XDLK Microsystem is a leading gyroscope manufacturer in China for microelectromechanical systems (MEMS), and its main products include MEMS gyroscopes/accelerometers/inertial measurement units (IMUs), which are used in high reliability, unmanned systems, and high-end industries. With its internationally advanced technology level, expanding product matrix under high-intensity R&D and "shelf style" product concept, we expect that the Company will benefit from the penetration of MEMS inertial sensors in high reliability areas and others, while intelligent driving, robotics, and other emerging fields will provide broad headroom for the Company's development. We initiate coverage with a "BUY" rating.
Domestic MEMS gyroscope leader in rapid development.
XDLK Microsystem is a domestic MEMS gyroscope leader with advanced technologies. Its main products include MEMS gyroscopes, MEMS accelerometers, IMUs, etc., which find applications in high reliability, unmanned systems, high-end industries and other fields. The Company has established a technological closed loop in key areas such as MEMS inertial sensor chip design, MEMS process program development, packaging and testing. It has built a comprehensive business process and supply chain system, positioning categories like MEMS gyroscopes at an internationally advanced level. Benefitting from technological accumulation and a robust downstream market, the Company has achieved rapid growth in revenue and net profit in recent years. Its profitability has also shown a steady increase, with its operating revenue reaching Rmb277mn in 2022, implying a 44.54% CAGR from 2020 to 2022; its attributable net profit (ANP) totaled Rmb117mn in 2022, with a CAGR of 45.41% from 2020 to 2022; its net profit margin (NPM) increased to 51.40% in 2022 from 47.47% in 2019, which indicates that its profitability is significantly higher than the comparable peers.
Multi-domain demand drives the flourishing development of the multi- billion-yuan market.
Due to the characteristics of low external dependency, inertial navigation systems and inertial measurement systems are widely used in aerospace, intelligent driving, high-end industries and other fields. Inertial sensors such as gyroscopes and accelerometers are the main components of inertial guidance and measurement systems. MEMS gyroscopes, with advantages such as miniaturization, high integration, and low cost, represent a crucial trend in gyroscope development. According to CCID Consulting (quoted from the Company's prospectus), in 2020, the scale of domestic MEMS industry reached Rmb73.67bn, up 23.2% YoY, and it is likely to reach Rmb127.06bn in 2023. According to LeadLeo Research Institute, the scale of domestic MEMS inertial sensors was approximately Rmb13.6bn in 2021. Currently, MEMS gyroscopes are gradually replacing ring laser gyroscopes (RLG) and fiber-optic gyroscope (FOGs) in the aerospace field, IMUs are increasingly widely used in high-end industrial sectors. At the same time, intelligent driving, humanoid robotics and other prosperous emerging industries are likely to open up a broad market space, contributing to the vigorous development of a multi-billion-yuan track. The MEMS inertial sensor market is currently dominated by overseas leaders such as Honeywell, Analog Devices (ADI). As domestic enterprises are in rapid development, the domestic localization space is vast.
With technology as the core and the "shelf style" as the foundation, XDLK drives long-term growth from multiple dimensions.
XDLK Microsystem has deeply engaged in the high-performance MEMS inertial sensor field, covering aspects such as design, process development, packaging and testing. The core parameters of its products have reached the international advanced level. At the same time, the Company consistently maintains a high level of research and development (R&D) investment, with an experienced core R&D team. Building on the its leading resonant MEMS device technology, it continuously advances product iterations and expansions. As of Dec 31, 2022, there were a total of 11 ongoing projects, spanning the next generation of gyroscopes, automotive IMUs, accelerometers, pressure sensors, and other categories, outlining a clear path for future product matrix iterations and expansions. Based on the foundation of leading technologies, XDLK Microsystem adopts a "shelf-style" approach for product development and expansion. Single products are tailored for multiple downstream applications. We believe that the "shelf-style" product strategy is advantageous for the Company in reducing R&D costs, continuously expanding applications, and breaking through potential strangleholds in a single market. Driven by its leading technology and a "shelf-style" strategy, the Company is likely to benefit significantly from the increased penetration of MEMS gyroscopes in high reliability fields.
Simultaneously, it will benefit from the vast development opportunities in areas such as intelligent driving and humanoid robots. Furthermore, the Company's IPO fundraising projects focus on product development and industrialization, and the introduction of equity incentives enhances the cohesion of core talents, further solidifying the Company's long-term competitiveness.
Potential risks: Fluctuations in raw material prices; less-than-expected new customers expansion; fluctuations in high reliability downstream orders; market development risks; cancellation of electronic design automation (EDA) licenses; technological R&D not up to expectations; expansion in emerging areas not meeting expectations.
Investment strategy: Benefiting from various fields such as aerospace, intelligent driving, and robotics, we expect the demand for MEMS inertial sensors and IMUs to grow steadily. With advanced international technologies, high-strength R&D to promote product iteration and expansion, as well as the "shelf style" product concept, we expect XDLK Microsystem to benefit from the increased penetration of MEMS inertial sensors in high reliability and other fields. At the same time, we expect emerging areas such as intelligent driving and robotics to fuel broad development growth room for the Company. We forecast the Company's 2023E/24E/25E ANP to be Rmb168mn/241mn/329mn, corresponding to EPS forecasts of Rmb0.42/0.60/0.82, implying 93x/65x/48x PE at the current price. We selected Gova Technology (688539.SH), Memsensing Microsystems (688286.SH) and Bdstar Navigation (002151.SZ) as comparable companies, which are trading at 53x 2024E PE on average and 1.21x 2024E PEG on average based on Wind consensus estimates.Combining the PE method and PEG method and taking into account the valuation level of comparable companies, as well as the Company's leading technological capabilities in inertial sensors and the broad development prospects in high reliability, intelligent driving, humanoid robots and other fields, we assign 75x 2024E PE to derive a target market cap of Rmb18bn on ~1.91x 2024E PEG. We initiate coverage with a "BUY" rating and a target price of Rmb45.
