LANDAI TECHNOLOGY GROUP(002765)：NEV COMPONENTS REGISTER HIGH EARNINGS GROWTH;AUTOMOTIVE DISPLAY BUSINESS PROMISING

　　1H22 results in line with our forecast

    　　Landai Technology Group (Landai) announced 1H22 results: Revenue declined 16.5% YoY to Rmb1.35bn; attributable net profit decreased 23.7% YoY to Rmb91.7; and recurring attributable net profit rose 4.8% YoY to Rmb80.5mn. In 2Q22, revenue dropped 31.1% YoY or 23.1% QoQ to Rmb588.1mn; attributable net profit slid 48.4% YoY or 17.7% QoQ to Rmb41.4mn; and recurring net profit fell 27.0% YoY or 25.7% QoQ to Rmb34.3mn.

    　　Trends to watch

    　　Multiple factors caused profit margin to decline, which we expect will gradually recover thanks to business structure optimization and economies of scale. In 1H22, gross margin (GM) fell 1.3ppt YoY to 17.1% and attributable net margin edged down 0.6ppt YoY to 6.8%. In 2Q22, GM declined 3.6ppt YoY or 0.5ppt QoQ to 16.8% and attributable net margin decreased 2.4ppt YoY but rose 0.5ppt QoQ to 7.0%. Landai received forex gains (accounting for 1.7% of revenue) thanks to USD appreciation, and its financial expense ratio fell in 1H22. However, raw material prices stayed high and equity incentive expenses (1.5% of revenue) weighed on earnings. As a result, the firm’s profit margin moderately dropped. We see upside in profit margin as Landai continues to optimize business structure and yields growing economies of scale.

    　　Power transmission business: Registered growth despite industry downturn in 2Q22; NEV component products to generate earnings. In 1H22, revenue from Landai’s automotive component manufacturing business increased 17.8% YoY to Rmb416.4mn, with GM up 2.3ppt YoY to 11.8%.

    　　New energy vehicle (NEV) components: Landai mass-produced some NEV components in 1H22. Its gear shafts and motor shafts for reducers have been sold to leading tier-1 suppliers - i.e., Nidec, Valeo, and GLB Intelligent Power Technologies - which in turn sell their products to automotive brands including Geely, SAIC, BYD and Sokon, among others. Given that downstream demand remains robust, Landai is planning new production bases.

    　　Motor balance shaft assembly: We believe the domestic motor balance shaft assembly market holds sizable demand potential.

    　　Automated transmissions: Landai’s 6AT products have been sold in overseas markets via mass production capabilities, erating incremental earnings. We believe NEV-related products will fuel strong revenue growth with the penetration rate of NEV rising and the firm’s capacity expanding.

    　　Touch screen and display business: Consumer electronics and industrial control systems under short-term pressure; automotive display becoming a key growth engine. In 1H22, revenue from Landai‘s electronic component manufacturing business dropped 25.9% YoY to Rmb854.8mn, with GM down 1.8ppt YoY to 19.2%. The firm’s consumer electronics and industrial control systems came under short-term pressure in 1H22 due to industry-wide growth decline, consumption downgrading, and tight global supply that led to deferred product delivery. Regarding its automotive display system business, Landai stepped up efforts to acquire clients and develop new offerings. It built closer ties with well-known tier-1 suppliers and its products finally entered the value chain of domestic automobile brands such as Great Wall Motor, Geely and SGMW, among others, which yielded incremental earnings. Given the booming smart cockpit sector, we think Landai can leverage its client resources to build the automotive display business into a new growth engine.

    　　Financials and valuation

    　　Our 2022 and 2023 earnings forecasts remain unchanged. The stock is trading at 20.4x 2022e and 14.7x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb12, implying 26.7x 2022e and 19.4x 2023e P/E, with 32.0% upside.

    　　Risks

    　　Volatile exchange rates and geopolitical situation; disappointing new projects; rising raw material prices.