Morningstar were Optimistic about Car Chips Dark Horse, Intron Technology, Whose Share Price Had Doubled in Three Months

Intron Technology reported a strong 2022 result with revenue up 59% to CNY 3.2 billion with net profit up 111% to CNY 200 million. Revenue growth was driven by new energy vehicle solutions which reported 132% growth, but we note that all key revenue lines reported at least 18% growth. Intron has been able to secure good semiconductor supply during a time of industry shortage which has helped it gain market share. The company now procures around 75% of its semiconductor supplies from Infineon (down from 80% previously), as it has also added other suppliers such as Horizon.

Intron’s exposure to new energy vehicles continues to grow with NEV sales representing 38% of second-half 2022 revenue, up from 29% in first-half 2022. The Chinese Association of Automobile Manufacturers, or CAAM, forecasts Chinese vehicle sales to increase 5% in 2022 with passenger vehicle sales expected to grow 7% and new energy vehicle sales expected to grow 42%. The government had set a target for electric vehicles, or EVs, to account for 20% of Chinese auto sales by 2025, up from 5.4% in 2020; however, CAAM now estimates that this target might even be reached in 2022.

Morningstar's value estimate is HKD 4.45 per share. This would put Intron at a 2022 price/earnings ratio of 14.6 times. The weighted average cost of capital is 9.70%.

Morningstar values Intron between HKD 2.50 per share and HKD 6.50 per share, giving it a high uncertainty rating.

Bull-case scenario values Intron at HKD 6.50 per share. Under this scenario, revenue growth over the next five years averages 31%, with operating income growing at an average of 37% given higher growth assumptions from the new energy business, which Morningstar forecast to grow at a compound annual average rate of 44% per year over the five years from 2021 to 2026 compared with 34% in the base case. Morningstar also assumes slower rates of decline in the body control and powertrain segments.

Bear-case scenario values Intron at HKD 2.50 per share. Under this scenario, revenue grows at 13% with operating profit growing at 9% per year. Growth from the new energy business averages 24% per year over the five years from 2021 to 2026, with the company losing market share. Morningstar also assumes increased rates of decline in the body control and powertrain segments.