Intron Tech's 1H23 revenue of RMB 2.63bn (+26.5% YoY) was slightly below our expectation, while attributable net income of RMB 154mn (+1.2% YoY) was 19% below our estimate mainly due to weaker cloud server segment, weaker gross margin and significant increase in R&D expense. Mgmt. attributed higher R&D expense to talent recruitment and software/equipment acquirements, and expected gradually normalized R&D spending towards 2H23/FY24E. Overall, we are positive on 2H23E earnings recovery driven by traditional peak season, normalised R&D spending and new product shipment. We trimmed FY23-25E EPS by 9-17% to factor in 1H23 results and lower margins. Trading at 6.3x/5.1x FY23/24E P/E, we think risk-reward is attractive compared with A/H share peers. Maintain BUY with new TP of HK$ 6.37. Upcoming catalysts include rising ADAS penetration and NEV client share gain.

1H23 higher R&D expense offsetting strong NEV growth. By segment, new energy/body control/safety/powertrain/automation & connectivity/cloud server revenue delivered +58%/-3.2%/+43%/+41%/+118%/-71% YoY growth. Intron reported solid new energy segment growth despite industry headwinds, driven by increasing client penetration and share gain on new projects. Cloud server weakness was due to shrinking demand from key customers and server market destocking. 1H23 net income of RMB 154mn (+1.2% YoY) missed our estimate by 19%, mainly due to significant increase in R&D expense ratio to 8.9% (vs. 7.0% in 1H22). Mgmt. stated higher R&D expense was due to talent acquisition and software/testing equipment purchase, and expected gradual normalizing of R&D expense in 2H23E. 1H23 GPM of 20.6% (vs. 21.6% in 1H22) was attributed to FX impact and price pressure from OEM customers. Mgmt. expected margin expansion upside from cost reduction and upstream price negotiation in 2H23E.

2H23E Outlook: back-loaded revenue in 2H23E with margin recovery.

We expect Intron's topline to be back-loaded in 2H23E driven by traditional seasonality and new product ramp-up, and we expect moderate impact from downstream auto OEM price competition and de-spec trend. We think the hike in R&D expense in 1H23 will gradually normalize in 2H23E. Overall, we estimate revenue/net profit growth of 33%/35% YoY in 2H23E.

Attractive risk/reward, reiterate BUY. We trimmed FY23-25E EPS by 9-17% mainly to reflect higher R&D expenses and weaker 1H23 earnings. Our new TP of HK$6.37 is based on same 12x FY23E P/E (24% below 5-year hist. avg.). Trading at 6.3x/5.1x FY23/24E P/E, we think risk-reward is attractive especially compared with A/H share peers.