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Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

<a target="_blank"></a><a target="_blank">Leoch International Technology [842_HK; HK$991 million/US$129 million market cap] reported robust growth in its overall revenues by 17.4% to RMB9,631.4 mn for FY2021 ended December. The revenue from batteries’ (and related items) business amounted to RMB9,249.2 mn, representing an increase of 11.1% from RMB8,324.2 mn for the corresponding period in 2020. The increase in revenue from batteries was mainly contributed by 27.3% growth in the overseas market business while growth in China was flat YoY. EPS rose by 11% on a YoY basis in FY2021 to RMB10 cents on account of dilution, while the profit amounted to RMB166.7 mn, representing an increase of 21% compared to the corresponding period in 2020. </a>
Financial Highlights for FY2021
<ul type="disc">
<li>Robust Growth: Net Profit +21%, Gross Profit +127%, Revenue +17%</li>
<li>Gross Profit Margin 13.4% in FY2021 (12.3% in FY2020)</li>
<li>Research and Development Expenses Rise 39% YoY</li>
</ul>
<ul type="disc">
<li>Finance Costs Down 9% YoY</li>
</ul>
<ul type="disc">
<li>Reserve Power Battery Segment Revenue Up 14% YoY</li>
<li>SLI Battery Segment Revenue Up 4.3% YoY</li>
<li>Motive Power Battery Segment Revenue Up 10% YoY</li>
<li>Recycled Lead Business Segment Revenue Up 57% YoY</li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/267/303/original/image_25476938921649236951431.png?1649236952" width="533" height="370" class="editor-image img-responsive" data-smartkarma-image-id="267303"></figure>
The volume delivered in terms of ton was around 4.3% higher than the same period last year mainly attributed to the overseas business. The increased volume of shipments was mainly due to its export business as global production capacity was recovering slowly amid the unstable pandemic condition. Revenue from recycled lead business amounted to RMB2,053.9 mn, representing an increase of 57.1% from RMB1,307.1 mn for the same period in 2020.&nbsp;
The company continues to witness a reduction in finance costs (down 9% YoY) but selling distribution and administration expenses have increased by 22% YoY. Also, the research and development expenses increased by 39% 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 should sustain recovery in FY2022.
This sustained recovery 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 first half of 2022 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 recover further in the first half of 2022 as it has shown resilient growth in 2021, but it would likely pick up higher pace in the second half of FY2022 and beyond. The rise in revenues for the Recycled Lead business segment was due to the resumption of full operations in 2021 since it began operations on a lower scale in May 2020.
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.&nbsp;
Maintain Long Term PT of HK$2.00; Short Term PT HK$1.50, 105% Upside
We continue to maintain a short term price target of HK$1.50 per share over a one year 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.
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.
Sharp Rise in Gross Profit and Uptick in Gross Profit Margin 
Gross profit increased by 27% from RMB1,188 mn in FY2020 to RMB1,510 mn in FY2021, mainly due to the strong demand from the overseas market coupled with resumption of full operations from the Recycled Lead business of the company. The gross profit margin increased for both, the battery business and the recycled lead business leading to an increase in the overall gross profit margin from 12.3% for FY2020 to 13.4% for FY2021. The increase in gross profit and gross profit margin for the battery business was mainly due to less operational disruption in China for the period while the increase for recycled lead products was primarily a result of resumption of full operation in 2021 which started on a lower scale in May 2020.
For further details and financial model, please see our attached Earnings Update Report.

Leoch International Technology [842_HK; HK$991 million/US$129 million market cap] reported robust growth in its overall revenues by 17.4% to RMB9,631.4 mn for FY2021 ended December. The revenue from batteries’ (and related items) business amounted to RMB9,249.2 mn, representing an increase of 11.1% from RMB8,324.2 mn for the corresponding period in 2020. The increase in revenue from batteries was mainly contributed by 27.3% growth in the overseas market business while growth in China was flat YoY. EPS rose by 11% on a YoY basis in FY2021 to RMB10 cents on account of dilution, while the profit amounted to RMB166.7 mn, representing an increase of 21% compared to the corresponding period in 2020. 
Financial Highlights for FY2021

Robust Growth: Net Profit +21%, Gross Profit +127%, Revenue +17%
Gross Profit Margin 13.4% in FY2021 (12.3% in FY2020)
Research and Development Expenses Rise 39% YoY


Finance Costs Down 9% YoY


Reserve Power Battery Segment Revenue Up 14% YoY
SLI Battery Segment Revenue Up 4.3% YoY
Motive Power Battery Segment Revenue Up 10% YoY
Recycled Lead Business Segment Revenue Up 57% YoY


The volume delivered in terms of ton was around 4.3% higher than the same period last year mainly attributed to the overseas business. The increased volume of shipments was mainly due to its export business as global production capacity was recovering slowly amid the unstable pandemic condition. Revenue from recycled lead business amounted to RMB2,053.9 mn, representing an increase of 57.1% from RMB1,307.1 mn for the same period in 2020.&nbsp;
The company continues to witness a reduction in finance costs (down 9% YoY) but selling distribution and administration expenses have increased by 22% YoY. Also, the research and development expenses increased by 39% 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 should sustain recovery in FY2022.
This sustained recovery 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 first half of 2022 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 recover further in the first half of 2022 as it has shown resilient growth in 2021, but it would likely pick up higher pace in the second half of FY2022 and beyond. The rise in revenues for the Recycled Lead business segment was due to the resumption of full operations in 2021 since it began operations on a lower scale in May 2020.
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.&nbsp;
Maintain Long Term PT of HK$2.00; Short Term PT HK$1.50, 105% Upside
We continue to maintain a short term price target of HK$1.50 per share over a one year 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.
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.
Sharp Rise in Gross Profit and Uptick in Gross Profit Margin 
Gross profit increased by 27% from RMB1,188 mn in FY2020 to RMB1,510 mn in FY2021, mainly due to the strong demand from the overseas market coupled with resumption of full operations from the Recycled Lead business of the company. The gross profit margin increased for both, the battery business and the recycled lead business leading to an increase in the overall gross profit margin from 12.3% for FY2020 to 13.4% for FY2021. The increase in gross profit and gross profit margin for the battery business was mainly due to less operational disruption in China for the period while the increase for recycled lead products was primarily a result of resumption of full operation in 2021 which started on a lower scale in May 2020.
For further details and financial model, please see our attached Earnings Update Report.

Leoch [842]: Robust Recovery, 5G Play at 4.8x P/E 2.5x EV/EBITDA: Earnings Update