We held an investor meeting with Xinli International (0732 HK - HK$2.8 - target price HK$5.20 - long position) on September 8 to provide more information on 1HFY21 performance and prospects. Further highlights include: 1) 2H sales momentum will remain strong, 22/23 order visibility is high, 2) gross profit expansion is expected to increase by 1-2% as the 2H21 product structure improves, and 3) LCD product capacity growth continues to be unleashed in this virtuous cycle with higher returns.
We are confident in the future of the company, maintaining the target price of HK$5.20 and maintaining a long position.
KEY HIGHLIGHTS
1H21 is in line with our expectations - Xinli International announced 1H21 results. Gross profit increased 40.1% year over year to HK$1.32 billion, mainly due to an increase in the average selling price of the automotive electrification business and a 2.9% increase in gross margin to 12.0%. Net profit of 1H21 increased substantially by 122.0% year over year to HK$665 million (HK$300 million for 1H20), in line with our previous earnings forecast.
Vehicle electrification is gaining momentum - we expect this revenue to grow 58.7%/32.7%/33.3% to 5.65 billion/7.5 billion/ HK$10 billion in fiscal year 21-23, mainly due to 1) product structure improvements. The growth of the TFT-LCD business continues to drive business growth. Each vehicle is equipped with 4-5 TFT-LCDs, and the gross margin is about 15%-30%, which is higher than 8-9% of smartphone-related products. We expect the contribution of automotive products to increase from 43% in 2020 to 59% in 2023. 1) With strong downstream demand, the average selling price of the automobile business will continue to increase by about 10%-15% in 2H21 (while 1H21 increased 16% year over year). 2) Over 2 years of visible on-hand orders from top OEMs, including premium customers such as Mercedes-Benz, Changan, and Great Wall.
Overall gross margin is expected to increase by 1-2% to 13.0%-14.0% in the second half of the year (12.0% for 1H). We think the gross margin for the second half of the year is expected to increase by 1-2% compared to the first half of the year. We expect the 2H21 hybrid gross margin to be 13.2%, while 1H21 is 12.0%), based on: 1) The profitability of vehicle displays can be expected to increase by 5-10% when supply is tight; 2) Demand for high-end manufacturing such as medical equipment and factory automation continues to grow, and 2H21 OLED shipments are expected to increase 40%.
Production capacity continues to expand healthily. Management said that production lines in Shanwei and Renshou will be fully put into operation in the third quarter of '22, with a total production capacity of 160,000 pieces per month (currently the utilization rates of the two factories are 75% and 55%, respectively). The new production line will enable Xinli to provide customers with integrated products, and we think the overall profit margin may expand from 11.9% in FY21 to 14.9% in FY23. We believe that the profitability of in-vehicle displays is expected to increase further when economies of scale are achieved.
The transaction was 7.0 times the price-earnings ratio of FY21E, with a target price of HK$5.20. Maintaining long positions to speed up vehicle electrification shipments and operating efficiency increased 1H21's net profit and reached a record high. Looking ahead, as demand from the automotive industry continues to grow, we believe vehicle display shipments can continue to grow steadily.
Under the upward cycle of the industry, we think profit margins will increase further, and industry valuations may rise. We maintain the net profit forecast for FY21E/22E/23E at +161%/+37%/+22.0%, reaching HK$1,312 million/HK$1,801/HK$2,192 million, corresponding to a compound annual growth rate of 63.4%.
The stock is currently trading at around 7.0 times the FY21E price-earnings ratio, with a potential payout rate of 30%-34%, which we don't think is expensive. Based on 13x the average price-earnings ratio of the same industry, our target price is HK$5.20. We maintain long positions.