1H21 net profit fell 21% year-on-year
Tianneng Power (Tianneng) announced 1H21 results on August 27: total sales revenue rose 60 per cent year-on-year to 36.3 billion yuan, while net profit fell 21 per cent to 661 million yuan. The decrease in net profit was mainly due to the increase in the cost of 1H21 raw materials. We think the results are relatively weak. We estimate that the company's diluted EPS of 2021 / 2022 / 2023 will be RMB 1.91 / 2.33 / 2.77 respectively, and we have a target price of HK $17.15 based on the 7.5x 2021 forecast PE. Our target multiple is lower than the industry average of 9.1 times Bloomberg's consensus forecast PE for 2021, mainly due to fluctuations in raw material costs and low Tianneng gross profit margin. Maintain a "buy" rating.
1H21 gross profit margin fell sharply, dragged down by the rising cost of raw materials, Tianneng has two major business sectors: battery manufacturing and battery raw material trade. 1H21, sales revenue from battery manufacturing rose 24% year-on-year to 16.1 billion yuan, with a gross profit margin of 11.6%, 4.66 percentage points lower than 1H20's 16.3%, mainly due to higher raw material costs. Sales revenue from the battery raw materials trading business increased 109% year-on-year to 20.2 billion yuan; however, the business had a low gross profit margin (1H20:
0% Landscape 1H21Rom 0.3%). As a result, the company's 1H21 consolidated gross margin fell sharply to 5.3 per cent from 9.3 per cent of 1H20.
Proper control of operating expenses
Despite the decline in gross profit margin, the cost of Tianneng 1H21 is well controlled. Total operating expenses (sales, management and R & D expenses) increased 16 per cent year-on-year to 1.467 billion yuan, accounting for 4.0 per cent of total sales revenue, compared with 5.6 per cent for 1H20. Overall, we believe that Tianneng's effective cost control partially offset the decline in 1H21 gross profit margin.
Benefit from the increased demand for electric two-wheelers
Tianneng is the largest manufacturer of lead-acid batteries for electric two-wheelers in China. In 2020, China's total production of electric two-wheelers increased by 27 per cent year-on-year to 48.3 million vehicles, while 1H21 production continued to maintain positive growth. Overall, we believe that Tianneng should benefit from the increase in the production of electric two-wheelers and the need for lead-acid battery replacement.
Lower profit forecasts considering rising costs; maintain "buy"
Taking into account the rising cost of raw materials and the resulting contraction in profit margins, we have lowered our 2023 net profit forecast from 2021 to 2.2 billion / 2.7 billion / 3.2 billion respectively. Based on the 7.5x 2021 forecast PE, we have lowered the target price to HK $17.15 (previous value: HK $20.00, based on 7x 2021 forecast PE). Our target multiple is lower than the industry average of 9.1 times Bloomberg consensus forecast PE for 2021 (previous value: 11.3 times), mainly due to fluctuations in raw material costs and low Tianneng gross profit margin.
Risk tips: 1) the demand for electric bicycles is weaker than we expected; 2) there is a major shift from lead-acid batteries to lithium batteries.