GUANGDONG HONGTU TECHNOLOGY(HOLDINGS)(002101)：CLIENT STRUCTURE CONTINUES TO IMPROVE;PRODUCT CATEGORIES GRADUALLY EXPANDING

　　1H22 results in line with our expectation
Guangdong Hongtu Technology (Holdings) Co Ltd (Hongtu) announced its 1H22 results: Revenue fell 2.4% YoY to Rmb2.90bn; attributable net profit grew 68.2% YoY to Rmb221mn; and recurring net profit edged down 0.03% YoY to Rmb124mn. For 2Q22, revenue declined 3.5% YoY (or 12.1% QoQ) to Rmb1.36bn; attributable net profit climbed 121.3% YoY (or 102.1% QoQ) to Rmb148mn; recurring net profit slid 2.4% YoY (but rose 10.1% QoQ) to Rmb65mn. The firm’s 1H22 results are in line with our expectation.
　　Trends to watch
　　Revenue grew YoY and QoQ and GM improved QoQ; divested loss-making assets to focus on main business. In 2Q22, revenue fell slightly QoQ due to weak output and sales caused by COVID-19 resurgence. Gross margin (GM) rose 1.15ppt QoQ to 19.2% in 2Q22, mainly due to falling raw material prices and compensation for the price difference from the firm’s downstream clients for previous raw material price hikes (as was specified in the contract), in our view. In April 2022, Hongtu sold its 76% stake in loss-making Baolong Motors for Rmb184mn, which should contribute Rmb78mn to net profit. The firm’s net profit rose 5.3% YoY to Rmb70mn in 2Q22 excluding this one-off gain. However, Hongtu’s net profit booked a QoQ decline of 3.8% in 2Q22 mainly due to falling revenue caused by the COVID-19 pandemic.
　　Client structure continues to improve; integrated die casting business poised for rapid growth. Revenue contribution from new energy vehicle (NEV) clients of Hongtu continued to rise. In 1H22, NEV clients contributed 17.55% of revenue to its die casting business, showing visible improvement compared with 10% in 2021. The firm has acquired new NEV customers such as XPeng, Leapmotor, Spotlight Automotive and NETA Auto, and continues to improve the structure of its client base. In addition, Hongtu ramped up its integrated die casting business, and has received orders from XPeng. It has also purchased eight large die-casting machines (12,000t), and has proprietary material patents that we believe will give the firm a cost advantage. Going forward, we expect Hongtu to continue expanding the client base for its integrated die casting business and win more orders, creating a second growth driver for the firm.
　　Strengthens presence in the light weight vehicle industry; establishes subsidiaries to increase client base; introduces new technologies to expand product categories. In July 2022, Hongtu established a joint venture in Chengdu to acquire new technologies such as vacuum die casting. The firm also set up wholly-owned subsidiaries in Tianjin and Guangzhou to further expand its client base. We believe Hongtu’s expansion into cities such as Chengdu, Tianjin and Guangzhou may help it acquire more clients from neighboring regions and offer them better services. In 1H22, Hongtu acquired equipment to facilitate the introduction of new low-pressure casting and differential-pressure casting technologies to extend its product lines. In 1H22, the firm received orders for five of its products that use these new technologies, unleashing further growth potential. Hongtu is targeting opportunities in light-weight chassis. It has completed the trial production of steering products, and plans to develop subframes for downstream clients such as BYD, Geely and GAC.
　　Financials and valuation
　　We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 36.8x 2022e and 30.4x 2023e P/E. We maintain an OUTPERFORM and our TP at Rmb35 (42.4x 2022e and 35.1x 2023e P/E), offering 15.3% upside.
　　Risks
　　Raw material price hikes; volatile forex rate; disappointing business expansion; goodwill impairment.
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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。