Core views:

FRD is a veteran service provider of electromagnetic shielding and thermal conduction solutions with more than 20 years of experience in the industry. Beyond its legacy communication and consumer electronic products, FRD is actively developing new energy products to provide integrated thermal management, electromagnetic shielding and lightweight solutions for new energy vehicles (NEVs), photovoltaics (PV), energy storage and so on. We expect FRD to deliver robust earnings growth ahead, benefiting from the rapid growth of the new energy industry and the rebound in profitability thanks to the improved capacity utilization rate. We initiate coverage with a "BUY" rating for the Company.

Abstract:

A leader in electromagnetic shielding and thermal conduction solutions with a 20-year presence

FRD has developed a series of products and solutions for electromagnetic shielding and thermal conduction applications, which are applied in the fields of communication, consumer electronics, new energy and so on. In recent years, driven by the products in new energy applications, such as battery end plates, liquid cold plates, thermal paste, inverter radiators, etc., the Company's revenue from thermal management materials and devices has increased from 13% of the total in 2018 to 33% in 1H22, becoming the top contributor to the total revenue and likely to achieve rapid growth in the future.

Product lines improved through M&As to build solution capabilities

FRD has built an integrated product matrix through independent R&D and the acquisition of Broadradio, Kunshan New Material and Runxingtai. With products covering the fields of electromagnetic shielding, thermal management, base station antennas, lightweight materials, and functional components, FRD is capable of meeting the integrated and lightweight equipment needs of customers in the communications, consumer electronics and new energy industries and providing one-stop solutions for customers on the back of its diversified product categories.

Another takeoff driven by the fast growth of NEVs, energy storage & PV

We believe that PV will likely become the major energy source in 2025. NEVs will also likely see rapid growth in penetration and output/sales. Electrochemical energy storage is likely to become the natural choice driven by high growth in new energy generation. The above-mentioned industries all have strict requirements for electromagnetic shielding, thermal management and lightweight components. With enhanced investments, FRD has accumulated customers in the fields of NEVs and energy storage, e.g., CATL, GAC Group and Sungrow. In the future, it will likely achieve rapid growth in new energy products with the fast development of the new energy industry.

An inflection point has arrived with a visible rise in profitability ahead.

FRD's profitability showed a downtrend in the past two years due to massive investment and less-than-expected demand from communication and consumer electronics. In 1Q/2Q22, with the mass production of new energy products, its capacity utilization rate has increased, leading to a QoQ rise in the gross profit margin (GPM). In 2H22, the GPM will likely improve further on the back of additional capacity commissioning, while the expense ratio may decline thanks to the further improved product mix and the rise in revenue, resulting in a rebound in profitability.

Potential risks: Intensified competition; slower-than-expected development of the new energy industry; fluctuations in major raw material prices; technology confidentiality breaches and the attrition of core technical personnel; management risks related to the expanding business scale.

Investment recommendation: FRD is a veteran service provider of electromagnetic shielding and thermal conduction solutions with more than 20 years of experience in the industry. Beyond its legacy communication and consumer electronic products, FRD is actively developing new energy products to provide integrated thermal management, electromagnetic shielding and lightweight solutions for new energy vehicles (NEVs), photovoltaics (PV), energy storage and so on. We expect FRD to deliver robust earnings growth ahead, benefiting from the rapid growth of the new energy industry and the rebound in profitability thanks to the improved capacity utilization rate. We expect its 2022E/23E/24E attributable net profit (ANP) to reach Rmb11mn/207mn/415mn, implying a CAGR of 186%. Based on the PEG and PE valuation methods, we assign 27x 2024E PE to derive a target market cap of Rmb11.2bn, corresponding to a target price of Rmb22, and initiate coverage with a "BUY" rating.