2021 results missed our expectations

LinControl Automotive Electronics announced its 2021 results: Revenue grew 9.5% YoY to Rmb835mn, attributable net profit fell 12.3% YoY to Rmb138mn, and recurring net profit dropped 24% YoY to Rmb113mn. Its GM fell 2.2ppt YoY to 31% in 2021. In 4Q21, revenue fell 5.3% YoY (+36% QoQ) to Rmb236mn, attributable net profit declined 69.1% YoY (-60.5% QoQ) to Rmb17mn, and recurring net profit decreased 93.2% YoY (-69.5% QoQ) to Rmb10mn. Its GM in 4Q21 fell 0.8ppt YoY (+1.4ppt QoQ) to 33.2%. We attribute the low profit to expenses for the equity incentive scheme and high R&D expenses. The firm’s results missed our expectations.

Trends to watch

Ensuring supply amid chip shortage; equity incentive scheme pushed up expenses. To offset the impact of the chip shortage, the firm locked in prices by signing contracts with chip suppliers. As a result, it saw sound customer acquisition in 2021. Its revenue rose 9.5% YoY in 2021 amid tepid demand for commercial vehicles. This shows its strong operating capability and stable supply. However, its GM dropped 2.2ppt YoY in 2021, as the portion of revenue from high-value-added product R&D shrank. In addition, the firm’s selling, G&A, and R&D expense ratios rose 3.1ppt, 2.5ppt, and 12.1ppt YoY in 2021, due to higher investment in business expansion and amortization of expenses for the equity incentive scheme. We expect the firm to maintain stable supply. Given its equity incentive scheme and business expansion, we think its earnings will likely remain under pressure in the short term.

High R&D investment bolsters business product upgrading and business expansion. The firm’s products are applied in more fields, including motors, pure electric vehicles, and hybrid vehicles. It increased R&D investment and the portion of skilled workers for diversified business lines in 2021. It also stepped up efforts to develop customized products for new vehicle models. In 2021, the firm’s R&D expenses soared 113% YoY, the number of technical staff rose 49.65% YoY, and the portion of technical staff grew 4.11ppt YoY, bolstering its transformation into a maker of electric and internet-connected products. Considering that the firm will keep expanding businesses, we think its R&D investment will likely remain high in the short term.

Orders for new-energy passenger vehicles ample; production on track; revenue to grow rapidly. Sales volume of vehicle control units and microcontroller units for pure electric vehicles was 16,000 units and 1,541 units in 2021. According to the firm, it added several new products for electric vehicles, some of which will be installed in vehicles in 2022. The firm is developing solutions for extended-range hybrid vehicles and P1+P3 hybrid vehicles that are more fuel-efficient under the worldwide harmonized light vehicles test procedure (WLTP). Its solutions for P1+P3 hybrid vehicles will likely debut in 1H22. In addition, solutions for extended-range hybrid vehicles have entered the stage of off-tool sample (OTS) installation, and the firm expects the solutions to be adopted by automakers in 2H22. Its project for 60kW generator control units for hybrid vehicles will likely come on stream in 2022. We think sales volume of its products for new-energy passenger vehicles are growing, and expect this business to become a main revenue growth driver in the medium to long term.

Financials and valuation

We cut our 2022 and 2023 revenue forecasts 7.7% and 12.5% to Rmb1.17bn and Rmb2bn, and lower our 2022 and 2023 earnings forecasts 26.1% and 39.0% to Rmb199mn and Rmb349mn, given our conservative expectation on chip shipments, the expenses on equity incentive scheme, and high R&D investment. The stock is trading at 24.2x 2022e and 13.8x 2023e P/E. We maintain OUTPERFORM and lower our TP 25.7% to Rmb130 (due to lower earnings forecasts), implying 33.7x 2022e and 19.2x 2023e P/E with 39.4% upside.

Risks

Overly concentrated customer structure; accelerated replacement of gasoline EMS amid trend toward electric vehicles; declining operating cash flow; growing inventories; issues with chip procurement; impairments of accounts receivable.