DONGWEI TECHNOLOGY(688700)：1H22 EARNINGS BEAT DESPITE COVID-19;BENEFITS FROM INDUSTRIALIZATION OF COMPOSITE COPPER FOIL

　　1H22 results beat our expectations
　　Dongwei Technology announced its 1H22 results: Revenue rose 18% YoY to Rmb412mn, attributable net profit accelerated 34% YoY to Rmb93mn, and recurring attributable net profit rose 29% YoY to Rmb86mn. In 2Q22, revenue increased 16% YoY (or 11% QoQ) to Rmb217mn, and attributable net profit grew 26% YoY (or 36% QoQ to Rmb54mn. The results beat our expectations as the COVID-19 impact on 2Q22 was smaller than we expected.
　　Profitability improved due to optimized product structure and good cost control. In 1H22, the blended gross margin (GM) rose 1.1ppt YoY to 43.68% due to an optimized product structure. The overall expense ratio fell 0.6ppt YoY to 19.04%, with the selling expense ratio up 0.3ppt YoY to 7.1%. The G&A expense ratio fell 1.1ppt YoY to 4.7% due to high IPO-related expenses in 1H21. The R&D expense ratio largely remained flat YoY at 7.3%. Net margin rose 2.8ppt YoY to 22.6%.
　　Trends to watch
　　Composite copper foil industrialization accelerates; leading equipment suppliers may benefit first. Some downstream manufacturers of composite copper foil film materials recently announced mass production plans. We believe it marks the acceleration of the industrialization of composite copper foil, and that the industry is entering the third stage of mass production. We believe leading manufacturers will set a good example, and companies with a wait-and-see attitude will decide to accelerate industrialization. We think electroplating equipment is a submarket with strong visibility and a favorable competitive landscape, and that it will benefit from this industrialization. Dongwei Technology, as a leading supplier, may benefit first.
　　Expands to front-end magnetron sputtering equipment to build equipment supply capability for whole production line. According to the firm, its magnetron sputtering winding coating equipment is mainly used in front-end of PET composite copper foil production. The firm plans to produce the equipment in 2H22 and gradually start mass production. The firm has years of technological accumulation in vacuum coating equipment, which closely connects with the electroplating equipment process. We believe if the firm achieves the shipment of its prototype magnetron sputtering equipment in 2H22 and successfully passes client verification, it may be able to provide equipment for the whole production line in the future. We estimate the firm has taken over 80% of the market share in the back-end plating equipment for composite copper foil. It has established solid relationships with film material manufacturers. If the production efficiency and value-for-money of equipment for the whole production line improves, the firm may have a higher market share in front-end equipment, which would be a new earnings growth driver.
　　Financials and valuation
　　Given pressure on demand in the printed circuit board (PCB) industry, we cut our 2022 revenue forecast 10.9% to Rmb1.1bn. Due to an optimized product structure and reasonable expense control, we maintain our 2022 and 2023 earnings forecasts. The stock is trading at 38.4x 2023e P/E. We maintain OUTPERFORM. Considering acceleration of composite copper foil industrialization and increases in sector value, we raise our target price by 42.9% to Rmb150 (50x 2023e P/E), offering 30.2% upside.
　　Risks
　　COVID-19 resurgence weighs on downstream demand; business development of new product lines disappoints; worse-than-expected downturn in downstream PCB manufacturing; new technology’s application expansion disappoints; fiercer competition.
【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。

   【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。