1Q22 results in line with our expectation

LinControl Automotive Electronics announced its 1Q22 results: Revenue fell 14.5% YoY (-27.7% QoQ) to Rmb171mn, attributable net profit rose 12.3% YoY (+139.6% QoQ) to Rmb40mn, and recurring net profit declined 10.8% YoY (+204.9% QoQ) to Rmb31mn. Gross margin (GM) increased 7.48ppt YoY (+5.33ppt QoQ) to 38.5%, hitting a new high thanks to the record-high growth of export business. The results were in line with our expectation.

Trends to watch

Cost control improved QoQ; gross margin hit a new high driven by a boom in export business. Despite the sluggish end-market sales of commercial vehicles and a YoY and QoQ decline in the firm’s revenue, its gross margin reached 38.49% (an all-time high), and net profit rose 12.34% YoY (+139.60% QoQ) in 1Q22, thanks to the rich application scenarios of the firm’s products and strong growth of its high-GM export business. Due to the firm’s business expansion and increased equity incentive expenses, expense ratio trended up YoY in 2021, but showed a notable marginal improvement in 1Q22. Specifically, selling expense ratio fell 1.73ppt QoQ, G&A expense ratio declined 0.36ppt QoQ, and R&D expense ratio dropped 4.83ppt QoQ. Given the need for business expansion and progress in amortization of equity incentive expenses, we think the firm’s expense ratio will likely face short-term downward pressure but may gradually improve in the future.

Revenue outperformed peers; commercial vehicle market to gradually recover. The COVID-19 resurgence in major sales regions, rising oil prices, and low logistics efficiency weighed on consumers’ willingness to purchase light-duty trucks (LDTs). As a result, LDT sales volume in China fell 19.6% YoY in 1Q21. Thanks to the increasingly rich application scenarios of the firm’s products and its strong business resilience, its revenue declined 14.5% YoY in 1Q22, outperforming peers. From a long-term perspective, we expect LDT sales to recover with the easing impact of COVID-19, improvement in logistics efficiency, and recovery of domestic consumption. Meanwhile, a Politburo meeting held on April 29 issued positive statements on real estate and infrastructure, and we expect the heavy-duty truck (HDT) industry to benefit from a potential recovery in demand. We also expect the implementation of the State IV emission standards to boost the replacement demand for non-road mobile machinery (NRMM) in 2022. Overall, we are upbeat on the recovery of the commercial vehicle market. We expect the firm to take the lead in the recovery on the back of its competitive advantages in chip procurement.

Multiple businesses booming; ample orders; new-energy passenger vehicle business to become a core growth driver in the medium and long term. The firm expects a number of its vehicle control unit and microcontroller unit products to be installed on vehicles in 2022. The firm also expects its solutions for P1+P3 hybrid vehicles to debut in 2022, and its solutions for extended-range hybrid vehicles to be adopted by automakers. Meanwhile, the firm expects its 60kW generator control units (GCU) for hybrid vehicles to come on stream in 2022. We think the sales volume of its products for new-energy passenger vehicles is growing, and expect this business to become a main revenue growth driver in the medium to long term.

Financials and valuation

We leave our 2022 and 2023 revenue and earnings forecasts unchanged. The stock is trading at 24.7x 2022e and 14.0x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb130 (33.8x 2022e and 19.2x 2023e P/E), offering 36.8% 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.