INNOTEK LIMITED

InnoTek (INNOT SP): Shifting gears to EV

• RE-ITERATE BUY Entry &ndash 0.95 Target &ndash 1.12 Stop Loss &ndash 0.88
• InnoTek is a precision metal components manufacturer serving the consumer electronics, office automation and mobility device industries. The company has a strong and diversified base of Japanese and European end-customers. 
• Auto is the way.  Through the annual report and annual general meeting, management has communicated strong expectations for the automotive division, led by a strong push for electric vehicles in China.
• 30% CAGR for EV in next 5 years.  IHS Markit expects light vehicle sales to grow at 6% CAGR from 2020 to 2023, with electric vehicles (EV) to lead growth at over 30% CAGR in the next 5 years. In response, InnoTek has managed to secure customers in the EV space, and can reasonably expect the automotive division to become their largest division in subsequent years. 
• Recent weakness is a buying opportunity.  Vehicle sales in China fell 3% YoY in May 2021, snapping a 13 consecutive month of gains since April 2020. Overall sales in China totaled 2.13mn vehicles for the month, according to China Association of Automobile Manufacturers (CAAM). On a YTD basis, Jan-May figures were up 36% from the same period last year, but could start to slow down due to the global chip shortage and surging raw material prices. Even then, CAAM projects China&rsquo s overall vehicle sales to grow by 6.5% this year, powered by sales of new energy vehicles (which include EVs, Hybrids and hydrogen fuel-cell vehicles). 
• OUTPERFORM and fundamental TP of S$1.12.  We expect InnoTek&rsquo s strategy to drive a recovery in both the top and bottom line. Our 5.5x EV/EBITDA peg translates to around 14.3x FY22F P/E.