1H22 results beat market expectation
　　Morimatsu International Holdings （Morimatsu） announced 1H22 results: Revenue grew 59.8% YoY to Rmb2.97bn, and attributable net profit surged 111.8% YoY to Rmb303mn. We believe the firm’s 1H22 results beat market expectation mainly due to rapid revenue growth and rising profitability driven by economies of scale.
　　Demand from downstream sectors such as EV batteries, electronic chemicals and pharmaceuticals drove rapid growth in revenue. In 1H22, Morimatsu’s revenue from raw materials for EV batteries soared 1,070% YoY to Rmb374mn, electronic chemicals rose 204.7% YoY to Rmb272mn, pharmaceuticals and biopharmaceuticals grew 105.4% YoY to Rmb1.13bn, and revenue from other sectors rose 157.4% YoY to and Rmb185mn. In contrast, revenue from industrial chemicals eased 0.5% YoY to Rmb860mn, that from daily chemicals fell 2.3% YoY to Rmb63mn, and from oil and gas refining dropped 57.6% YoY to Rmb77mn.
　　Ample orders on hand to bolster future earnings growth. According to the announcement, the firm’s new orders grew 50.05% YoY to Rmb5.11bn in 1H22. Specifically, Rmb1.04bn of new orders came from the electronic chemicals sector, Rmb876mn from industrial chemicals, Rmb468mn from raw materials for EV batteries, Rmb1.29bn from pharmaceuticals and biopharmaceuticals, Rmb855mn from oil and gas refining, Rmb446mn from daily chemicals, and Rmb134mn from other sectors. In 1H22, the firm had Rmb7.88bn of orders on hand, up 61.48% YoY. We expect these orders to contribute to incremental earnings in 2H22 and 1H23 considering it typically takes 9–12 months for the firm to deliver orders.
　　Profitability improved notably, supported by effective management. In 1H22, Morimatsu’s gross margin （GM） rose 0.4ppt YoY to 26.6%, and net profit margin grew 2.5ppt YoY to 10.2%. In 1H22, the firm’s selling and R amp;D expense ratios increased 0.8ppt YoY to 3.2% and 0.8ppt YoY to 4.9%, while G amp;A and financial expense ratios fell 2.4ppt YoY to 7.7% and 0.4ppt YoY to 0.3%. We believe the firm’s profitability improved mainly because: 1） Products of the firm’s downstream sectors remained in short supply, with demand from sectors including biopharmaceuticals and EV batteries grew rapidly, driving improvement in GM; and 2） Revenue expanded rapidly, outpacing expenses due to effective management and economies of scale.
　　Trends to watch
　　Clear capacity expansion plan; increased production capacity to meet booming downstream demand. In 2017–2019, Morimatsu’s sales to output ratio remained above 90%, and its revenue growth was mainly limited by production capacity. The firm plans to expand its capacity to manufacture high-end intelligent equipment and complete sets of equipment in the fields of biopharmaceuticals, daily chemicals, and electronic chemicals. The firm expects its completed project in Nantong to boost its effective capacity by more than 20%. Construction of a factory in Changshu, Jiangsu province, is underway and the firm expects Phase I （about 130,00 sqm） to be delivered in 4Q23. As they come onstream, these new projects will help the firm win more orders from downstream industries, in our view.
　　Financials and valuation
　　Considering the firm has ample orders on hand, we raise our net profit forecast for 2022 by 22.6% to Rmb639mn, and for 2023 by 24.4% to Rmb845mn, implying 15x 2022e and 11x2023e P/E. We maintain an OUTPERFORM rating. We expect capex to grow consistently, bolstered by booming downstream demand. Thus, we raise our TP by 42.9% to HK$13.86, implying 20x 2022e and 15x 2023e P/E, offering 31.3% upside.
　　Risks
　　Cyclicality in downstream sectors; liquidity risks; volatile forex.