Intron Earnings: Strong Leverage to Electric Vehicles and Autonomous Driving; Valuation Reduced

Intron Technology’s 01760 first-half 2023 result showed very strong revenue growth of 27% driven by strong growth from electric vehicles and automated vehicles. However, several factors, including a large increase in research and development costs and interest expenses meant this strong revenue growth was not reflected in net profit, which grew only 1.2%. Electric vehicles and automated vehicles contributed 55% of Intron’s revenue in the first half and we see a long growth runway for them. We expect unit growth for new energy vehicles in China of around 35% in 2023 and high-teens growth until 2025, and we expect Intron may be able to take market share at above this rate. Intron continued to invest in R&D in the first half with R&D expenses up 59% accounting for 8.9% of total revenue, up from 7% of total revenue in the first half of 2022. We expect Intron to spend around 7% of revenue on R&D in the medium term, broadly in line with its historical spending. Interest expense also increased to CNY 46.8 million in the first half of 2023 from CNY 15.7 million in the first half of 2022 due to increases in both debt and interest rates. The company is increasing its CNY-denominated debt, with the interest rate for this debt nearly half that of the interest rate on its USD-denominated debt.

We decrease our fair value estimate to HKD 6.70 from HKD 8.20 per share previously following the result, due to a combination of reduced revenue and earnings forecasts and a weaker CNY. The stock trades at around 52% discount to our fair value, which combined with our Very High Uncertainty Rating drives a 4-star rating as of Aug. 24, 2023. We also retain our narrow moat rating due to the company’s solid reputation and strong customer relationships in supplying electronics to auto original equipment manufacturers. The moat rating is supported by its return on invested capital, which has historically been well over its cost of capital except for the COVID-19-affected 2020.