CALB’s Second-Half Margin and Core Profit Beat

No-moat CALB 03931 reported its first set of financial results after listing in Hong Kong last year. The company posted 4 times year-over-year net profit growth for 2022, which was helped by capacity expansion and margin improvement. While revenue was largely in line with our expectation, gross margin beat with a 3-percentage-point increase from a year ago. We reduce our 2023 and 2024 net profit forecasts by 11% and 2%, respectively, despite higher margin assumptions, to reflect lower government grants, and we maintain our fair value estimate at HKD 20.0 per share. Our fair value implies a forward price/earnings ratio of 13 times. At the current price, the shares are trading in Morningstar 3-star territory, fairly valued in our view.

CALB’s revenue grew nearly 2 times year over year to CNY 20.4 billion in 2022, with a 115% increase in power battery sales volume and a 41% gain in average selling price, on our estimates. As a result, gross margin expanded 3 percentage points year over year to 10.3% from 7.5% in 2021. Net profit for 2022 increased 4 times year over year to CNY 692 million. Excluding CNY 209 million government grants and investment income, core net profit reached CNY 483 million compared with a loss of CNY 285 million in 2021. For the second half last year, the company’s total revenue grew 166% year over year and gross margin expanded 7 percentage points.

Despite a solid 2022, we retain our view that the company will face increasing pricing pressure to acquire new automobile customers, which leads to lower profitability than leading players in the next few years. Given its relatively smaller scale, we believe CALB will have to compete on pricing. Excluding government subsidy and investment income, we forecast CALB’s net margin to stay at a single-digit level of 4%-6% in 2023-25.