英恒科技:Power by automotive electronification

Leading automotive electronics solutions provider in China

Intron Tech is a newly listed IPO which provides vehicle electronics solutions to domestic automotive OEMs with clientsinclude eight of the top ten new energy vehicle brands including BYD, BAIC and Geely and as well as OEM part suppliers which amounted to 874customers in FY17. Intron provides electronic solutions in 3 of 4categories such as Body Control (24% sales), Safety (24% sales),Powertrain (12% sales) and Electric Vehicle (24% sales). The business model of Intron starts with R&D on new product

applications, and then approach customers to propose new ideas or customers seeks solutions, Intron will then source semiconductors and outsource the PCB production to EMS providers and after they will sell the products in volume on mark-up basis. Intron’s revenue has been fast-growing with CAGR of 42% during 2015-2017, and NEV segment is a key growth driver with CAGR of 80% during the same period due to the strong sales of NEV models.

The secular trends driving automotive electronification in China

brand OEMs

There are 3 trends driving the automotive electronification in the China domestic vehicle market, these include: 1) Quality

Improvement of domestic OEMs manufacturers compared to imports, the average number of chips used in a conventional vehicle

in China brand vehicle was 571 compared to 754 in foreign brand,but it is expected the average chip used in China brand will increase to 925 with 10.1% CAGR compared to foreign brand of 1,110 by2021. 2) NEVs use even more chips than conventional vehicles due to the application of electric motors and motor controllers, the average number of chips used in a NEV was 776 for China brand NEV compared to 571 in China brand conventional vehicle, and the average number of chip used in NEV is expected to reach 1,453 by2021, representing 2016-2021 CAGR of 13.4%. 3) Increases in content of ADAS and autonomous driving the value of electronic component per vehicle to increase from Rmb1,624 in 2016 to Rmb3,978 in 2021 representing CAGR of 25.1%.

Strong R&D capabilities

Intron has strong R&D capabilities with 230 R&D staff in FY17, R&D expenses accounted for 44% of its operating expenses in FY17 and accounted for 5.1% of the total revenue in FY17. As such, Intron has39 registered patents and 66 software copyrights. The company will increase R&D and 90% of the IPO proceed of HK$725m will be used to expand R&D capabilities, investing in R&D equipments and acquiring smaller players that will boost R&D capabilities. Intron also has cooperation agreement with SinoGerman University of Applied Science and mutual technical engineering cooperation on functional safety and automated driving with TTTech of Germany, who recently awarded trial contract to help to develop ADAS L3 with the German automotive JV in China.

Undemanding valuation

Intron is trading at PE ratio of 12x/7.8x FY18/FY19 according to market estimate, although there is no direct peer comparable, HK/China auto parts which are trading at average 17.5x/14.2xFY18/FY19 PE, overseas auto electronic peers trading at 21x/17.1xFY18/FY19 PE, and upstream semiconductor peers are trading at21.8x/19.2x FY18/FY19. We believe valuation is undemanding and Intron is benefiting from structural change of domestic automotive electronification.