1H18 earnings meet expectation
Tianneng Power International announced 1H18 results: Revenuerose 27.7% YoY to Rmb14.5bn; net profit increased 16.9% YoY toRmb0.51bn or Rmb0.46per share, meeting our expectation. Grossmargin dropped 0.9ppt YoY due to price declines and high prices ofthe firm’s core raw material, lead.
Trends to watch
Continues to lead in lead-acid batteries. Revenue from e-bike ande-tricycle batteries surged 31.8% YoY to Rmb12.2bn on steady growthin domestic demand. Revenue from special purpose batteriesincreased 30.2% YoY to Rmb1.14bn, providing stable cash flow.
Tianneng’s market share kept rising, further cementing its leadingposition in lead-acid batteries.
Lithium battery revenue in structural decline. Revenue from lithiumbatteries fell 39% YoY to Rmb0.28bn as the company continued toshift its core focus from electric vehicles to e-bikes where it has morecompetitive advantages. Tianneng is now focusing on upgradingdemand for lead-based battery e-bikes and e-tricycles. Long term, itplans to return its attention to the EV markets when subsidies end.
Recycling business growth remains strong. Recycling revenue rose36% YoY in 1H18 to Rmb0.75bn, 5.1% of Tianneng’s total. With totalcapacity at the battery recycling bases in Zhejiang and Henanreaching 0.4mn tonnes/year, we believe recycling can partially offsetthe effects of lead price fluctuations on lead-based battery costs.
Earnings forecast
Considering Tianneng’s strategic transition within the lithium-ionbattery segment and margin pressure, we lower our 2018 and 2019EPS forecasts 4.8% and 5.2% to Rmb1.22 and Rmb1.52.
Valuation and recommendation
The stock is trading at 6.5x 2018e and 5.2x 2019e P/E. We believe theeffects of its lithium-ion battery transition and lead price fluctuationswill be brief. Maintain BUY and target price of HK$12 （9.8x 2018e and7.9x 2019e P/E; offering 23.1% upside）。
Risks
Raw material prices could be more volatile than expected