1Q22 results in line with our forecast

Ankura Smart Transmission Engineering Technology (Ankura) announced its 1Q22 results: Revenue rose 2.84% YoY and 40.89% QoQ to Rmb236mn, and attributable net profit grew 22.92% YoY and 62.77% QoQ to Rmb68mn, in line with our expectations.

Trends to watch

Steady YoY growth sustained despite high base of last year. The firm’s quarterly revenue is relatively volatile as gas insulated transmission line (GIL) projects are constructed and delivered according to differing schedules. In 1Q21, revenue surged 240% YoY to Rmb229mn, accounting for 28% of full-year total, mainly due to the completion of Yanziji GIL project and incremental contribution from connector and substation businesses. In 1Q22, revenue rose by another 2.84% YoY from a high base in 1Q21 and increased 40.89% QoQ. Over the same period, gross margin and net margin expanded 0.4ppt and 4.7ppt YoY to 50.6% and 28.8%, while expense ratio picked up 0.4ppt YoY to 15.9%.

Remain upbeat on earnings potential in 2022 and longer-term growth prospect. Cable connectors: We estimate segment’s revenue will likely increase 15% thanks to recovering power grid investment and Ankura’s improved incentive system for marketing employees. GIL: We expect the GIL projects in Nanjing (Rmb179mn tender won at end-2022), Caoshan Tourist Resort (Rmb571mn tender won in June 2021) and Sinochem Huaxing Petrochemical’s GIL renovation project (Rmb26mn tender won in December 2021) to recognize Rmb480mn revenue in 2022. Coupled with new projects scheduled to begin operation in 2022, this may drive up GIL revenue by 90% YoY to Rmb553mn in 2022. Smart modular substations: Since 2022 Ankura has secured over Rmb400mn in orders for smart modular substations. We expect revenue from smart modular substations to reach Rmb100mn in 2022. Over the longer term, we see strong growth potential in GIL and modular substations, which are both at the early growth stage. We believe Ankura may achieve robust growth over the long term as it accumulates project experience and a solid track record.

New contract for smart modular substations. At end-March, Ankura announced that it had signed an EPC contract with Shanghai Electric to build smart modular substations for Tencent’s Yizheng Dongsheng cloud computing internet data center. The smart modular substations can save land occupation by 60% and construction time by 50% compared with the traditional substations. Moreover, the full insulation solution helps support reliable power supply. We think the firm’s success in securing the new project indicates its visible competitive advantages, and should help Ankura further expand its smart modular substation business.

Financials and valuation

We leave our 2022 and 2023 net profit forecasts unchanged at Rmb304mn and Rmb438mn. The stock is trading at 21.4x 2022e and 14.8x 2023e P/E. We maintain OUTPERFORM and TP of Rmb59.70, implying 33.0x 2022e and 22.9x 2023e P/E, offering 54.3% upside.

Risks

GIL promotion disappoints; fiercer competition in GIL industry; low net OCF.