Rating: BUY (Initiation)

Target price: RMB108.00

Share price (9 Sep): RMB85.01

Market Cap (RMBm): 6,800.8

Up/downside: 27.0%

Functional device manufacturer BSC is growing rapidly, with revenue and net profit CAGRs of 34.65% and 34% respectively; 1H21 revenue was RMB300m, up 54.4% yoy, and net profit was RMB89.3m, up 186.88%yoy. Its customers include industry giants such as Foxconn and BYD. We initiate coverage with a BUY call and a target price of RMB108.

Functional device manufacturer has shown a rapid growth trend since inception

Functional device manufacturer BSC focuses on R&D to drive production and sales. Its products include electronic functional devices, fixtures and automation equipment, which are used in consumer and automotive electronics. It has quality customers and direct customers include upstream manufacturing service providers and component manufacturers of terminal brands such as Foxconn, BYD, Goertek, Ultrasonic Electronics, Truly Optoelectronics and Q Technology. Its products are ultimately used in Apple and Huawei, as well as consumer electronics brands Xiaomi, OPPO and VIVO, and auto brands Audi and Volkswagen, among others. Since its inception, BSC’s business has grown rapidly, with revenue and net profit CAGRs of 34.65% and 34%, respectively. 1H21 revenue was RMB300m, up 54.4% yoy, and net profit was RMB89.3m, up 186.88% yoy.

Market-leading customers; customer and capacity expansion

Functional devices allow customization, fast product updates, scale and customer stickiness. Competition is fierce among the many domestic and foreign participants. Its products are imported by global OEM leader Foxconn: Foxconn drove a sales revenue CAGR of 24.9% over 2017/18/19/20, contributing 76%/84%/54%/61% to revenue. BSC’s ROE leads the industry with a good-quality profit structure. Quality customers have raised its brand profile, and its product and brand equity has gone on to support customer growth. New customers include OFILM, Q Technology and Flex, lifting its business scale. Its Initial public offering (IPO) project has expanded production capacity and raised product quality. Its increases in production and supply capacities are aligned to customer expansion, ensuring better profit elasticity for the long term.

Wearable devices and auto electronics: high demand for functional devices

The Android TWS+ smartwatch has helped to expand the wearables market. Improvements in binaural connect and the supply chain have lowered costs. Compared to Apple’s Airpods, Android TWS has much headroom to grow. With Android TWS, we think it could even overtake Airpods in growth. We expect smartwatches to replicate the TWS’ growth trend. With giants such as Huawei and Apple expanding smartwatch medical applications, the demand potential has expanded with a new wearable target market. 

The transformation of automobile electrification, increase in ADAS penetration and smart cockpits have expanded automobile electronic applications and lifted the value of in-vehicle functional devices. The penetration rate of new energy vehicles in 1Q21 was 5.8%, up 1.8ppt vs full-year 2020. The growth momentum continues to break records. Policy support and new model launches would accelerate the transformation of vehicles into electric vehicles. Consumption upgrades and lower costs align with rising penetration of ADAS, so the smart cockpit market has much growth potential. Automotive electronics account for a continuous increase in in-vehicle manufacturing cost and could approach 50% in 2030, which would lift the value of in-vehicle functional devices.

Valuation and risks

We expect BSC’s revenue to arrive at RMB1.03bn/1.42bn /1.84bn in 2021/22/23E and net profit at RMB249m/346m/451m, corresponding to EPS of RMB3.12/4.32/5.64. We assign a 25x PE in 2022E and initiate coverage with BUY and a target price of RMB108.

Risks include: downstream demand turning out less than expected; customer expansion less than expected; incremental production capacity additions less than expected; intensifying competition; market share loss; and profitability decline risks.

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