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Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

<a target="_blank"></a><a target="_blank"></a><a target="_blank"></a><a target="_blank">We continue to maintain a short-term price target of HK$1.50 per share on </a><a target="_blank">Leoch</a>&nbsp;International Technology [842_HK; HK$991 million/US$129 million market cap] over a one year time period which implies an upside of 105% over the current price of HK$0.73 per share as we feel the business performance will continue its upward growth momentum in FY2022 and beyond.
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 13x on our FY2022 EPS estimate of RMB 12 cents and an EV/EBITDA multiple of 4x on our FY2022 EBITDA estimate. &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 4.8x P/E and 2.5x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 3.5x P/E and 2.2x EV/EBITDA based on our FY2023 EPS and EBITDA estimates, respectively.
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. 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.
Focus on Innovation to Generate Higher Revenues and Margins Going Forward
In 2021, the company continued to focus on innovation, to work closely with international and domestic battery experts and research institutions in order to research and develop new technologies and products. The company continued working on new models of lead-acid and lithium-ion batteries and rolling out new products tailor-made for applications in the network power and motive market segments. These products included product series such as AGM VRLA batteries, VRLA-GEL battery, pure lead batteries, UPS high-rate batteries, marine batteries, railway batteries, start-stop batteries, automotive batteries, motorcycle batteries, OPzV, OPzS, PzS, PzV and PzB tubular plate batteries, golf cart batteries, scrubber sweeper batteries and electric vehicle batteries. New models of battery catering for the era of autonomous driving of smart cars are also expected to be launched in the near future.
As on 31st December 2021, company’s battery R&amp;D team consisted of more than 350 researchers and related development &amp; sampling technicians. Focus on innovation is expected to sustain the growth momentum in revenues and contribute to higher margins for the company going forward.
Robust Sales Network in more than 100 Countries and Regions
The company continues to maintain its product distribution network of more than 100 countries and regions across the world and has established regional sales offices in Beijing, Shenzhen, Zhaoqing, Nanjing, Hong Kong, Singapore, Malaysia, Australia, India, Sri Lanka, USA, the EU and United Kingdom. Together with the domestic sales centers in China, the company has more than 80 sales offices and centers around the world. As on 31st December 2021, the company had over 700 dedicated sales and marketing and related supporting employees.
5G: A Big Market Opportunity for Leoch
We believe that the new 5G investment cycle will drive significant growth in the size of the telecommunications backup power solution market in China and would definitely bring the company new growth opportunities in the near to medium-term. Being a global supplier of power solutions for telecommunications and data center industries,&nbsp;we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years.
In 2022, most important China’s growth engines come from infrastructure. The government report emphasizes that a part of infrastructure projects will be used on “new infra”, which covers digitalization of factory operations, full 5G coverage of the economy. In 2021, China has more than 1.42 million 5G base stations and government has set a goal to build more than 600,000 in 2022, an increase of 42%. China will ramp up 5G coverage for business areas, industrial parks, high-speed trains, transport hubs, shopping centers, and other crowded spaces. The country will heavily promote the innovative development of 5G applications and further advance the demonstration of ‘5G + industrial internet’ scenarios besides ‘5G + medical health’ and ‘5G + smart education’. With all these developments planned, China will work to ensure the number of 5G base stations tops 2 million.
To achieve the goal in stepping up industrial digitalization, data centers development is pivoted to be a national priority in 2022. Local governments in China are doubling down on plans to accelerate 5G rollout and more than 20 provincial and municipal governments have emphasized that a lot of effort will be put in construction of “new infrastructure” like 5G and data centers in their 2022 work plans. Cities like Shanghai has pushed forward the in-depth coverage of the superfast wireless network and has ambitions to build super large computing power platforms to meet growing demand.
The Ministry of Industry and Information Technology revealed that 2022 is a critical year for the large-scale development of 5G applications. Improving 5G network coverage, accelerating the in-depth integration of 5G and vertical industries and moderately speeding up the coverage of 5G in counties and rural towns are the goals. Ten ministries, including the Cyberspace Administration of China, recently unveiled a digital rural development action plan for the period from 2022 to 2025, which called for an intensified push to promote digital infrastructure upgrades in rural areas.
The 5G construction will rapidly push up the demand for lithium batteries used in base stations from 2021 to 2025. It is estimated that the number of communication towers will increase to 13 million by 2025, the global market demand for lithium batteries for communication will reach 60GWh, and the market size will exceed RMB60 billion. We expect the demand for lithium iron phosphate batteries used in communications will continue to expand company’s lithium-ion battery plant and provide a solid ground to capture new opportunity in this area. Since 2020, the “fast forward button” for the new 5G infrastructure development has been pressed.
Capacity in Place to Meet Ever Increasing Worldwide Demand
Leoch has already expanded its manufacturing capacity both locally and overseas, with a new lithium-ion plant in China and two new lead-acid plants in Vietnam in 2019. It has made an investment of RMB1.2 bn in the construction of a new lithium-ion battery manufacturing facility in Anhui, China which has already commenced commercial production. This new facility has allowed the company to accelerate the development of a series of innovative 5G power solutions to meet the ongoing customer demands, seizing opportunities arising from the fast-evolving telecommunications market.
Although there was no aggressive expansion in production capacity for lead-acid batteries in 2021, the company is gradually expanding lithium-ion batteries production capacity according to its strategic plan. It is expected that the lithium-ion battery capacity will increase from 1.8GWh in 2020 to 4GWh gradually over the next few years and potentially contribute up to RMB5 bn in annual revenue. We believe this preparation will start to provide a fruitful return starting 2022.
&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 important long-term growth drivers in the 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,&nbsp;please see our attached Business Update Report.

We continue to maintain a short-term price target of HK$1.50 per share on Leoch&nbsp;International Technology [842_HK; HK$991 million/US$129 million market cap] over a one year time period which implies an upside of 105% over the current price of HK$0.73 per share as we feel the business performance will continue its upward growth momentum in FY2022 and beyond.
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 13x on our FY2022 EPS estimate of RMB 12 cents and an EV/EBITDA multiple of 4x on our FY2022 EBITDA estimate. &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 4.8x P/E and 2.5x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 3.5x P/E and 2.2x EV/EBITDA based on our FY2023 EPS and EBITDA estimates, respectively.
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. 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.
Focus on Innovation to Generate Higher Revenues and Margins Going Forward
In 2021, the company continued to focus on innovation, to work closely with international and domestic battery experts and research institutions in order to research and develop new technologies and products. The company continued working on new models of lead-acid and lithium-ion batteries and rolling out new products tailor-made for applications in the network power and motive market segments. These products included product series such as AGM VRLA batteries, VRLA-GEL battery, pure lead batteries, UPS high-rate batteries, marine batteries, railway batteries, start-stop batteries, automotive batteries, motorcycle batteries, OPzV, OPzS, PzS, PzV and PzB tubular plate batteries, golf cart batteries, scrubber sweeper batteries and electric vehicle batteries. New models of battery catering for the era of autonomous driving of smart cars are also expected to be launched in the near future.
As on 31st December 2021, company’s battery R&amp;D team consisted of more than 350 researchers and related development &amp; sampling technicians. Focus on innovation is expected to sustain the growth momentum in revenues and contribute to higher margins for the company going forward.
Robust Sales Network in more than 100 Countries and Regions
The company continues to maintain its product distribution network of more than 100 countries and regions across the world and has established regional sales offices in Beijing, Shenzhen, Zhaoqing, Nanjing, Hong Kong, Singapore, Malaysia, Australia, India, Sri Lanka, USA, the EU and United Kingdom. Together with the domestic sales centers in China, the company has more than 80 sales offices and centers around the world. As on 31st December 2021, the company had over 700 dedicated sales and marketing and related supporting employees.
5G: A Big Market Opportunity for Leoch
We believe that the new 5G investment cycle will drive significant growth in the size of the telecommunications backup power solution market in China and would definitely bring the company new growth opportunities in the near to medium-term. Being a global supplier of power solutions for telecommunications and data center industries,&nbsp;we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years.
In 2022, most important China’s growth engines come from infrastructure. The government report emphasizes that a part of infrastructure projects will be used on “new infra”, which covers digitalization of factory operations, full 5G coverage of the economy. In 2021, China has more than 1.42 million 5G base stations and government has set a goal to build more than 600,000 in 2022, an increase of 42%. China will ramp up 5G coverage for business areas, industrial parks, high-speed trains, transport hubs, shopping centers, and other crowded spaces. The country will heavily promote the innovative development of 5G applications and further advance the demonstration of ‘5G + industrial internet’ scenarios besides ‘5G + medical health’ and ‘5G + smart education’. With all these developments planned, China will work to ensure the number of 5G base stations tops 2 million.
To achieve the goal in stepping up industrial digitalization, data centers development is pivoted to be a national priority in 2022. Local governments in China are doubling down on plans to accelerate 5G rollout and more than 20 provincial and municipal governments have emphasized that a lot of effort will be put in construction of “new infrastructure” like 5G and data centers in their 2022 work plans. Cities like Shanghai has pushed forward the in-depth coverage of the superfast wireless network and has ambitions to build super large computing power platforms to meet growing demand.
The Ministry of Industry and Information Technology revealed that 2022 is a critical year for the large-scale development of 5G applications. Improving 5G network coverage, accelerating the in-depth integration of 5G and vertical industries and moderately speeding up the coverage of 5G in counties and rural towns are the goals. Ten ministries, including the Cyberspace Administration of China, recently unveiled a digital rural development action plan for the period from 2022 to 2025, which called for an intensified push to promote digital infrastructure upgrades in rural areas.
The 5G construction will rapidly push up the demand for lithium batteries used in base stations from 2021 to 2025. It is estimated that the number of communication towers will increase to 13 million by 2025, the global market demand for lithium batteries for communication will reach 60GWh, and the market size will exceed RMB60 billion. We expect the demand for lithium iron phosphate batteries used in communications will continue to expand company’s lithium-ion battery plant and provide a solid ground to capture new opportunity in this area. Since 2020, the “fast forward button” for the new 5G infrastructure development has been pressed.
Capacity in Place to Meet Ever Increasing Worldwide Demand
Leoch has already expanded its manufacturing capacity both locally and overseas, with a new lithium-ion plant in China and two new lead-acid plants in Vietnam in 2019. It has made an investment of RMB1.2 bn in the construction of a new lithium-ion battery manufacturing facility in Anhui, China which has already commenced commercial production. This new facility has allowed the company to accelerate the development of a series of innovative 5G power solutions to meet the ongoing customer demands, seizing opportunities arising from the fast-evolving telecommunications market.
Although there was no aggressive expansion in production capacity for lead-acid batteries in 2021, the company is gradually expanding lithium-ion batteries production capacity according to its strategic plan. It is expected that the lithium-ion battery capacity will increase from 1.8GWh in 2020 to 4GWh gradually over the next few years and potentially contribute up to RMB5 bn in annual revenue. We believe this preparation will start to provide a fruitful return starting 2022.
&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 important long-term growth drivers in the 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,&nbsp;please see our attached Business Update Report.

Leoch [842]: 5G Play at 4.8x P/E, 2.5x EV/EBITDA: Business Update Report