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IAT Automobile Technology (IAT) recently announced a plan to establish a joint venture (JV), Shenzhen Gecko Innovation Technology Co., Ltd. (Gecko) with IAT chairman Qiwu XUAN, Jiangfeng LIU and Faristar (HK) Investment Holding Limited (holding 10%, 4%, 63% and 23% of the JV). According to the company, the JV will focus on skateboard chassis technology and products, in line with the growing shift towards electric and intelligent vehicles.

Comments

High compatibility of skateboard chassis to enhance vehicle R&D efficiency and lower development cost. Based on modular platform technology, the skateboard chassis integrates the electric motor, controller and battery system, the braking and steering system and the suspension system. It is highly compatible with different types of vehicles thanks to its modular design, enhancing both chassis modules’ reusability and parts’ compatibility. In addition, the skateboard design is applicable to multiple powertrains and car models, allowing automakers to accelerate rolling out new models and meeting consumers’ demand for personalized design. Emerging automakers such as Rivian have forayed into the skateboard chassis market.

Leveraging experience in design services to empower development of skateboard chassis; using private placement proceeds to fund R&D of modular platform. IAT boasts strong expertise in engine systems, car body structures and chassis systems thanks to its extensive experience in automotive design services, laying a foundation for its foray into the skateboard chassis market. In addition, the company plans to use the proceeds from a recent private placement to fund the R&D of frontier technologies such as the modular platform, high performance power unit system and electrical/electronic architecture (EEA). We believe the establishment of the skateboard chassis subsidiary marks a significant step towards IAT’s technology industrialization goal and could create a new growth driver for the company.

Aiming for domestic leadership in third-party design services; riding the tide of auto electrification and intelligentization. On the one hand, emerging automakers and leaders in other industries are expanding their presence in the auto industry, while traditional automakers are boosting their presence in electric vehicle sector by accelerating the rollout and upgrade of EV models. On the other hand, the growing shift towards electric and intelligent vehicles is spurring demand for diversified and personalized design, further expanding demand for automotive design services. We think emerging automakers and IAT are complementary to each other and their successful cooperation on Li ONE and XPeng G3 should help IAT acquire more EV clients and pave the way for wider cooperation. Over the long term, we believe the company, as an industry leader, will likely benefit significantly from a trend towards intensive R&D and specialization in auto design amid intensifying sector competition.

Valuation and recommendation

We maintain our 2021, 2022 and 2023 earnings forecasts. The stock is trading at 22.7x 2022e and 17.9x 2023e P/E. Looking ahead into 2022, we expect IAT’s design services to maintain solid growth thanks to accelerated recognition of revenue from design services and fading market concerns about certain clients. We maintain an OUTPERFORM rating and a TP of Rmb41.00, implying 34.9x 2022e P/E and offering 54.0% upside.

Risks

Disappointing business expansion of subsidiary and/or delivery of new orders.