Intron Earnings: Gross Margin Squeezed Further on Auto Competition; Fair Value Cut to HKD 3.40

Intron Technology’s first-half 2024 results showed continued strong revenue growth of 8%, driven by electric vehicles, automated vehicles, and cloud servers. However, intense competition among its automaker customers put pressure on Intron’s gross margin, which contracted to 15.9% from 20.6% in the first half of 2023, leading to a 37% decline in net profit. We lower our fair value estimate for Intron to HKD 3.40 per share from HKD 4.60 following the results, due to a combination of reduced revenue and gross margin forecasts. We have lowered our 2024 gross margin assumption to 16% from 18% previously and our long-term gross margin to 17.5%, from 19% before. Despite this, the stock trades at about a 60% discount to our fair value, which, combined with our Very High Morningstar Uncertainty Rating, drives a 5-star rating as of Aug. 28, 2024. Based on our estimates, Intron trades on a 2024 price/earnings ratio of 5.6 times and would trade on 15 times at our fair value, which we believe is fair, given the forecast growth. We also retain our narrow moat rating due to its solid reputation and strong customer relationships in supplying electronics to auto original equipment manufacturers, or OEMs, who have historically been reluctant to change reliable suppliers.