1H22 results in line with our forecast
　　AInnovation Technology Group (AInnovation) announced 1H22 results: Revenue rose 76.1% YoY to Rmb646mn, gross margin jumped 81.8% YoY to Rmb206mn, and adjusted net losses totaled Rmb59mn, narrowing 44.9% YoY. The firm’s revenue and net profit attributable to shareholders are in line with our expectations, due to strong demand from downstream manufacturing and financial industries.
　　Trends to watch
　　Manufacturing’s digital transformation ongoing; results grow rapidly despite the pandemic, driven by intelligent manufacturing.
　　Revenue from the manufacturing industry climbed 83.8% YoY to Rmb336mn, driven by momentum in the domestic intelligent manufacturing market. Revenue from automotive equipment, OLED panel semiconductor, steel metallurgy, energy and power, and engineering and construction sectors grew 61% to Rmb121mn, 710% to Rmb51mn, 2,934% to Rmb31mn, 1,095% to Rmb41mn, and 2,005% YoY to Rmb31mn.
　　Revenue from financial services jumped 78% YoY to Rmb219mn, continuing to grow swiftly. Revenue from the banking industry rose 138% YoY to Rmb155mn.
　　Revenue from other industries grew steadily by 48% YoY to Rmb89mn.
　　Growing economies of scale and technology asset accumulation drive improvement in efficiency; GM rising. In 1H22, GM rose 1ppt YoY to 31.9%, due to growing economies of scale and improved delivery efficiency backed by reuse of technology assets accumulated on its AI platform. As of 1H22, the total number of technology assets was 2,156, with reuse rate of technology assets at 96.3%. In 1H22, AInnovation’s G&A, selling and R&D expense ratios moved -6.0ppt, -22.4ppt and +1.2ppt YoY to 8.7%, 29.3% and 33.7%. The decline in G&A and selling expense ratios was mainly driven by dilution effects from rapid revenue growth and strong cost controls. Operating cash flow was -Rmb251mn in 1H22, mainly because sales growth led to increased used of cash. End-of-period cash and cash equivalents were Rmb1.64bn at end-1H22, indicating ample cash on hand.
　　Firm helps empower AI+ manufacturing. AInnovation continued to develop the AInnovation Intelligent Manufacturing System, with MMOC technology at the core, to facilitate the application of AI products and solutions, and to offer AI+ manufacturing to high-quality clients. The firm had 697 patents (about 90% were invention patents) at June 30, 2022. The firm continued improving its AI+ manufacturing coverage by acquiring a 51% interest in Aolipu Qizhi and Shanghai Higher AI technology. In August, AInnovation was designated a “little giant” firm at the national level , indicating its efforts in AI+ manufacturing have been recognized by the central government.
　　Financials and valuation
　　Given the firm’s strong revenue growth and solid profitability, we maintain our 2022 and 2023 revenue forecasts, but raise our adjusted attributable net profit forecasts to -Rmb120mn from -Rmb187mn, and -Rmb86mn from -Rmb134mn. We are optimistic about prospects for intelligent manufacturing. We maintain OUTPERFORM and lift our TP 33% to HK$28.00 (8.8x 2022e P/S or 6.0x 2023e P/S), considering its resilient growth amid the COVID-19 pandemic, offering 37% upside. The stock is trading at 6.4x 2022e P/S or 4.0x 2023e P/S.
　　Risks
　　Intensifying market competition; continued loss of business; loss of key clients; failure to evolve with technology.