1H22 results in line with our forecast

Harmontronics Automation Technology （Harmontronics） announced that in 1H22, revenue increased 40.4% YoY to Rmb363mn and attributable net profit surged 134.8% YoY to Rmb50mn; recurring attributable net profit grew 20.6% YoY to Rmb11mn. The firm’s 1H22 results were in line with our forecast. In 2Q22, revenue increased 51.8% YoY to Rmb264mn and attributable net profit surged 134.2% YoY to Rmb48mn; recurring attributable net profit increased 25.4% YoY to Rmb25mn.

Delivering battery charging and swapping facilities in bulk. In 1H22, revenue from auto electronics facilities, battery charging and swapping facilities, and alternative fuel vehicle （AFV） battery facilities came in at Rmb169mn, Rmb134mn, and Rmb43mn, with the gross margin at 37.6%, 24.5%, and 26.7%. Harmontronics delivered battery charging and swapping facilities in bulk in 1H22. The COVID-19 resurgence caused the delivery of other businesses to delay. Due to the impact of structural business changes, blended gross margin fell 3.6ppt YoY to 31.7% in 1H22.

Expense control strengthened; economies of scale boosted growth. In 1H22, selling, G amp;A, and R amp;D expense ratios were down 2.2ppt, 1.2ppt, and 3.0ppt YoY, while financial expense ratio rose 1.7ppt YoY mainly on more bank loans. In 1H22, fair value gains from other non-current financial assets totaled Rmb42.15mn, up Rmb31.20mn YoY. As a result, net margin rose 5.5ppt and 6.4ppt YoY to 13.8% and 18.3% in 1H22 and 2Q22. As of end-1H22, contract liabilities equaled Rmb238mn, increasing by Rmb85mn and Rmb125mn compared with 1H21 and early 2022, implying ample backlog orders.

Trends to watch

Market for battery swapping for commercial vehicles increasingly mature; Harmontronics boasts a competitive client base. Data from Evpartner shows that the sales volume of new energy heavy-duty trucks （HTD） surged 386% YoY in 7M22 to 11,600 units, and increased 119% YoY in July to 1,455 units. Specifically, the sales volume of new-energy HDT with battery-swapping functions grew 8.1 times YoY to 5,513 units in 7M22, representing 47.3% （vs. 22.8% in 7M21） of total sales volume. We believe that the market for battery swapping for commercial vehicles （CV） is increasingly mature in terms of technologies, synergies in industrial chains, and costs. We expect sales of CVs with battery-swapping functions and the construction of battery swapping stations to maintain rapid growth in the next few years.

Markets for auto electronics facilities and LiB facilities remain buoyant. The firm’s backlog orders for auto electronics facilities maintain fast growth as capex in the auto electronics sector recovers. We expect a growing popularity of electric and smart autos will support steady growth of the auto electronics sector and thus drive up capex in facilities. The firm announced on August 19 that it won Rmb834mn of orders from Amer for battery activation and capacity upgrading facilities. The order value was 3.9 times higher than the firm’s revenue from lithium-ion battery （LiB） facilities in 2021. We believe that the LiB facilities business will start to generate incremental growth.

Financials and valuation

We maintain our 2022 and 2023 EPS forecasts of Rmb1.62 and Rmb2.80. The stock is trading at 41x 2022e and 24x 2023e P/E. As we think the improving growth prospects of the battery swapping sector will likely push up the firm’s valuation, we raise our target price by 8% to Rmb75.87, implying 47x 2022e and 27x 2023e P/E, offering 15% upside. Maintain OUTPERFORM.

Risks

Disappointing product delivery and/or construction of battery swapping facilities.