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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

Leoch [842_HK; HK$1426 million/US$185 million market cap] reported a stellar rise in its overall revenues by 15% to RMB9,631 mn for FY2020 ended December, despite the 7% decline reported in the first half of FY2020. This indicates that revenues rose sharply in the second half of FY2020 by 23% which shows recovery has been very sharp and resilient for the company as compared to the overall industry during the period. Revenue from the total Battery business segment amounted to RMB8,324 mn,&nbsp;a healthy increase of 13% from RMB7,387 mn in 2019. The increase in revenue was mainly due to a sharp recovery in China’s domestic automobile sales. Also, due to lockdown in most of the countries the demand for exports revived in the second half of FY2020. The volume delivered in terms of tonnage increased by approximately 20% as compared to 2019 in which more than 75% was contributed by China. This significant and sharp growth in revenue from its core battery business segment, during uncertain times, signifies a strong competitive market position of the company, signaling more robust growth in the near future as conditions come back to normalcy. The company has strategized to focus on allocating more resources for marketing as well as research and development purposes to garner higher revenue from the autonomous car driving market opportunity.
&nbsp;Revenue from recycled lead business amounted to RMB1,307 mn, representing an increase of 35% from RMB971 mn in 2019. This rise in revenues for the recycled lead business segment was due to the resumption of full operations in the month of May 2020. We had expected the recycled lead business to make up for lost ground in the second half of the year to contribute more quantum of revenue to the overall business. After resumption of full operation, output increased significantly, generating sales to third parties of more than RMB1 bn in the second half of 2020.
&nbsp;EPS declined by only 10% on a YoY basis to RMB9 cents on account of the recovery in revenues from the recycled lead business. The EPS had declined by 67% in the first half of 2020 signaling a sharp recovery of 47% in the second half of FY2020 only to register an overall decline of 10% for FY2020. The company continues to witness a reduction in finance costs (down 20% YoY) but selling distribution and administration expenses have increased by 12% YoY. Also, the research and development expenses increased by 45% 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 FY2021.
&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 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. With all the capacity expansion undertaken in FY2019 along with rising gross profit margins (12.3% in FY2020 from 12.1% in FY2019) declining finance costs (20% 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 and is staring at an Inflection Point in 2021 to make the best of its opportunities. With the issuance of 5G licenses for commercial use by China’s Ministry of Industry and Information Technology (MIIT) in June 2019, we believe revenue from the Reserve Power (especially in the Telecom and Data Center sub-segment – largest contribution to total revenues) will continue its upward growth momentum in FY2021 and beyond.
&nbsp;Revise PT to HK$2.00; 90% Upside
We had initially given a one year PT on Leoch at HK$1.00 per share which indicated an upside of 117% over the stock price of HK$0.46. The stock has gathered momentum and is up 78% year to date and has already crossed our initial price target. We are revising our price target to HK$2.00 per share which implies an upside of 90% over the current price of HK$1.05 per share as we feel the business performance has resumed its upward growth momentum in the second half of FY2020 which will continue in FY2021 and beyond. Our price target implies a P/E multiple of 12x on our FY2021 EPS estimate of RMB 13 cents and an EV/EBITDA multiple of 7.1x on our FY2021 EBITDA estimate of RMB535 mn. With all the negatives factored into the stock price along with secular tailwinds provided by the recent 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 6.4x P/E and 5.1x EV/EBITDA based on our FY2021 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 4.0x P/E and 4.9x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively.
&nbsp;Uptick in Gross Profit Margin 
Gross profit increased by 17% from RMB1,015 mn in FY2019 to RMB1,188 mn in FY2020, mainly due to higher contribution from the battery business of the company resulting in an increase in the overall gross profit margin from 12.1% for FY2019 to 12.3% for FY2020. Higher gross profit margins were a result of lower production costs for the overall battery business segment.
&nbsp;Motive Power Battery Segment - Stellar Growth of 34%
The Reserve Power batteries sub-segment revenues increased by 7% to RMB4,187 mn (2019: RMB3,913 mn) and accounted for 50.3% of total sales during FY2020 as compared to 53% in 2019. The increase was mainly due to a sharp recovery in the business from China. The growth momentum for the Telecom and Data Center business in China continues to recover with good demand traction while the overseas demand remains suppressed resulting in an overall positive recovery in sales during FY2020. Besides lead-acid battery, the company has deployed a lot of resources in the development of various lithium based battery models and will continue to expand its product portfolio to increase market share.
&nbsp;The SLI battery business sub segment reported 17% growth to RMB2,883 mn contributing 35% to the overall revenue of the company as compared to RMB2,471 mn (33%) in 2019. Leoch garnered more than 20% market share in the commercial vehicle segment especially for batteries used in supporting air conditioning systems in heavy duty automobiles. Also, it was one of the core suppliers to reputed manufacturers such as FAW, SAW, Sinotruk, Foton and Shaanxi Heavy Duty Automobile. Leoch is one of the major suppliers to domestic new energy automobile brands such as BYD, Geely Auto, Nio, GWM, BAIO BJEV, Xpeng, ONE and Weltmeister. The demand for growth from China was seen to be sharp resulting in an overall double-digit growth.
&nbsp;The motive power battery sub-segment reported a stellar increase in revenues by 34% to RMB1,115 mn in FY2020 as compared to RMB834 mn in FY2019. The recovery of business activities in China and booming exports pushed up the demand for all areas of applications in the motive power battery segment, especially for machines used in the logistics industry. Currently, China’s market for low-speed electric vehicles, two-wheelers and tricycles has reached 300 mn units and the corresponding power battery market has reached more than RMB70 bn. It is expected that the market will grow at a healthy rate in the coming years.
&nbsp;The company’s revenue decreased by 2.4% to RMB1,390 mn in Europe, Middle East and Africa but increased by 23% in China to RMB6,326 mn, 0.8% in USA to RMB1,022 mn and 16% in Asia Pacific to RMB893 mn (excluding China).
&nbsp;Sharp Recovery in Recycled Lead Business in FY2020
Revenue from recycled lead business rose 35% to RMB1,307 mn in FY2020 (FY2019: RMB971 mn). Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in 2018. The lead recycling facility resumed full operations in the first half of 2020 and revenues are expected to continue rising and reach levels to the tune of RMB2 bn in FY2021 and make up for the lost opportunity. Even if the average SMM Lead price per ton recovers to that seen in 2019 the revenue from the recycled lead business will gain further traction.
&nbsp;Focus on Innovation to Generate Higher Revenues and Margins Going Forward
In 2020, the company continued to focus on innovation, to work closely with international and domestic battery experts and research institutions to research on new technologies and develop new 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 2020, company’s battery R&amp;D team consisted of more than 350 researchers and related development &amp; sampling technicians. The company also owns 505 patents, with another 160 pending applications as on 26th March 2021. Focus on innovation is expected to sustain the growth momentum in revenues and contribute to higher margins for the company going forward.
&nbsp;For further details, please see our attached Earnings Update Report.

Leoch [842_HK; HK$1426 million/US$185 million market cap] reported a stellar rise in its overall revenues by 15% to RMB9,631 mn for FY2020 ended December, despite the 7% decline reported in the first half of FY2020. This indicates that revenues rose sharply in the second half of FY2020 by 23% which shows recovery has been very sharp and resilient for the company as compared to the overall industry during the period. Revenue from the total Battery business segment amounted to RMB8,324 mn,&nbsp;a healthy increase of 13% from RMB7,387 mn in 2019. The increase in revenue was mainly due to a sharp recovery in China’s domestic automobile sales. Also, due to lockdown in most of the countries the demand for exports revived in the second half of FY2020. The volume delivered in terms of tonnage increased by approximately 20% as compared to 2019 in which more than 75% was contributed by China. This significant and sharp growth in revenue from its core battery business segment, during uncertain times, signifies a strong competitive market position of the company, signaling more robust growth in the near future as conditions come back to normalcy. The company has strategized to focus on allocating more resources for marketing as well as research and development purposes to garner higher revenue from the autonomous car driving market opportunity.
&nbsp;Revenue from recycled lead business amounted to RMB1,307 mn, representing an increase of 35% from RMB971 mn in 2019. This rise in revenues for the recycled lead business segment was due to the resumption of full operations in the month of May 2020. We had expected the recycled lead business to make up for lost ground in the second half of the year to contribute more quantum of revenue to the overall business. After resumption of full operation, output increased significantly, generating sales to third parties of more than RMB1 bn in the second half of 2020.
&nbsp;EPS declined by only 10% on a YoY basis to RMB9 cents on account of the recovery in revenues from the recycled lead business. The EPS had declined by 67% in the first half of 2020 signaling a sharp recovery of 47% in the second half of FY2020 only to register an overall decline of 10% for FY2020. The company continues to witness a reduction in finance costs (down 20% YoY) but selling distribution and administration expenses have increased by 12% YoY. Also, the research and development expenses increased by 45% 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 FY2021.
&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 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. With all the capacity expansion undertaken in FY2019 along with rising gross profit margins (12.3% in FY2020 from 12.1% in FY2019) declining finance costs (20% 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 and is staring at an Inflection Point in 2021 to make the best of its opportunities. With the issuance of 5G licenses for commercial use by China’s Ministry of Industry and Information Technology (MIIT) in June 2019, we believe revenue from the Reserve Power (especially in the Telecom and Data Center sub-segment – largest contribution to total revenues) will continue its upward growth momentum in FY2021 and beyond.
&nbsp;Revise PT to HK$2.00; 90% Upside
We had initially given a one year PT on Leoch at HK$1.00 per share which indicated an upside of 117% over the stock price of HK$0.46. The stock has gathered momentum and is up 78% year to date and has already crossed our initial price target. We are revising our price target to HK$2.00 per share which implies an upside of 90% over the current price of HK$1.05 per share as we feel the business performance has resumed its upward growth momentum in the second half of FY2020 which will continue in FY2021 and beyond. Our price target implies a P/E multiple of 12x on our FY2021 EPS estimate of RMB 13 cents and an EV/EBITDA multiple of 7.1x on our FY2021 EBITDA estimate of RMB535 mn. With all the negatives factored into the stock price along with secular tailwinds provided by the recent 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 6.4x P/E and 5.1x EV/EBITDA based on our FY2021 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 4.0x P/E and 4.9x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively.
&nbsp;Uptick in Gross Profit Margin 
Gross profit increased by 17% from RMB1,015 mn in FY2019 to RMB1,188 mn in FY2020, mainly due to higher contribution from the battery business of the company resulting in an increase in the overall gross profit margin from 12.1% for FY2019 to 12.3% for FY2020. Higher gross profit margins were a result of lower production costs for the overall battery business segment.
&nbsp;Motive Power Battery Segment - Stellar Growth of 34%
The Reserve Power batteries sub-segment revenues increased by 7% to RMB4,187 mn (2019: RMB3,913 mn) and accounted for 50.3% of total sales during FY2020 as compared to 53% in 2019. The increase was mainly due to a sharp recovery in the business from China. The growth momentum for the Telecom and Data Center business in China continues to recover with good demand traction while the overseas demand remains suppressed resulting in an overall positive recovery in sales during FY2020. Besides lead-acid battery, the company has deployed a lot of resources in the development of various lithium based battery models and will continue to expand its product portfolio to increase market share.
&nbsp;The SLI battery business sub segment reported 17% growth to RMB2,883 mn contributing 35% to the overall revenue of the company as compared to RMB2,471 mn (33%) in 2019. Leoch garnered more than 20% market share in the commercial vehicle segment especially for batteries used in supporting air conditioning systems in heavy duty automobiles. Also, it was one of the core suppliers to reputed manufacturers such as FAW, SAW, Sinotruk, Foton and Shaanxi Heavy Duty Automobile. Leoch is one of the major suppliers to domestic new energy automobile brands such as BYD, Geely Auto, Nio, GWM, BAIO BJEV, Xpeng, ONE and Weltmeister. The demand for growth from China was seen to be sharp resulting in an overall double-digit growth.
&nbsp;The motive power battery sub-segment reported a stellar increase in revenues by 34% to RMB1,115 mn in FY2020 as compared to RMB834 mn in FY2019. The recovery of business activities in China and booming exports pushed up the demand for all areas of applications in the motive power battery segment, especially for machines used in the logistics industry. Currently, China’s market for low-speed electric vehicles, two-wheelers and tricycles has reached 300 mn units and the corresponding power battery market has reached more than RMB70 bn. It is expected that the market will grow at a healthy rate in the coming years.
&nbsp;The company’s revenue decreased by 2.4% to RMB1,390 mn in Europe, Middle East and Africa but increased by 23% in China to RMB6,326 mn, 0.8% in USA to RMB1,022 mn and 16% in Asia Pacific to RMB893 mn (excluding China).
&nbsp;Sharp Recovery in Recycled Lead Business in FY2020
Revenue from recycled lead business rose 35% to RMB1,307 mn in FY2020 (FY2019: RMB971 mn). Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in 2018. The lead recycling facility resumed full operations in the first half of 2020 and revenues are expected to continue rising and reach levels to the tune of RMB2 bn in FY2021 and make up for the lost opportunity. Even if the average SMM Lead price per ton recovers to that seen in 2019 the revenue from the recycled lead business will gain further traction.
&nbsp;Focus on Innovation to Generate Higher Revenues and Margins Going Forward
In 2020, the company continued to focus on innovation, to work closely with international and domestic battery experts and research institutions to research on new technologies and develop new 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 2020, company’s battery R&amp;D team consisted of more than 350 researchers and related development &amp; sampling technicians. The company also owns 505 patents, with another 160 pending applications as on 26th March 2021. Focus on innovation is expected to sustain the growth momentum in revenues and contribute to higher margins for the company going forward.
&nbsp;For further details, please see our attached Earnings Update Report.

Leoch [842]: 5G Play at 9.3x P/E, 5.6x EV/EBITDA - Earnings Update