Intron Provides High Leverage to Chinese EV, Automated Driving Growth; Lift FVE to HKD 8.20

Intron Technology’s 2022 result was driven by strong growth in revenue from electric vehicles, or EVs, and automated vehicles, with consolidated revenue up 52% and net profit up 107%. Together, these two categories made up 52% of Intron’s revenue in the second half and we see a long growth runway for them. We expect unit growth of new energy vehicles in China of 30%-35% in 2023 and high teens growth until 2025, and Intron would grow faster through taking market share. Intron continued to invest in research and development in 2022, with R&D expenses up 61%, accounting for 6.9% of total revenue, up from 6.5% in 2021. Being the largest distributor of Infineon chips in China has helped Intron gain customer market share in times of chip shortages, as we have seen over the past 18 months, particularly with original equipment manufacturers. We increase our fair value estimate to HKD 8.20 from HKD 7.50 per share previously, following the result. The stock trades at around a 44% discount to our fair value, which combined with our Very High Morningstar Uncertainty Rating, drives a 4-star rating as of March 28, 2023. We also retain our narrow moat rating due to its solid reputation and strong customer relationships in supplying electronics to auto original equipment manufacturers, who have historically been reluctant to change reliable suppliers. 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, and we expect above-cost-of-capital returns over our forecast period.