KINLONG HARDWARE PRODUCTS(002791)：CENTRALIZED PRODUCTION MANAGEMENT;FOCUS ON EXPANDING COMPETITIVE PRODUCT CAPACITY

　　What's new
　　Kinlong Hardware Products (Kinlong) announced that it plans to invest about Rmb2bn in the construction of its project in Tangxia, Dongguan to manufacture hardware products for smart homes and smart security products.
　　Comments
　　The firm plans to invest in capacity expansion for smart products while pursuing centralized production management. Kinlong aims to build an industrial park in Tangxia to manufacture hardware products for smart homes and smart security products, and has invited its subsidiaries to invest. The project mainly covers products for smart homes, smart communities and light current systems, laying the foundation for future production capacity expansion. We note that the capacity at the firm’s various subsidiaries used to be decentralized. However, this project is located near the Shenzhen-Dongguan electronics manufacturing cluster, which may help the company fully utilize local supply chain resources. In addition, once the capacity of Kinlong’s subsidiaries is centralized in the new industrial park, the firm can take advantage of the management system and optimize the firm’s product mix, cost reduction and R&D coordination, and develop a comprehensive product portfolio of smart products.
　　Smart products represent the firm’s new competitiveness; to boost integration of product mix. In our opinion, as consumers are increasingly valuing smart homes, digitalized property management and smart communities, various smart products are being used in residential, industrial or commercial buildings more widely, with a rapidly expanding blue ocean market emerging. Kinlong consolidates resources from the upstream sectors in the supply chain to produce an integrated portfolio of smart products, including barrier gates, facial recognition, security cameras and video doorbells into its smart community product series, and combining smart locks, smart switches, smart laundry racks and smart curtains into a product combo of smart home systems. The firm is also leveraging its direct sales channels to provide downstream customers with cost-effective and integrated bundles of “products plus services,” cementing the firm’s leadership in this smart product segment. We think that these planned investments also demonstrate the firm’s confidence in its development. Smart products have become a new competitive edge for Kinlong, helping the firm’s sales personnel secure more orders from clients, directing client traffic to other products, and leading to a fast-growing integrated product portfolio.
　　Recovering demand and easing cost pressure; 2H22 results promising. The firm’s results were under great pressure in 1H22, due to a weak real estate sector, lackluster real estate demand impacted by COVID-19, as well as rising costs amid the Russia-Ukraine conflict. In 2H22, we expect demand to return to normal given recovering sales in the real estate market and rising housing completions. We think the firm may see accelerated improvement in employee efficiency, contributing to robust revenue growth. In addition, with the real estate sector recovering, the firm may witness rising proportion of sales from the high-margin door and window hardware products, which is likely to boost gross margin. Moreover, against the backdrop of interest rates raised overseas and weakening demand globally, raw material prices of commodities like non-ferrous metals are likely to drop, which may enhance the firm’s gross margin, in our view.
　　Financials and valuation
　　We maintain our 2022 and 2023 EPS forecasts at Rmb3.3 and Rmb4.7. The stock is trading at 40x 2022e and 28x 2023e P/E. We maintain OUTPERFORM rating. Due to rising risk appetite in the market and greater possibility of demand recovery, we raise our target price by 57% to Rmb165 (35x 2023e P/E), offering 27% upside.
　　Risks
　　Disappointing recovery of demand from housing completions; rises in raw material prices sharper than expected; disappointing improvement in employee efficiency.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。