Investment Summary

Company profile:

Tuopu Group is an industry leader in the field of automotive NVH that is capable of synchronous design with the original equipment manufacturer. In recent years, on the basis of the original business of shock absorbers and interior functional parts, the Company has proactively arranged the module of the lightweight chassis system and the automotive electronics business as the future Ŗ+3" strategic development projects, in order to adapt to the trend of electrification, intellectualization and lightweight of vehicles.

FY20's Results Grew by Nearly 40% against the Trend, and Q1 FY21 Results Rose by 116%

Continued High Growth with Nearly Doubled Results in the First Three Quarters

In the first three quarters of 2021, Tuopu Group recorded an operating revenue of RMB7,823 million, up 81.14% yoy; net profit attributable to the parent company of RMB753 million, up 94.44% yoy; net profit attributable to the parent company excluding non-recurring items of RMB731 million, up 103.47% yoy. The basic EPS was RMB0.69, a year-on-year growth of 86.49%. Specifically, in the third quarter, the Company reported a revenue of RMB2,906 million, up 65.44% yoy or 16.70% qoq; net profit attributable to the parent company of RMB294 million, up 71.26% yoy or 37.43% qoq.

Since this year, recovery in the global auto market has been hit by chip shortages. In this context, Tuopu Group bucked the trend with substantial growth that is significantly better than the industry level. The main reason is that the Company has actively expanded to the NEV lightweight chassis and automotive electronics over the years, and has gradually seen effect in its transformation. Besides, thanks to its forward-looking layout, it has received a great number of orders, with the localized Tesla project making significant contribution in order increment. Also, the rising sales in the supporting models of other core customers have brought rapid growth in operating results.

Improved Quarter-on-Quarter Gross Margin

In Q3, the Company's gross margin recorded was 21.12%, down 5 ppts from the reading for the previous year, mainly due to the dramatic increase in raw material prices and freight costs. This figure also represents a quarter-on-quarter increase of 1.29 ppts, mainly because the Company actively negotiated with downstream customers to transfer part of the rising costs, and began to achieve certain effect. The period expense rate in Q3 was 8.3%, a year-on-year drop of 5.7 ppts or a quarter-on-quarter drop of 0.4 ppts. Specifically, the ratio of expenses to sales went down by 3.5 ppts yoy, which was caused by the fact that transportation expense and storage expense were no longer included in sales expense under the new accounting standards; the R&D expense ratio dropped by 1.1 ppts. The final net profit margin was 10.25%, up 0.37 ppts yoy or 1.61 ppts qoq.

Further Growth Driven by Sales Volume of Downstream Automobile Enterprises and Tier0.5 Cooperation Mode

With its excellent vehicle synchronous R&D capability, strategic forward-looking layout, the Company fixed its partnership with downstream customers in advance and has begun to harvest orders.

In terms of lightweight chassis, the Company's aluminum alloy integrated vacuum cast chassis has been recognized by Ford, RIVIAN and other customers and mass production has started. The value of single vehicle in cooperation with RIVIAN has reached RMB11,000. As for thermal management system, the integrated heat pump assembly and electronic expansion valve, electronic water valve, electronic water pump developed by the Company have been recognized by customers, and the Company is expected to become the overall solution provider in new energy thermal management, with the overall value of single vehicle up to RMB6,000 to RMB9,000. With respect to intelligent driving control system, IBS products, as the two core executors of ADAS, are making efforts to match with intelligent steering system EPS, which are expected to be a new growth point for the Company in the future.

Meanwhile, the Company has implemented the Tier0.5 business model by which it has gradually gained the recognition of intelligent electric vehicle enterprises. In this model, the Company can get more orders with more supporting products for single vehicle and higher sales amount.

Investment Thesis

In terms of valuation, taking into account the chip shortage and rising raw material price factors, we slightly lower the profit forecast for 2021, and lift the profit forecast for 2023 as we expect that the chip shortage will be completely resolved in 2023, corresponding to the EPS of 1.05/1.43/1.95 yuan in 2021/2022/2023. 1.43/1.95 (originally 1.17/1.43/1.92 yuan). We are optimistic about the development prospects of the company's lightweight business and automotive electronics. So, we lift the Company's target price to RMB 60 yuan, respectively 57/42/31 x P/E for 2021/2022/2023, a "Accumulate" rating. (Closing price as at 3 November)

Risk

Price war among peers

Raw material price increase

New business risk

Financials

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