Times Electric’s （03898 HK） 2021 revenue decreased 5.7% YoY to RMB15.1 billion. Shareholders’ net profit decreased 18.5% YoY to RMB2.0 billion. Results missed expectation. Overall gross profit margin decreased by 3.5 ppts YoY to 33.7%. Selling expenses ratio stayed flat YoY at 6.9%, administrative expenses ratio increased 0.7 ppts YoY to 5.4%, and R&D expenses ratio increased 0.7 ppts YoY to 11.2%.
We expect total revenue to increase at a CAGR of 12.5% in 2021-2024.
We expect revenue CAGR of rail transit equipment business, emerging equipment business and others business to be 3.8%, 42.1% and 15.0%, respectively, in 2021-2024. We expect gross margin to improve from 33.5% in 2022 to 34.4% in 2024. We expect the Company to maintain a net cash position in 2022-2024.
Our EPS estimates for 2022/ 2023/ 2024 are RMB1.446, RMB1.695 and RMB1.950, respectively. We are positive about the Company’s outlook but the Company may face a lot of short-term challenges. Lower the TP to HK$40.00, representing 17.7x/ 15.2x/ 13.3x 2022/ 2023/ 2024 EV/EBITDA, respectively. Maintain "Accumulate" rating.
2021 shareholders’ net profit decreased 18.5% YoY to RMB2.0 billion. Results were below expectation. Times Electric’s （03898 HK, "TE" or the "Company"） 2021 revenue decreased 5.7% YoY to RMB15.1 billion. Shareholders' net profit decreased by 18.5% YoY to RMB2.0 billion, EPS decreased 22.8% YoY to RMB1.63 （the decline in EPS was larger than that in shareholders’ net profit mainly due to an increase in the number of ordinary shares in issue following the Company’s debut on the Science and Technology Innovation Board of the SSE during the reporting period）。 Results were below expectation, mainly due to lower-than-expected drop in rail transit equipment revenue, which was down 11.8% YoY to RMB12.3 billion, mainly due to the significant YoY decrease in State Railway Group Co., Ltd.’s investment in new rolling stock during the period. Overall gross profit margin decreased by 3.5 ppts YoY to 33.7%, mainly due to substantial increase in raw material prices during the period. The selling expense ratio stayed flat YoY at 6.9%, the administrative expenses ratio increased 0.7 ppts to 5.4% YoY, and the R&D expenses ratio increased 0.7 ppts to 11.2% YoY, mainly due to the Company’s increased R&D efforts. Net financial income was RMB74 million, compared with net finance costs of RMB3 million in 2020, mainly because the Company’s interest-bearing debt was small and the Company held a lot of cash to earn interest.
We expect total revenue to increase at a CAGR of 12.5% in 2021-2024. During 2021, revenue of rail transit equipment business decreased 11.8% YoY to RMB12.5 billion, due to significant YoY decrease in State Railway Group Co., Ltd.’s investment in new rolling stock, and reduced purchase from the Company. As the demand for railway passenger transportation and railway freight transportation remains weak, investment in new rolling stock from State Railway Group Co., Ltd.’s investment is unlikely to significantly increase in 2022-2024. Nevertheless, we think the industry’s worst time has passed and there should be mild recovery in demand for rail transit equipment in 2022 and onwards. We expect a revenue CAGR of 3.8% for rail transit equipment business in 2021-2024. As for emerging equipment business, revenue increased 35.3% YoY to RMB2.6 billion in 2021. Due to substantial increase in demand for IGBT products and industrial sensors products due to increase in demand from new energy vehicles and photovoltaics （while shortage of international similar products due to logistics problems also fueled further demand）， and the Company’s new production facilities are entering mass production phase, we expect fast revenue growth to continue. We expect a revenue CAGR of 42.1% for emerging equipment business in 2021-2024.
In addition, we expect a revenue CAGR of 15% for others business in 2021-2024. Overall, we expect total revenue to increase at a CAGR of 12.5% in 2021-2024.
We expect gross margin to improve from 33.5% in 2022 to 34.4% in 2024. Gross margin dropped 3.5 ppts YoY to 33.7% in 2021, mainly due to decrease in gross margin for both rail transit equipment business and emerging equipment business, and revenue contribution from higher-gross-margin rail transit equipment business decreased 5.6 ppts YoY to 81.0%. Going forward, we expect gross margin of rail transit equipment business to gradually improve with the increased use of the Company’s self-manufactured IGBT units which lower cost of production, while gross margin of emerging equipment business will also increase due to improvement of success rate of its semi-conductor products and expansion in manufacturing facilities which lower unit costs. We expect gross margin to improve from 33.5% in 2022 to 34.4% in 2024.
We expect selling expenses ratio to remain at 6.9% in 2022-2024, administrative expenses ratio to decrease from 5.1% in 2022 to 4.9% in 2024, and research and R&D expenses ratio to remain stable at 10.9% in 2022-2024. We expect selling expenses ratio to increase in line with the increase in revenue due to increased marketing efforts and selling expenses ratio to remain at 6.9% in 2022-2024. We expect administrative expenses ratio to decrease gradually from 5.1% in 2022 to 4.9% in 2024, due to the Company’s continuous stringent cost control efforts and expected increase in revenue. Finally, we expect R&D expenses ratio to remain stable at 10.9% in 2022-2024 due to the Company’s commitment in research and development efforts.
We expect the Company to remain in net cash position in 2022-2024. As at end of 2021, the Company had a net cash position of RMB7.8 billion, while operating cash inflow increased 23.0% YoY to RMB2.2 billion in 2021. We expect operating cash inflow to amount to RMB1.6 billion, RMB1.7 billion, and RMB2.0 billion in 2022-2024, respectively. We expect the Company to maintain a small loan balance of approximately RMB500 million, annual dividends amounted to RMB637 million, and total capital expenditure of RMB3.4 billion in 2022-2024; we expect total financing and investing needs for the next three years combined to be approximately RMB5.4 billion, which is approximately equal to the expected combined operating cash inflow for the next three years. Hence, we expect the Company to remain in a net cash position in 2022-2024.
Lower the TP to HK$40.00, maintain "Accumulate". Our EPS estimates for 2022/ 2023/ 2024 are RMB1.446, RMB1.695 and RMB1.950, respectively. Despite that rail transit equipment business should remain slow-moving due to prolonged weak demand, we expect demand for semi-conductor products such as IGBT and industrial sensors to remain very strong and revenue contribution of the emerging equipment business is likely to double from 17.0% in 2021 to 34.3% in 2024. The competitive edge of the Company in IGBT and industrial sensors are unmatchable in the domestic market due to the Company’s substantial investment in R&D over the year and having one of the widest application scenarios for its products, in particular, in the rail transit industry, in China. The Company might transition from a rail transit equipment manufacturer to an IDM for semi-conductors and precision components in 5 years’ time. We are positive about the outlook of the Company and expect a revaluation as the transition is moving forward. Despite this, we think the Company still faces a lot of challenges in the coming two years. We lower the TP to HK$40.00, representing 17.7x/ 15.2x/ 13.3x 2022/ 2023/ 2024 EV/EBITDA, respectively. Maintain "Accumulate".