of Rmb272mn in 1H22. Specifically, the firm revised the fair value of its investments (e.g., GEO-CHIP, ChangZhou ChemSemi, and UniVista) up by Rmb48mn within the reporting period. As the high-end product (e.g., RK3588) takes a long time to design, we believe the mass production of these products may mostly occur in 2H22, driving rapid growth in the firm’s revenue and profit HoH in 2H22.

    　　Product wise, in 2020the firm released its new generation of intelligent vision processors, RV1109 and RV1126, and in 2021 launched its high-end intelligent visual processor, RK3588. These products have been well received by industry leading clients. In March 2022, the firm rolled out its new value-for-money intelligent vision processors, RV1103 and RV1106, further broadening its product mix to cover low-end, mid-range, and high-end intelligent vision products. The firm’s RV1103 and RV1106 enjoy competitive advantages in intelligent coding and image processing with low power consumption and upgraded neural processing unit (NPU).

    　　According to its announcement, Rockchip’s RK3568M and RK3588M are undergoing AEC-Q100 tests, and they have already been adopted by several automakers. The firm expects the tests to be completed by end-2022, and vehicles that are equipped with these two products to hit the market in 2023.

    　　Financials and valuation

    　　We left our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 52.5x 2022e and 36.1x 2023e P/E. We maintain an OUTPERFORM rating and our TP at Rmb119.6, implying 42.2x 2023e P/E and offering 16.9% upside.

    　　Risks

    　　Demand for consumer electronics weakens; market competition intensifies; insufficient production capacity; employee attrition.