Core point of view:
The FY2H21 earnings report was mixed. Johnson Electric announced FY2H21 revenue of US$1.8 billion (+37% HoH/ +21% YoY), 5% higher than GF's expectations, due to the recovery in auto market demand and WFH's continued incentive for IPG's revenue growth. The gross profit margin of 23.3% was 1.1/0.5 percentage points higher than Guangfa and market estimates, mainly due to the increase in operating rate. However, with the contribution of less revenue from outside the industry, net profit of 110 million US dollars was revised from the same period last year, but it was still lower than GF and market expectations.
However, the revenue outlook for FY2022 is positive. Looking ahead to FY2022, although the shortage of automotive chips will continue to affect the automotive supply chain in FY1H22, the company is confident that FY2022's overall revenue will still grow by more than 10% as upstream operators gradually develop production capacity. We expect that as revenue continues to expand, it will ease the pressure on profitability caused by rising raw materials and less favorable product combinations (the gross margin of the automotive products division is slightly lower than the company average).
Hybrid and new energy vehicles are still a long-term theme. According to Johnson Electric's latest expectations, the total product value content of a vehicle is expected to increase by 50% (previously estimated at 10-20%) from traditional fuel vehicles to oil-electric hybrid or new energy vehicles, mainly due to the increase in components provided by Johnson Electric and the price increase brought about by the upgrade of existing components. Meanwhile, IHS Markit estimates that the share of oil-electric hybrid and new energy vehicles in the overall automotive market is expected to rise to 33% in 2027 (compared to 9% in 2020). Therefore, the company estimates that the compound revenue growth rate for FY2021-2026 can reach 5-9%, which is superior to 3-4% of global automobile shipments.
Valuation and investment advice. Johnson Electric currently has a forward price-earnings ratio of 8 times. Compared with the average forward price-earnings ratio of the past 5 years before the loss in 2020, we think there is a certain premium on the reasonable valuation of the company's current upward cycle in the automotive industry. Maintain a “buy” rating and arrive at a reasonable value of HK$32.9 per share based on 13 times the earnings per share in FY2022.
Risk warning. The epidemic is heating up; automobile fuel emission policies are progressing more slowly than expected; and there is a shortage of components.
