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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

We had initially given a one year PT on Leoch [842_HK; HK$1385 million/US$180 million market cap] 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 140% year to date and has already crossed our initial price target. We are revising our price target to HK$1.50 per share which implies an upside of 47% over the current price of HK$1.02 per share as we feel the business performance would resume its upward growth momentum in FY2021 and beyond. Our price target implies a P/E multiple of 14.5x on our FY2021 EPS estimate of RMB 9 cents and an EV/ EBITDA multiple of 6.6X on our FY2021 EBITDA estimate of RMB515 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 9.8x P/E and 5.6x EV/EBITDA based on our FY2021 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 7.4x P/E and 4.9x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively.
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. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years.
It is expected that 5G will help accelerate the development of Internet of Things, big data, artificial intelligence and other technologies, driving the &nbsp;growth of the global data center market at an exponential rate. We believe that the increasing demands for backup power solutions in the data center market will help drive revenue growth for the company in the near future. Although the global economic environment remained challenging in the second half of 2020, the speedy recovery in China provides a strong backup to prevent overall decline in the company’s battery business.
Inflection Point, Green Shoots Visible
Leoch in the first half of 2020 had reported a decline of only 7% in its overall revenues which was far more resilient as compared to the overall industry performance during the period. Despite the global recession and weak overseas market demand, the company still achieved solid performance in its Power Solutions business in the first half of 2020. The overall shipment in tons to PRC customers improved by more than 35% but that of the overseas market decreased by 5% as compared to the corresponding period of last year. The volume of shipments increased by more than 15% in total during the period which benefited from a stable recovery of the Chinese economy. This positive 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.
We expect the recycled lead business to make up for the lost ground in the second half of the year to contribute more quantum of revenue to the overall business as the plant has resumed full operations late in the month of May.
We believe the rise in research and development expenditure should generate higher growth and increase margins for the company going forward through product innovation. Once the recycled lead business makes up for the lost business in the second half, along with increased revenues from the battery segment due to further recovery, the overall profitability would return to normal levels.&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 (13% from 11.8% YoY in 1HFY2020) declining finance costs (18% lower YoY) and selling and distribution expenses remaining flat, we believe with all the negatives behind, the company is geared up to deliver on 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) would resume its upward growth momentum in FY2021 and beyond.
Expect Sharp Recovery in Recycled Lead Business in 2HFY2020
Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility has resumed operations in the first half of 2020 and revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
For further details please see our attached Update Report.

We had initially given a one year PT on Leoch [842_HK; HK$1385 million/US$180 million market cap] 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 140% year to date and has already crossed our initial price target. We are revising our price target to HK$1.50 per share which implies an upside of 47% over the current price of HK$1.02 per share as we feel the business performance would resume its upward growth momentum in FY2021 and beyond. Our price target implies a P/E multiple of 14.5x on our FY2021 EPS estimate of RMB 9 cents and an EV/ EBITDA multiple of 6.6X on our FY2021 EBITDA estimate of RMB515 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 9.8x P/E and 5.6x EV/EBITDA based on our FY2021 EPS and EBITDA estimates, respectively. Also, the stock trades at extremely attractive multiples of just 7.4x P/E and 4.9x EV/EBITDA based on our FY2022 EPS and EBITDA estimates, respectively.
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. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years.
It is expected that 5G will help accelerate the development of Internet of Things, big data, artificial intelligence and other technologies, driving the &nbsp;growth of the global data center market at an exponential rate. We believe that the increasing demands for backup power solutions in the data center market will help drive revenue growth for the company in the near future. Although the global economic environment remained challenging in the second half of 2020, the speedy recovery in China provides a strong backup to prevent overall decline in the company’s battery business.
Inflection Point, Green Shoots Visible
Leoch in the first half of 2020 had reported a decline of only 7% in its overall revenues which was far more resilient as compared to the overall industry performance during the period. Despite the global recession and weak overseas market demand, the company still achieved solid performance in its Power Solutions business in the first half of 2020. The overall shipment in tons to PRC customers improved by more than 35% but that of the overseas market decreased by 5% as compared to the corresponding period of last year. The volume of shipments increased by more than 15% in total during the period which benefited from a stable recovery of the Chinese economy. This positive 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.
We expect the recycled lead business to make up for the lost ground in the second half of the year to contribute more quantum of revenue to the overall business as the plant has resumed full operations late in the month of May.
We believe the rise in research and development expenditure should generate higher growth and increase margins for the company going forward through product innovation. Once the recycled lead business makes up for the lost business in the second half, along with increased revenues from the battery segment due to further recovery, the overall profitability would return to normal levels.&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 (13% from 11.8% YoY in 1HFY2020) declining finance costs (18% lower YoY) and selling and distribution expenses remaining flat, we believe with all the negatives behind, the company is geared up to deliver on 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) would resume its upward growth momentum in FY2021 and beyond.
Expect Sharp Recovery in Recycled Lead Business in 2HFY2020
Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility has resumed operations in the first half of 2020 and revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
For further details please see our attached Update Report.

Leoch [842]: 5G Play at 9.8x P/E 5.6x EV/EBITDA - Update Report