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Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

<a target="_blank">Leoch International Technology Ltd. [842_HK; HK$1154 million/US$150 million market cap] reported a robust rise in its overall revenues by 41% to RMB5,181 mn for 1HFY2021 ended June, as the Power Solutions and Recycled Lead segments witnessed a sharp recovery in the first half of FY2021. Power Solutions business amounted to RMB4,248 mn, representing an increase of 24.7% from RMB3,405 mn for the corresponding period in 2020 while revenue from Recycled Lead business amounted to RMB932.5 mn, representing an increase of 235% from RMB278.8 mn for the corresponding period in 2020.</a>
&nbsp;The rise in revenues for the Recycled Lead business segment was due to the resumption of full operations since May 2020. We had expected the Recycled Lead business to make up for lost ground since the second half of the year to contribute more quantum of revenue to the overall business even in the first half of 2021. After resumption of full operation since the second half of 2020, output increased significantly, generating sales to third parties of more than RMB1 bn in the second half of 2020 and RMB 933 mn in first half of 2021.
&nbsp;This significant and sharp growth in revenue from its core battery business and Recycled Lead business segment, during uncertain times, signifies a strong competitive market position of the company. The revenue growth momentum is expected to remain subdued in the second half of 2021 on account of uncertainty due to the Covid-19 pandemic. The growth in revenue and profitability is expected to gather momentum once economic and business conditions return to normalcy. We expect revenues to show positive growth in the current year due to the lower base in 2020, but it would likely pick up higher pace in FY2022 and beyond.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/227/026/original/image_33050263421630380412868.png?1630380412" width="520" height="220" class="editor-image img-responsive" data-smartkarma-image-id="227026"></figure>
&nbsp;EPS was flat on a YoY basis in the first half of 2021 to RMB2 cents on account of dilution, while the profit amounted to RMB29.2 mn, representing an increase of 15.9% compared to the corresponding period in 2020. The company continues to witness a reduction in finance costs (down 15% YoY) but selling distribution and administration expenses have increased by 44% YoY. Also, the research and development expenses increased by 141% YoY as the company continued deploying huge resources for capturing most of the opportunities from the rising deployment of 5G. We believe the rise in research and development expenditure should generate higher growth and increase margins for the company going forward through product innovation. As the Recycled Lead business continues to make up for the lost business in the previous year along with the increased revenues from the battery segment due to recovery, the overall profitability would return to normal levels in FY2022.
&nbsp;To capture tremendous opportunities arising from the 5G era and meet growing demands for compelling power solutions for the current and future market needs, Leoch has already built-up its manufacturing capacity both locally and overseas, with a lithium-ion plant in China and two lead-acid plants in Vietnam in 2019. With all the capacity in place along with rising gross profit margins (14.4% in 1HFY2021 from 13% in 1HFY2020), declining finance costs (15% lower YoY) and selling and distribution expenses now expected to remain flat, we believe with all the negatives behind, the company is geared up to deliver on further growth in FY2022 and beyond to make the best of its opportunities.
&nbsp;Maintain Long Term PT of HK$2.00; Short Term PT HK$1.50,77% Upside
We introduce a short term price target of HK$1.50 per share over a one year period which implies an upside of 77% over the current price of HK$0.85 per share as we feel the business performance will resume its upward growth momentum in the first half of FY2022 which will continue in FY2022 and beyond.
&nbsp;We maintain our long term price target of HK$2.00 per share as any recovery in the business and economic conditions would rerate the stock to higher levels. Our long term price target implies a P/E multiple of 11x on our FY2022 EPS estimate of RMB 16 cents and an EV/EBITDA multiple of 8X on our FY2022 EBITDA estimate of RMB468 mn.
&nbsp;With all the negatives factored into the stock price along with secular tailwinds expected post pandemic by the ongoing 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 4.4x P/E and 5.4x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 3.4x P/E and 4.4x EV/EBITDA based on our FY2023 EPS and EBITDA estimates, respectively.
&nbsp;Uptick in Gross Profit Margin 
Gross profit increased by 56% from RMB477 mn in 1HFY2020 to RMB745 mn in 1HFY2021, mainly due to rising contribution from the Recycled Lead business of the company resulting in an increase in the overall gross profit margin from 13% for 1HFY2020 to 14.4% for 1HFY2021. Higher gross profit margins were a result of an increase in contribution by the Recycled Lead business after the plant began commercial production since May 2020.
&nbsp;Secular Demand Growth to Provide Strong Tailwinds Post Pandemic 
We expect the global and Chinese lead-acid battery industries to completely recover lost ground in FY2022 and beyond. The continued development of technologies such as cloud computing, e-commerce and proliferation of data centers and servers will be an important long-term growth driver in demand for UPS batteries. The development of 5G networks will support the growth of telecom batteries in the medium- term. With the increasing penetration of automobiles and growing fleet of ageing vehicles in China, both the OEM and aftermarket demand for SLI batteries in the country should remain strong. Being one of China’s largest and most reputed lead-acid battery suppliers, Leoch is well positioned to capture this demand.
&nbsp;For further details and financial model, please see our attached Earnings Update Report.

Leoch International Technology Ltd. [842_HK; HK$1154 million/US$150 million market cap] reported a robust rise in its overall revenues by 41% to RMB5,181 mn for 1HFY2021 ended June, as the Power Solutions and Recycled Lead segments witnessed a sharp recovery in the first half of FY2021. Power Solutions business amounted to RMB4,248 mn, representing an increase of 24.7% from RMB3,405 mn for the corresponding period in 2020 while revenue from Recycled Lead business amounted to RMB932.5 mn, representing an increase of 235% from RMB278.8 mn for the corresponding period in 2020.
&nbsp;The rise in revenues for the Recycled Lead business segment was due to the resumption of full operations since May 2020. We had expected the Recycled Lead business to make up for lost ground since the second half of the year to contribute more quantum of revenue to the overall business even in the first half of 2021. After resumption of full operation since the second half of 2020, output increased significantly, generating sales to third parties of more than RMB1 bn in the second half of 2020 and RMB 933 mn in first half of 2021.
&nbsp;This significant and sharp growth in revenue from its core battery business and Recycled Lead business segment, during uncertain times, signifies a strong competitive market position of the company. The revenue growth momentum is expected to remain subdued in the second half of 2021 on account of uncertainty due to the Covid-19 pandemic. The growth in revenue and profitability is expected to gather momentum once economic and business conditions return to normalcy. We expect revenues to show positive growth in the current year due to the lower base in 2020, but it would likely pick up higher pace in FY2022 and beyond.

&nbsp;EPS was flat on a YoY basis in the first half of 2021 to RMB2 cents on account of dilution, while the profit amounted to RMB29.2 mn, representing an increase of 15.9% compared to the corresponding period in 2020. The company continues to witness a reduction in finance costs (down 15% YoY) but selling distribution and administration expenses have increased by 44% YoY. Also, the research and development expenses increased by 141% YoY as the company continued deploying huge resources for capturing most of the opportunities from the rising deployment of 5G. We believe the rise in research and development expenditure should generate higher growth and increase margins for the company going forward through product innovation. As the Recycled Lead business continues to make up for the lost business in the previous year along with the increased revenues from the battery segment due to recovery, the overall profitability would return to normal levels in FY2022.
&nbsp;To capture tremendous opportunities arising from the 5G era and meet growing demands for compelling power solutions for the current and future market needs, Leoch has already built-up its manufacturing capacity both locally and overseas, with a lithium-ion plant in China and two lead-acid plants in Vietnam in 2019. With all the capacity in place along with rising gross profit margins (14.4% in 1HFY2021 from 13% in 1HFY2020), declining finance costs (15% lower YoY) and selling and distribution expenses now expected to remain flat, we believe with all the negatives behind, the company is geared up to deliver on further growth in FY2022 and beyond to make the best of its opportunities.
&nbsp;Maintain Long Term PT of HK$2.00; Short Term PT HK$1.50,77% Upside
We introduce a short term price target of HK$1.50 per share over a one year period which implies an upside of 77% over the current price of HK$0.85 per share as we feel the business performance will resume its upward growth momentum in the first half of FY2022 which will continue in FY2022 and beyond.
&nbsp;We maintain our long term price target of HK$2.00 per share as any recovery in the business and economic conditions would rerate the stock to higher levels. Our long term price target implies a P/E multiple of 11x on our FY2022 EPS estimate of RMB 16 cents and an EV/EBITDA multiple of 8X on our FY2022 EBITDA estimate of RMB468 mn.
&nbsp;With all the negatives factored into the stock price along with secular tailwinds expected post pandemic by the ongoing 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 4.4x P/E and 5.4x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 3.4x P/E and 4.4x EV/EBITDA based on our FY2023 EPS and EBITDA estimates, respectively.
&nbsp;Uptick in Gross Profit Margin 
Gross profit increased by 56% from RMB477 mn in 1HFY2020 to RMB745 mn in 1HFY2021, mainly due to rising contribution from the Recycled Lead business of the company resulting in an increase in the overall gross profit margin from 13% for 1HFY2020 to 14.4% for 1HFY2021. Higher gross profit margins were a result of an increase in contribution by the Recycled Lead business after the plant began commercial production since May 2020.
&nbsp;Secular Demand Growth to Provide Strong Tailwinds Post Pandemic 
We expect the global and Chinese lead-acid battery industries to completely recover lost ground in FY2022 and beyond. The continued development of technologies such as cloud computing, e-commerce and proliferation of data centers and servers will be an important long-term growth driver in demand for UPS batteries. The development of 5G networks will support the growth of telecom batteries in the medium- term. With the increasing penetration of automobiles and growing fleet of ageing vehicles in China, both the OEM and aftermarket demand for SLI batteries in the country should remain strong. Being one of China’s largest and most reputed lead-acid battery suppliers, Leoch is well positioned to capture this demand.
&nbsp;For further details and financial model, please see our attached Earnings Update Report.


Leoch [842]: 5G Play at 4.4x P/E 5.4x EV/EBITDA : Earnings Update