1H22 performance is in line with our expectations

The company announced 1H22 results: 1H22 achieved income of 1.37 billion yuan, year-on-year-1.9%, home net profit of 170 million yuan, year-on-year-6.5%, deducting non-net profit of 160 million yuan,-4.6% year-on-year. Corresponding to the company's 2Q22 income of 600 million yuan, year-on-year / month-on-month ratio-25.3% torque 22.1%; return to the mother net profit of 100 million yuan, year-on-year / month-on-month + 21.5% plus 59.4%; deduction of non-net profit of RMB 100 million, year-on-year / month-on-month + 20.2% / month-on-month + 20.2% / month-on-month 54.9%, in line with our expectations.

Trend of development

Machine tool business losses expanded, power tools business profits under pressure, exchange gains thickened profits. 1H22 annual high-end equipment business income of 80 million yuan, year-on-year-13.8%, of which machine tool business gross profit margin of-2.5%, year-on-year-0.2ppt, from positive to negative, mainly due to fierce competition in the industry, upgrading customer demand, epidemic prevention and control and other effects. The revenue of power tool accessories was 500 million yuan,-23.3% compared with the same period last year, of which the gross profit margin of power tools was 22.2%, year-on-year-3.7ppt, which continued to decline, mainly due to epidemic prevention and control and the contraction of customer demand. On the profit side, due to the company's wide range of overseas business, the depreciation of RMB in the second quarter brought more obvious exchange gains for the company, thickening 1H22 profits by 58 million yuan. Looking forward, we expect that the relatively weak demand in the power tools industry may continue to 1Q23, with negative year-on-year demand growth, which is expected to lead to a decline in 2H22 revenue and profits in the company's power tools business.

The business of switching power stations is growing strongly, and profitability continues to improve. 1H22's new energy industry revenue was 730 million yuan, + 27.25% compared with the same period last year, accounting for 53.4% of revenue. Among them, the new energy vehicle exchange power station contributed 370 million revenue, + 123.2% compared with the same period last year. We estimate that the corresponding construction of about 300 exchange power stations, in the context of the epidemic disturbance production and marketing, is still in line with our expectations at the beginning of the year. In terms of profitability, the profit margin of the exchange power station business continues to improve month-on-month, with 1H22 reaching more than 5 per cent. We expect that with the gradual development of customers from other vehicle factories or operators, orders for replacement power stations are expected to continue to rise, leading to a steady rise in profits.

The policy is favorable to promote the vigorous development of the power exchange business model, and the company has a first-mover advantage. In March 2022, the Ministry of Industry and Information Technology issued the key points of Automobile Standardization in 2022, calling for speeding up the construction and improvement of the charging standard system for electric vehicles. In August, the executive meeting of the State Council decided to continue the implementation of policies such as exemption from vehicle purchase tax for new energy vehicles, and vigorously build charging piles. We believe that with policy support, the power exchange mode is expected to accelerate commercialization and large-scale development. The company has the first-mover advantage of technology and scale and is expected to benefit from the policy dividend.

Profit forecast and valuation

Based on the conservative forecast of 2H22 demand for power tools, we cut our 2022 profit forecast by 14% to 350 million yuan, leaving the 2023 profit forecast unchanged. Maintain the rating of the outperforming industry, switch the valuation to 2023, and increase the target price of SOTP by 33.3% to 16 yuan, corresponding to 20.6 times / 14.7 times Pmax E in 2023, taking into account that the policy is good for the industry, which has 10.2% upward space compared with the current stock price. The current share price corresponds to 18.7 / 13.3 times the 2022 pound in 2023.

Risk

The recharge penetration rate is lower than expected, and exchange rate fluctuations affect the company's profitability.