Times Electric reported a strong set of interim results, with sales and net profit up by 31.3% and 32.5% YoY. Sales of emerging equipment segment rose by 105% YoY while the rolling stock equipment segment rose by only 2% YoY, with respective 44% and 55% of sales portion.Gross margin declined slightly to 31.1% in 1H23, as the gross margin of the emerging equipment like IGBT used for new energy and EV was lower than the rolling stock part. SG&A cost rose by only 19.1% YoY and financial income increased by 36% YoY, all contributing to the high earnings growth. The third IGBT product line will commence the mass production since 2H24 to solve the tight production capacity issue. We slightly raise sales and net profit estimate in 2H23 to reflect the stronger-than-expected earnings. New TP HK$51.26 is derived by applying the unchanged 23x23E P/E. With 102% upside, retain BUY rating.
　　Key Factors for Rating
　　Sales growth beat the consensus expectation was mainly driven by the high growth of emerging equipment and the re-procurement of the EMU (Electric Multiple Units). Emerging equipment segment that rose by 105% YoY contributed 44% of sales in 1H23, a strong growth of IGBT, electric system for EV, multiple products for clean energy industry. The rolling stock parts segment was still the largest segment with 55% sales contribution and 2% YoY. CRC (China Railway Co.) placed the first EMU order in the pasted four years, helping the sales foundation.
　　Emerging equipment bears lower gross margin than the rolling stock as the profitability of the parts suppliers over the auto chain is much squeezed. The slight decline in gross margin was caused by the quick expansion of emerging products. The blended gross margin could face further slight contraction.
　　Times Electric works on building the third product line of IGBT, with the scheduled production time in 2H24. The third line will have 720K production capacity, equivalent to the total capacity of the existing two lines. Times Electric has strong determination to become a leading semi-conductor manufacturer.
　　Key Risks for Rating
　　The technology innovation is challenging in the semi-conductor industry. EV sales and pricing outlook is not positive for the parts suppliers over the chain.
　　Valuation
　　We slightly raise sales and net profit estimate in 2H23 to reflect the stronger- than-expected earnings. We retain sales growth estimate same in 2024E. New TP HK$51.26 is derived by applying the unchanged 23x23E P/E. With 102% upside, retain Buy rating. Now is the right timing to accumulate Times Electric.