Preannounces 2021 earnings up an estimated 193-196% YoY

    NCE Power has preannounced its 2021 results, estimating that net profit attributable to shareholders increased 193-196% YoY to Rmb408-413mn, and recurring attributable net profit rose 197-200% YoY to Rmb400- 405mn. In 4Q21, the firm’s attributable net profit could equal a range of Rmb97-102mn, up 153-166% YoY but down 28.6-25.0% QoQ. The preannounced results are largely in line with our forecast.

    Trends to watch Import substitution accelerates; sector demand to maintain high

    growth in 2022. In 2021, NCE Power’s earnings registered notable growth, which we attribute to a relatively complete power discrete value chain that secures the firm’s capacity supply and product quality in overseas markets, boosting the development of import substitution. In the short term, we think that import substitution demand from domestic clients will be a main driver of the firm’s earnings growth. In 2021, market demand for chips used in power and electrical energy conversion power discrete remained strong. However, the manufacturing capacity grew at a limited rate, resulting in tight industry supply. In this case, as expenses on foundries and prices of manufacturing materials increased, NCE Power was able to pass through these costs via price increases for its products.

    We believe supply will remain tight in 2022 amid a changing structure of downstream demand: Consumer electronics and power customer demand will fall, while that of industrial, photovoltaic （PV） power, and electric vehicles （EV） sectors will maintain high growth.

    Watch demand from PV and AFV sectors. In 2021, NCE Power

    increased sales of shielded-gate MOSFET and IGBT, and expanded into the PV, energy storage and EV markets through optimizing market mechanisms and customer and product mix. We expect incremental demand from these downstream sectors to boost the firm’s earnings growth in the medium and long term due to China’s carbon neutrality pledge. Therefore, we suggest paying attention to rising orders from fields of PV, energy storage and EV, as well as new client expansion.

    Valuation and recommendation

    We leave our 2021 and 2022 earnings forecasts unchanged, and introduce our 2023 earnings forecast of Rmb643mn. We remain upbeat on the outlook of power discrete sector. We believe NCE Power will maintain relatively high gross profit margin as it continues to optimize product mix.

    We maintain an OUTPERFORM rating. The stock is trading at 32.8x 2023e P/E. We cut our TP by 10% to Rmb204.28 （mainly reflecting sector valuation decline caused by macro market volatility）， implying 45x 2023e P/E, offering 37% upside.

    Risks

    New product R&D, demand for power discrete, and projects funded by proceeds from private placement disappoint; wafer foundry costs increase; competition intensifies.

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