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Slowing Growth, More Selective On Stock Picks

3Q21 was a tough quarter for automation names around the globe, plagued by component shortages, cost hikes, the resurgence of COVID-19, and power outages in China. Our channel checks show that the demand in 2021 has not yet peaked, but the growth rate will still slow down to low- to mid-single digits in 2022 from the mid-teens growth in 2021. We are turning selective on stock picks as new economy industries like solar, 3C and semis will outperform cyclical sectors, and selective domestic IA names will retain rapid growth through import substitution. Maintain OVERWEIGHT.

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WHAT’S NEW

• 3Q21 was tough for the automation names in both the domestic and foreign market. 3Q21 was a tough quarter for the entire industrial automation (IA) supply chain with both domestic and foreign names facing the common problem of component/ transportation (shipping) cost hikes and semiconductor shortage.

• Domestic automation companies seem to be less affected by the semiconductor shortages thanks to their localised supply chain and relatively smaller scale, but saw more pressure from component cost hikes as they tend to have a lower pricing power vs foreign names.

• On the other hand, most of the foreign automation leaders reported a miss in 3Q21 earnings and had to cut down its full-year targets, due to a worse-than-expected chip shortage which is now expected to at least last through the next two quarters. However, foreign brands have been raising ASPs as their customers are less price sensitive (eg ABB raised its robots ASP by 6-8% about one month ago). This should in turn benefit the domestic IA names from 4Q21 as they are now following suit in raising prices.

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• Orders outlook: Peaking cycle? Not quite. According to MIR Databank, China’s IA demand growth was +8.3% yoy in 3Q21, further slowing down from +15.4% yoy in 2Q21. Without a doubt, the IA demand growth peaked in 2021, and the mid-teens growth in 2021 can no longer be sustainable. Nevertheless, apart from the slowing demand, the industry was plagued by a plethora of problems in 3Q21, including the abovementioned component shortages, resurgence of COVID-19, and power outages which turned out to have a greater than- expected impact on the IA industry. These events will likely continue to affect the IA
industry for the rest of 2021 and make the slowdown more abrupt.

• The guidance provided by various IA names indicates that the current industry downturn will be short-lived. The Japanese automation names stated that orders from China remain solid, and in actuality their new orders came in stronger than expected. Nevertheless, the chip shortage is expected to remain a problem to deliveries from 4Q21-1Q22. The Taiwanese automation names expect demand from China to remain weak through 4Q21, although the impact is expected to gradually subside throughout the quarter; they are still expecting growth in 2022 through the normalisation of demand and market share gains. The domestic names maintained their advantages of having a localised supply chain and expect the shortage to be a non-factor in 4Q21. Domestic names are also more optimistic regarding their growths going into 2022, and are seemingly more immune to the slowing market thanks to a lower base and high potential in market share gains ie their growth rate is currently more affected by technological advancement rather than the overall industry demand.