Company Profile

BFarasis Energy Gan Zhou Co., Ltd. is a China-based company mainly engaged in the research, development, production and sales of lithium-ion power batteries for new energy vehicles and battery systems for complete vehicles. The Company also provides integrated solutions for power batteries for new energy vehicle manufacturers. The Company’s main products are batteries, modules and battery packs for ternary soft pack power batteries. Its products are used in new energy passenger vehicles, new energy special vehicles and electric motorcycles. The Company conducts its businesses within the domestic market and to overseas markets. (Source: Reuters)

Event

Farasis Energy Gan Zhou Co., Ltd. (“Farasis Energy”/ the company) announced its third-quarter financial results of 2022.

In the first nine months of 2022, Farasis Energy reported CNY 8.63 billion in revenue, a surge of 339.2% year on year (YoY); its gross margin was 10.9%; the company reported its net income attributable to shareholders at CNY-278 million, with net margin attributable to shareholders at -3.2%.

In Q3 alone, Farasis Energy reported CNY 3.41 billion in revenue, up 213.2% from a year earlier but down 7.7% from a quarter earlier, leading to its gross margin at 6.7%; it reported its net income attributable to shareholders at CNY -120 million, with its net margin attributable to shareholders at -3.5%, down 5.8 percentage points from that in Q2.

On November 10th, the company announced to raise funds of CNY 3.32 billion through private placement, with issuance price at CNY 23.7 per share. The company planned to issue 140 million shares.

Comments

Farasis Energy turned losses into profits in Q2 while it reported its net income attributable to shareholders at CNY-120 million in Q3, showing its profitability under pressure once again.

Its scale effect is likely to improve and its profitability will enhance effectively as its new production capacity in Zhenjiang, Wuhu, Hanzhou and An’ning is to release in the upcoming years.

Guangzhou Industrial Investment Holdings Group (GIIHG) and Guangzhou Industrial Investment and Capital Operation Holding Group Ltd, which are state-controlled investment companies, will be introduced through this private placement, and this move will further facilitate the company’s business expansion.

Earnings forecast and investment recommendation

Farasis Energy focuses on soft pack cells, new production capacity helps expand its energy storage business, and the introduction of state-controlled investment companies will facilitate its business expansion.

The company’s Q3 performance was under pressure. The company’s production capacity and product will boost its profitability as its capacity is to release in the upcoming years along with its newly-launched CTP technology.

We estimated its net income attributable to shareholders at CNY 10 million in 2022, CNY 1.02 billion in 2023, and CNY 2.11 billion in 2024, implying a P/E ratio to 2977.2x, 28.7x, and 13.8x, based on the closing price on November 11th of 2022.

We give it an “Outperform” rating with the first coverage.

Potential risks

slower-than-expected production capacity expansion; less-than-expected orders from big clients; slower-than-expected promotion of new technologies; weaker-than-expected cost control