High-end manufacturing: New energy vehicle sales maintained strong growth in November| Xing research

Weekly research report

Huaxing Securities "Xing Research" extracts the essence of last week's research report of Huaxing Securities Research Institute for you, helping you to fully understand the economic trends at home and abroad and analyze the hot spots of market segments.

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High-end manufacturing:

New energy vehicle sales continued to grow strongly in November

China's new energy vehicle sales reached 378,000 units in November, up 122% year-on-year and up 18% month-on-month, and retail penetration reached 20.8% in the month (18.8% in October);

In November, domestic power battery demand continued to rise, with a total output of 28.2GWh, an increase of 122% year-on-year; the installed capacity reached 20.8GWh, up 106% year-on-year, and the market share of Ningde rose to 55% in the same month.

New energy vehicles continued to grow rapidly in November, with a penetration rate of more than 20% in the month: According to the data of the Association of Passenger Vehicles, the domestic narrow passenger car market sales in November were 1.816 million units, down 12.7% year-on-year and up 6.0% month-on-month, and the month-on-month growth rate continued to be weak mainly affected by the high base and the decline in promotion margins in the same period last year. New energy vehicle sales in November reached 378,000 units (BEV/PHEV sales of 302,000 units), up 122% year-on-year and 18% month-on-month, and the penetration rate of new energy vehicles in the month reached 20.8% (vs 18.8% in October). From January to November 2021, the cumulative sales of new energy vehicles reached 2.51 million units (BEV/PHEV sales of 204/47 million units), an increase of 192% year-on-year, and the cumulative penetration rate of new energy vehicles in the first 11 months reached 13.8%, and the annual penetration rate is expected to be close to 15%. In November, the top 5 models of new energy vehicles sold in China were: Hongguang MINI EV (40,395 units), BYD Qin (30,049 units), BYD Han (12,838 units), Chery eQ (9,291 units), and BYD Dolphin (8,800 units). In November, the new energy passenger car market diversified, SAIC and GAC Group performed relatively strongly, and the highlights of traditional car companies were outstanding. At the same time, BYD's pure electric and plug-and-mix two-wheel drive have performed well, and three models have entered the top five of sales.

Demand for lithium iron phosphate continues to be strong, and domestic brands are growing rapidly: power battery demand continued to rise in November as the growth momentum of new energy vehicles continued. According to the data of the Power Battery Innovation Alliance: 1) Production: In November 2021, China's power battery production totaled 28.2GWh, an increase of 122% / 12% year-on-year / month-on-month. Ternary battery production was 10.4GWh, an increase of 43%/13% year-on-year/month; lithium iron phosphate battery production was 17.8GWh, an increase of 229%/12% year-on-year/month. From January to November, China's power battery production accumulated 188.1GWh, an increase of 176% year-on-year. The cumulative output of ternary and lithium iron phosphate batteries was 82.4/105.2GWh, respectively, an increase of 106%/275% year-on-year. 2) Installed capacity: The installed capacity of power batteries in November was 20.8GWh, up 153%/35% year-on-year/month-on-month. Ternary batteries installed a total of 9.2GWh, up 57%/31% year-on-year/month; lithium iron phosphate batteries installed a total of 11.6GWh, up 146%/38% year-on-year/month, and the installed capacity of lithium iron phosphate batteries continued to rise. From January to November, the installed capacity of power batteries in China accumulated 128.4GWh, an increase of 153% year-on-year; among them, the installed capacity of ternary and lithium iron phosphate batteries reached 63.3/64.7GWh respectively, up 95%/256% year-on-year. 3) Enterprise concentration: In November 2021, the top 5 domestic installed capacity enterprises were: Ningde Times (11.5Gwh), BYD (3.5Gwh), AVIC Lithium Battery (1.09Gwh), Guoxuan Hi-Tech (1.08Gwh) and Hive New Energy (0.56Gwh), with a total installed power battery capacity of 17.7GWh, accounting for 85% of the total installed capacity. CATL's market share further rose to 55% in October (50% in October), and its leading position continued to be stable. According to the data of the Power Battery Innovation Alliance, the top 5 power battery companies in the domestic power battery installed capacity from January to November are: Ningde Era (65.9Gwh), BYD (21.3Gwh), AVIC Lithium Battery (7.5Gwh), Guoxuan Hi-Tech (6.6Gwh) and LG New Energy (5.3Gwh), with a total power battery installed capacity of 106.6GWh, accounting for 83% of the total installed capacity, and other domestic power battery manufacturers (Hive, Tafir) are growing rapidly. It is expected that the top five manufacturers will all be domestic brands before next year.

We believe that China's new energy vehicle market, represented by domestic new power brands, will continue to develop rapidly, and we maintain the forecast that China's new energy vehicle sales in 2021 will be close to 3 million units (an increase of 120% year-on-year), and raise the annual power battery installed capacity forecast to 150Gwh (year-on-year +136%). We believe that CATL, as a leading enterprise with an installed capacity of more than half of the country, will continue to be the core beneficiary of the outbreak of the power battery industry, and we are optimistic that the leading intelligence as a supplier of lithium battery core equipment in Ningde will also benefit from the strong demand for downstream power batteries.

Risk warning: 1) sales of new energy vehicles are less than expected; 2) competition in the industry is intensifying; 3) raw material prices continue to rise.

("High-end Manufacturing - November Market Data: New Energy Vehicle Sales Maintain Strong Growth, Upward Revision of Power Battery Full-Year Installed Forecast to 150Gwh", Report Date: December 14, 2021)

Food & Beverage:

The regulatory tone of the domestic e-cigarette industry is good

We believe that the latest policy is a major positive for leading enterprises such as Fog core technology and Smore International.

The State Tobacco Monopoly Administration issued the Administrative Measures for Electronic Cigarettes (Draft for Comment), and the consultation period for comments ended December 17.

Friendly regulatory tone: According to the Administrative Measures for E-cigarettes (Draft for Comment) (hereinafter referred to as the Administrative Measures), although China's e-cigarette industry will still face regulatory restrictions, our interpretation of this is that the industry's leading enterprises will still be able to operate existing businesses (mainly based on economic considerations). In our view, a major potential risk is that the industry regulator China National Tobacco Corporation (hereinafter referred to as China Tobacco) may inhibit industry growth when the market is considered overheated, including by controlling the supply of raw materials such as nicotine and restricting e-cigarette manufacturers from expanding production capacity.

China Tobacco is confirmed as the regulator of the e-cigarette industry: This may mean that China Tobacco may not be able to compete with other e-cigarette companies. Article 4 of the Administrative Measures stipulates that the State Council and the competent administrative departments for tobacco monopoly in provinces, autonomous regions and municipalities directly under the Central Government (i.e., China Tobacco and its subordinate institutions) are in charge of the supervision and management of e-cigarettes. We regard this provision as a major positive, since, in accordance with the general practice of the principle of public administration avoidance, supervisory or regulatory authorities are generally not allowed to engage in competitive activities within their regulatory field to avoid unfair competition. In this case, we believe that China Tobacco is unlikely to produce its own e-cigarette products or build its own brand for commercial purposes in the domestic market, so the competitive risks faced by Smore International and Wuxin Technology are greatly reduced.

E-cigarette wholesale is still facing uncertainties, which may lead to channel disruption: the Administrative Measures stipulate that enterprises that have obtained a tobacco monopoly wholesale enterprise license will need to apply for a change in the scope of the license before they can engage in the wholesale business of e-cigarette products. Although all tobacco wholesale enterprises in China are currently subsidiaries of China Tobacco, the Administrative Measures do not specify whether the new tobacco monopoly wholesale license will be granted to non-China Tobacco affiliated entities, and we believe that existing e-cigarette wholesale enterprises may not be able to obtain appropriate licenses in a timely manner, or may not be able to obtain licenses at all. However, all e-cigarette transactions will be conducted on the unified e-cigarette transaction management platform established by China Tobacco, and we expect that China Tobacco will be able to track every e-cigarette transaction (from raw material suppliers to retailers).

Risk Warning: Regulatory Changes, Health Risks Associated with E-Cigarettes, Competitive Risks.

("Food, Beverage and Tobacco - Regulatory Tone for the Domestic E-Cigarette Industry", Report Date: December 16, 2021)

ZTO Express:

The performance inflection point has arrived

The third-quarter results were lower than we expected, but the worst seemed to be over: ZTO announced its third-quarter results, with parcel volume up 23% year-on-year to 5.7 billion pieces and revenue up 11.3% year-on-year to RMB7.4 billion. Although the competitive environment in the third quarter was still severe, and the price of express tickets fell by 7.2%, ZTO successfully increased its gross profit margin to 21.2% (an increase of 0.2 percentage points year-on-year), mainly due to the company's expansion of scale and operational efficiency, which led to a 7.3% reduction in single ticket costs. Attributable net profit fell slightly by 2.9% year-on-year. It is worth mentioning that in view of the recent industry-wide price increases, ZTO management reiterated that the company focuses on high-quality growth, which we believe means that ZTO will seek to balance market share growth and profitability. According to management guidelines, net profit increased by at least 30% in the fourth quarter and the full-year profit target for 2022 increased by 32-35%, which we see as a positive sign of an improved competitive environment.

We believe that China's express delivery industry has entered a new phase, with slower competition and a good pricing environment: against the backdrop of the Chinese government's push for "common prosperity" and the recent price increase in the express delivery industry, the industry price war that has prevailed since 2017 seems to be over. We believe that the market's concerns about continued price increases seem to have eased, and the remarks made by ZTO management about future "high-quality growth" have also supported our views. Since ZTO is the leading company in the industry in terms of market share, zhongtong's market share in the first nine months of 2021 will reach 21% in terms of the number of parcels (based on our estimates), so we believe that ZTO's statement may lead other companies in the industry to follow in its footsteps, which should drive China's entire express delivery industry to improve profitability.

Risk warning: China's economic growth has slowed, raw material and fuel costs have risen, and the price war has restarted.

(ZTO US - Performance Inflection Point: Expected Profit Margin Recovery in Fourth Quarter, Report date: December 16, 2021)

aurora:

Despite the adversity, change is now on the right track

Growth is on track; stocks are oversold amid regulatory concerns about Chinese stocks.

Management is determined to control costs and the time point for achieving breakeven is clearer.

Unlock growth mode: Aurora announced the results for the third quarter of 2021, consolidating our confidence in the company's development prospects. Core subscription revenue increased 32% year-over-year to $40 million, with paid customers increasing 73 to 2,396 from the second quarter. The subscription business covers notification SDKs (software development tools) and VaaS (video as a service) and connects personal devices. The business has accumulated a large amount of data, which has become the core digital asset of Aurora, and has also laid the foundation for the company's monetization strategy, supporting the rapid growth of value-added services (mainly Aurora Alliance). Despite facing headwinds in the macro environment, vertical application revenue grew 18% year-over-year, supported by customers in the financial sector. The Aurora Alliance's growth slowed due to tighter censorship of mobile app security issues, with a supply-side DAU (daily active user) of about 180 million, remaining stable. Aurora will continue to optimize its algorithms to further increase ad load and eCPM (Revenue per Thousand Impressions). Despite the tightening of the regulatory environment, in the same caliber (excluding the impact of exiting the precision marketing business), total revenue in the third quarter increased by 38% sequentially, further accelerating from the 34% growth rate in the second quarter.

VaaS and UMS (Unified Push Service) Boost Subscription Growth in 2022: Management highlighted strong demand for UMS and VaaS for private cloud deployments from banking and financial institution customers, and aurora sales teams will focus on expanding into this area. Given that the VaaS offering is still in its early stages of development, we expect the strong revenue growth to continue into 2022, while we expect arPU (average revenue per user) to increase due to the relatively larger contract amounts for private cloud VaaS offerings. However, the VaaS business may be under pressure due to the higher cost of broadband.

Expected margin improvement: We raised our 2021-23 revenue forecast by 1-3% due to faster-than-expected revenue growth in the third quarter, strong new business growth and improved liquidity. Given management's determination to optimize R&D efficiency, we expect Aurora to break even at the adjusted net profit level.

Risk Warning: Data Security Risk, Product Development Risk, Sales Team Efficiency Less Than Expected, Aurora Alliance Supply Side Risk. (Aurora (JG US) - Third Quarter Review: On The Face of Adversity, Change Is Now on Track, Report Date: December 14, 2021)