2021 results in line with our forecast

Ankura Transmission Engineering Technology (Ankura) announced that revenue rose 52.35% YoY in 2021 and 7.39% YoY in 4Q21 to Rmb806mn and Rmb167mn, while attributable net profit grew 50.29% and 701.55% YoY to Rmb200mn and Rmb42mn, in line with our expectations.

Trends to watch

GIL business revenue rises 82.91% YoY; upbeat on high growth visibility secured by comprehensive advantages. In 2021, gas　insulated transmission line (GIL) products and system services contributed Rmb291mn (36.15%) to Ankura revenue, a rise of 82.91% and 6ppt YoY, with gross margin rising 9.52ppt YoY to 65.13%. We think that the GIL tenders that Ankura won in 2020 and 2021 will recognize revenue of around Rmb480mn in 2022, including the Rmb179mn Nanjing Yanziji project, the Rmb571mn Caoshan tourist resort project, and the Sinochem Group’s renovation project. Ankura should also secure new orders in 2022.Looking ahead, we see strong growth potential in GIL applications in relocating of urban overhead lines underground, in UHV transmissions and in industrial parks. We believe that Ankura has high growth visibility backed by its technological strength, cost advantages, and solid track records. We expect GIL revenue to grow at a CAGR of 74% over 2021-2023.

Major business cable connectors maintained steady revenue and　high profitability. In 2021, revenue for cable connectors rose 22.99% YoY to Rmb313mn. Revenue for medium-to-low-voltage connectors fell 15.34% YoY to Rmb5.9mn; 110 (66)kV connector revenue rose 1.54% to Rmb136mn; 220kV connector revenue slipped 27.84% to Rmb49mn; and revenue for 330-500kV connectors jumped 261.17% to Rmb52mn. Gross margins of the three products were 44.47%, 61.37% and 64.28%. We expect the cable connector business to deliver a revenue CAGR of 15% over 2021-2023 thanks to a recovery of investment in power grids and stronger incentives for the marketing team.

Smart modular substations business proactively expanding. In 2021,revenue and gross margin of smart modular substations business increased 345.32% and 9.33ppt YoY to Rmb44mn and 30.42%. Ankura explored a new leasing-based cooperation model with State Grid Jiangsu Integrated Energy Service and expanded the use of modular substations by governments and central SOEs in alternative energy, cultural tourism　property, consumer electronics, and temporary electricity. We believe that such moves will boost growth going forward. We think the firm’s new modular substation capacity will come online at end-2022 or early 2023 and will facilitate business expansion and elevate gross margin.

Financials and valuation

We leave our 2022 and 2023 net profit forecasts unchanged at Rmb304mn and Rmb438mn. The stock is trading at 23.4x 2022e and 16.2x 2023e P/E.We maintain OUTPERFORM and our TP of Rmb59.70, (33.0x 2022e and 22.9x 2023e P/E), offering 41.1% upside.

Risks

GIL promotion disappoints; GIL market competition intensifies; low net OCF.