1H22 revenue and net profit to grow at least 50% and 100% YoY
Morimatsu International Holdings (Morimatsu) preannounced a positive profit alert: 1H22 consolidated revenue and net profit may grow at least 50% and 100% YoY to exceed Rmb2.78bn and Rmb287mn. The firm’s preannounced results beat market expectations.
　　Trends to watch
　　1H22 consolidated revenue to grow at least 50% YoY thanks to growth of orders on hand. We attribute the firm’s significant revenue growth to the fulfillment of orders on hand. The firm’s orders on hand hit a record high to Rmb5.7bn at end-2021, and we believe orders may have maintained the rapid growth in 1H22. In the downstream, the significant order growth in the pharmaceutical sector and raw materials for EV batteries (including mining and metallurgy) may have boosted the firm’s consolidated revenue growth. We expect a balanced growth in each segment in downstream sectors such as pharmaceuticals, EV batteries, chemicals, electronic chemicals, oil and gas refining, and daily chemicals.
　　1H22 consolidated net profit to grow at least 100% YoY thanks to economies of scale and improved profitability, in our view. We think the firm’s efforts in business expansion have paid off. We see growing demand for pressure equipment in the downstream sectors, and the firm enjoys the flexibility in becoming the equipment supplier in those sectors with great potential, rapid growth, and high gross margin. We believe the firm’s overall gross margin will improve. Moreover, the firm continues to scale up its businesses, while expanding production capacity to enhance order fulfillment. We believe the economies of scale diluted SG&A and R&D expenses, and the reduced expense ratios resulted in higher YoY growth of net profit than revenue growth.
　　Net profit to grow at least 76% YoY if excluding 1H21 IPO expenses. The firm’s 1H21 G&A expenses included Rmb19.85mn of IPO expenses. We estimate that consolidated net profit may grow at least 76% YoY if excluding such expenses, still beating market expectations.
　　Clear capacity expansion plan; increased production capacity and growing downstream demand bolster solid earnings growth. The firm’s sales to output ratio remained over 90% in 2017-2019, and its revenue growth was mainly limited by production capacity. In order to take more downstream orders, the firm plans to expand its production capacity to engage in the manufacturing of high-end intelligent equipment and complete sets of equipment in the fields of biopharmaceuticals, daily chemicals, and electronic chemicals. We believe that the firm will obtain more orders from various industries, and we foresee rapid growth of the firm along with the ramp-up of its production capacity.
　　Financials and valuation
　　We maintain our 2022 and 2023 EPS forecasts at Rmb0.49 and Rmb0.64. The stock is trading at 12.7x 2022e and 9.7x 2023e P/E. We maintain OUTPERFORM and TP of HK$9.70, implying 17x 2022e and 13x 2023e P/E with 34.4% upside.
　　Risks
　　Cyclicality in downstream industries; liquidity risks; exchange rate risks.