A strong recovery in China’s auto sales and a positive outlook for the EV industry has prompted UOB Kay Hian research analyst John Cheong to retain his ‘buy’ rating for InnoTek with a higher target price of $1.20 from 82 cents previously.

Based on data from the China Association of Automobile Manufacturers, March auto sales surged as China recovered from the pandemic, jumping 67% y-o-y and 64% m-o-m to 2.38 million.

China's 1Q2021 passenger vehicle sales are estimated to grow 73% y-o-y to 6.34 million units, which Cheong believes will bode well for InnoTek, which derives over 30% of its revenue from its exposure to the China automobile market.

Cheong is also bullish on InnoTek’s shift towards electric vehicles (EV) and the parts assembly business, which the company alluded to in its 2020 Annual Report outlook statement dated April 13.

InnoTek highlighted a shift towards EV for its auto division as well as its metal components division which now serves EV manufacturers. 

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Cheong also notes that InnoTek is moving beyond single-part manufacturing to parts assembly within the EV industry, with initial orders secured for the latter and more expected to come in the future.

"As the industry evolves holistically towards charging stations and infrastructure support, InnoTek will seek to deepen its value proposition with existing and develop new customers," he says.

China’s passenger EV sales are expected to reach 2 million units in 2021 (+80% y-o-y) according to the China Passenger Car Association, driven by both domestic demand and exports.

Cheong also expects demand for InnoTek’s office automation (OA) segment to recover in FY2021 ending December post-Covid. He notes InnoTek’s factory in Thailand started commercial production of OA equipment in 2020, with InnoTek looking to develop the factory to support automotive customers in Thailand in the future.

Overall, Cheong expects InnoTek’s FY2021 earnings per share to grow 39% y-o-y. 

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The analyst also points out that InnoTek’s cash-generating ability is underappreciated, noting that the company’s net cash position as of end-2020 stood at $90.2 million (44% of current market cap), up 158% from $35 million as of end-2015.

“InnoTek has been paying out a dividend per share of 0.5 cents since 2016, and gradually increased this to 2 cents in 2020,” Cheong adds.

His higher target price of $1.20 is pegged to FY2022 P/E of 12 times, up from FY2021's P/E of 10 times.

The analyst believes InnoTek is undervalued at current valuations. “InnoTek is trading at 9 times FY2022 earnings (ex-cash P/E of 5x), which is unjustified based on its resilient business model, high net cash position and high margins as compared to its peers. Thus, we believe InnoTek should trade nearer to its peers’ multiple of 12 times FY2022 earnings,” he says.

As at 3.06pm, shares in Innotek are up 3.5 cents or 3.89% higher at 93.5 cents.