Times Electric reported strong 3Q22 results with revenue and net profit up by 34.7% and 36.4% YoY, respectively. Although gross margin declined to 30.1% in 3Q22 from 33.2% in 2Q22, SG&A cost saving contributed mainly to the net profit growth. SG&A cost declined by 1.8% YoY, much lower than the top-line growth. Sales growth is mainly contributed by the emerging equipment segment whose revenue rose 137% YoY. Times Electric believes the US’s restrictions on semi- conductor will not have a big impact on the company’s business operations, as the power semi-conductor products manufactured by the firm are different from chip-based products. We reiterate BUY and raise TP to HK$47.
　　Key Factors for Rating
　　Times Electric is more dedicated to the semi-conductor industry. In 9M22, the emerging equipment segment, including the power semi-conductor products, electric control systems for EV, and industrial power converter systems, contributed 32% of the total revenue with a 137% YoY growth. The three major new products accounted for 12%, 8%, 7% of total revenue, respectively, during the first three quarters in 2022, implying a corresponding high YoY growth rate of 77.8%, 194%, and 304%. The traditional railway transportation equipment segment which manufactures the key hauling system for EMU (Electric Multiple Units) and locomotives contributed 72% of total revenue with only a 5.37% YoY growth. The outlook of the hauling system for rolling stocks remain flat, while the fast growing emerging equipment segment is expected to increase its revenue share towards the overall income.
　　Times Electric guides the demand for the semi-conductor product to be very strong, driven by the rapid development of electric vehicle and new energy industries. The company also believes the recent export curb imposed by the US does not affect the company, as the power product is not as severely affected as the chip semi-conductor products. In the meantime, Times Electric rolls out the expansion plan for the third phrase of production lines.
　　Key Risks for Rating
　　Times Electric reiterates they are focusing on improving the yield rate. However, the progress to lift the yield rate is uncertain.
　　The outcome of the Phrase III expansion plan is uncertain due to the issue of technology stability.
　　Higher R&D cost might be required for the innovations of semi-conductors.
　　Cost-saving from the SG&A expense may not always work to help offset the decline in gross margin.
　　Valuation
　　We revise up our sales and net profit estimates as the earnings in 3Q22 are better than we expected. We forecast sales and net profit to decline by 5% and 3% YoY in 4Q22, respectively, due to the high base. The revised sales and net profit are estimated to grow by 10% and 9% in both 22 and 23, respectively.
　　The new TP of HK$47 is derived by applying the unchanged 23x22E P/E target multiple. With a 44% upside, we reiterate BUY rating.