1H22 earnings slightly beat preannouncement
Times Electric announced its 1H22 results: Revenue grew 23.2% YoY to Rmb6.53bn. Attributable net profit rose 25.3% YoY to Rmb871mn, slightly beating the firm’s preannouncement of Rmb842mn, due to the strong growth of emerging equipment. In 2Q22, revenue climbed 24% YoY to Rmb3.98bn, and attributable net profit increased 22% YoY to Rmb530mn.
　　Revenue from rail transit equipment edged up YoY; locomotive business under pressure. In 1H22, the firm’s revenue from rail transit equipment rose 4.7% YoY to Rmb4.6bn. Revenue from rail transit electrical equipment declined 5.0% YoY to Rmb3.63bn. In 1H22, main client China Railway Rolling Stock Corporation’s (CRRC) revenue from electrical multiple units (EMU) rose 68% YoY, while revenue from locomotive and urban rail transit businesses fell 74% and 13% YoY. We believe revenue in the rail transit industry fell further due to the COVID-19 resurgence. However, we expect bidding for locomotive projects to gradually recover as COVID-19 subsides, driving a margin rebound in the industry. In 1H22, revenue from rail engineering machinery, communication signals, and other rail transit products reached Rmb535mn (+95.4% YoY), Rmb186mn (+42.8% YoY), and Rmb246mn (+46.6% YoY).
　　Emerging equipment business saw doubled revenue growth; IGBT to maintain rapid growth. In 1H22, revenue from the emerging equipment business surged 135.3% YoY to Rmb1.83bn. Revenue from power semiconductor devices and electric drive systems for alternative fuel vehicles (AFV) rose 106.6% and 197.1% YoY to Rmb772mn and Rmb436mn. Revenue from industrial converter products, marine equipment, and sensor devices all doubled and reached Rmb326mn, Rmb169mn, and Rmb125mn. As the firm’s IGBT (insulated gate bipolar transistor) phase II production line gradually adds new capacity, we believe the firm’s low- and medium-voltage automotive IGBT products will enter a period of fast growth in sales volume. We expect the firm’s IGBT business to maintain rapid growth going forward.
　　GM trended down YoY; net profit margin stable. In 2Q22, the firm’s blended gross margin (GM) fell 4.3ppt YoY due to the declining high-GM locomotive business. Thanks to strengthened control over expenses, the firm’s period expense ratio dropped 4.1ppt YoY, and net profit margin slid 0.2ppt YoY to 13.3% in 2Q22. In 1H22, the firm’s operating cash outflow decreased by Rmb1.69bn YoY to Rmb443mn.
　　Trends to watch
　　Phase II IGBT production line started mass production; to ramp up investment in silicon carbide capacity. The firm’s phase II production line came on-stream in 1H22, and has reached 80% of its design capacity of 20,000 units of 8-inch wafers per month, with a yield rate of approximately 80%. We see upside potential in its capacity ramp-up. We expect the firm’s revenue from the automotive IGBT business to grow rapidly, driven by rising ASP and downstream demand. In April, the firm plans to invest Rmb462mn in the technological upgrade of its existing 10,000 units/yr 4-inch silicon carbide production line into a 6-inch silicon carbide line with an annual production capacity of 25,000 units/yr. We expect the firm to replicate its IGBT success in silicon carbide products, by expanding its presence from high-voltage into low- and medium-voltage devices and building a full set of advanced silicon carbide technologies.
　　Financials and valuation
　　We maintain our 2022 EPS forecast at Rmb1.55, and raise our 2023 EPS forecast 7% to Rmb1.78 given the firm’s increasing IGBT capacity. The stock is trading at 21.1x 2022e and 18.4x 2023e P/E. We maintain OUTPERFORM and raise our target price 9% to Rmb45.49 to reflect our higher earnings forecasts. Our TP implies 25x 2022e and 22x 2023e P/E, offering 19% upside.
　　Risks
　　Slower-than-expected increase in IGBT production capacity; R&D of new silicon carbide products disappoints; rail transit equipment tenders happen later than we expected.