Lingyi iTech is a leader in precision structural parts for consumer electronics with a full presence in “materials + precision components & structural parts & modules + assembly” along the industry chain through vertical integration. The Company’s supply to its major North America customer steadily increased in terms of material categories and product value on the smartphone side, while the mixed-reality (MR) device side may bring earnings elasticity. For its supply of structural parts, heat dissipation modules, middle frames, and other products to the major domestic customer, we estimate the average selling price (ASP) to exceed Rmb200. From the medium- and long-term perspective, the Company is cooperating with Hanson Robotics in robots and venturing into photovoltaics (PV) and battery structural parts for a presence in renewable energy, aiming to create a second growth curve. We are optimistic about the Company’s growth momentum brought by its horizontal and vertical business strategy and progress with major customers. We reiterate the "BUY" rating with a target price of Rmb8.6.

Company profile: From a leading manufacturer of precision functional parts to an intelligent manufacturing platform.

Through acquisitions and integration of upstream and downstream businesses, Lingyi iTech has achieved a full presence in “materials + precision components & structural parts & modules + assembly” along the industry chain through vertical integration. In 2021, the Company entered the new energy vehicle (NEV) track through the acquisition of Jintai Electronics. At present, its main products include top covers, battery shells and connectors to power batteries. In addition, it is making efforts in the clean energy field by providing original design manufacturer (ODM) services to Enphase, the leader in the North America microinverter market. In 1Q-3Q23, Lingyi iTech posted revenue of Rmb24.646bn, with revenue of Rmb9.357bn in 3Q23 alone (-5.14% YoY, +15.89% QoQ). Although there was some delay in the pull-in of new products by the major North America customer, the Company’s market share and value increased steadily, with the major domestic customer contributing to the increase in shipments. In terms of profit, the Company achieved attributable net profit (ANP) of Rmb622mn in 3Q23 (-16.54% YoY, +3.35% QoQ); and we estimate its 3Q23 operating profit to be Rmb810mn (+10% YoY, +72% QoQ) after excluding one-off factors and the effect of exchange rates, implying a significant improvement in operating earnings.

The major North America customer: Smartphone material categories and value steadily increased, and the MR business contributes to the earnings elasticity.

According to our calculations, Lingyi iTech has provided products to the full range of the major North America customer’s smartphones with an ASP exceeding US$22 and a supply share of approximately 40%. It will also likely extend business from structural parts to the modules and other products (such as keyboard modules, touchpads, heat dissipation modules, etc) in the future, leading to a further increase in the value. At the same time, the Company is actively participating in the research and development (R&D) of MR product lines, with first-generation products covering structural components, heat dissipation parts, soft packs and other products. We estimate that the value of a single unit exceeds US$200, making the Company a high-ASP player in the domestic supply chain. Subsequently, it is also engaged in the development of second-generation products catering to the major North America customer, with the potential to contribute to revenue growth in 2025.

The major domestic customer: Lingyi iTech supply may exceed Rmb200 in ASP based on our estimates.

In 2H23, the domestic major customer released its new flagship smartphone, and started to pull-in in 3Q, making contributions to the Company’s earnings.

As a consumer electronics platform company, Lingyi iTech supplies products including structural parts, heat dissipation modules, middle frames, cover boards and other products, and we expect its ASP to exceed Rmb200 for each unit, and in addition to the existing flagship models of its major domestic customer, the Company is likely to be included in this customer’s following full range of high-/medium-/low-end products. If the domestic major customer increases its shipment shares in 2024 as expected, Lingyi iTech will likely see significant increments in revenue.

In the medium to long term: Cooperating with Hanson Robotics in robots and venturing into PV and battery structural parts for a presence in renewable energy to create the second growth curve.

Lingyi iTech boasts the capability for both components and full-set unit production in the humanoid robot field, it independently develops rotate vector (RV) reducer and other core products, and serves as an original equipment manufacturer (OEM) manufacturer for Hanson. In the PV sector, the Company has deep ties with the global microinverter leader Enphase and becomes one of its largest ODM contract manufacturers, we estimate that the Company’s market share ranges from 30%-40%, which will likely further increase with the establishment of overseas production capacity. In the field of battery structural components, the Company has gradually expanded its presence through external acquisitions and multiple investment projects. It has strategically set up four major structural component factories in regions like Fujian to cater to core customers, which includes CATL, Eve Energy and REPT Battero.

Potential risks: Affected downstream demand by macroeconomic fluctuations; disappointing new product and material expansion; slower-than-expected development progress of new business; less-than-expected new production capacity release; exchange rate fluctuations; intensified industry competition, etc.

Investment strategy: As a leader in precision structural parts for consumer electronics, Lingyi iTech has become an intelligent manufacturing platform through vertical integration and horizontal expansion. It forges deep ties with its major North America customer, and consistently enriches its business coverage, product lines and material categories to meet the needs of this customer. In addition, it has also actively built presence in emerging markets such as foldable displays and augmented reality/virtual reality (AR/VR). In the renewable energy field, Lingyi iTech grasps the opportunities to expand in the NEV and PV sectors, with visible benefits going forward. Considering that the Company may see accelerated revenue growth in 2024 driven by its major North America customer and major domestic customer and the ramp-up in the shipment of MR products, we raise our 2023E/24E/25E net profit forecast for the Company to Rmb2.2bn/3.0bn/3.9bn (from Rmb2.2bn/2.7bn/3.1bn), equivalent to EPS forecast of Rmb0.32/0.43/0.55, respectively. Considering the average valuation of ~18x 2024E PE (based on Wind consensus estimates) for comparable companies in the field of consumer electronics precision parts, namely Luxshare Precision (002475.SZ), BYD Electronic (00285.HK) and Everwin Precision (300115.SZ); and the average valuation of ~18x 2024E PE (based on Wind consensus estimates) for comparable peers in the field of battery structure parts, including Kedali (002850.SZ) and Zhenyu Technology (300953.SZ), we assign 20x 2024E PE to derive a target price of Rmb8.6 after factoring in the Company’s quality customer resources and visible fast revenue growth driven by its major customers. We reiterate the “BUY” rating.