Order Backlog Remains Robust, Gross Margins On Track To Recovery
Management is confident in achieving its 15,000 robot shipment target in 2022 on the back of a robust order backlog with its welding robots and shipment share gains from its large clients. Gross margins will continue to recover from 4Q21, with Estun optimising its product cost structure in 3Q21 and material costs moderating. 4Q21 net profit will miss on one-off items, but this is likely already anticipated. Investors will focus more on Estun’s deliveries and profitability improvements from 2022. Maintain
BUY. Target: Rmb34.00.
• Management is confident in shipping 15,000 robots in 2022 despite the slowdown in China’s industrial robot output in recent months. This confidence is based on:
a) Shipment share gains from large clients. Estun has entered the supply chain of several large manufacturers in 2021, including CATL and Sany Heavy. Shipments to these names in 2021 were in smaller volumes for test runs, but given the positive feedback from the new clients, Estun is now expecting more share allocation from them.
b) Robust growth and share gains in its welding robot business. Estun sees robust demand for domestic welding robots. In 9M21, >1,000 welding robots were shipped, including 300 Cloos robots sold in Europe, and >700 sold in China. Sales in China include Cloos robots shipped from Europe, the newly launched QWAS/EWAS series, and Estun welding robots. This number will likely grow to 2000 units for full-year 2021, and a further 50-100% to 3,000-4,000 units in 2022, based on an ample existing order backlog.
c) Estun’s focus is on the fast-growing industries, including 3C (share gains), EV battery (share gains, fast-growing), Solar (fast-growing, expanding applications), welding robots (share gains) and lathes (share gains). These fast-growing sectors are expected to contribute to 75% of its 2021 shipment volume, and will likely grow in % contribution given the significantly faster growth rate compared to other end-industries.
• China’s industrial robot output was more affected by component shortages. On the macro side, we reiterate our view that China’s industrial robot output was mainly affected by chip shortage in 2H21 rather than an actual peaking cycle, as cross checking with global robotic names shows solid order backlog from China through the next two quarters. Once the chip shortage gradually eases for the industrial equipment manufacturers from end-21 to 1Q22, the output will likely resume positive growth on a sequential basis.
• Gross margin will continue to recover in 4Q21. While the robot segment’s margins are expected to remain stable in 4Q21, the core component business’ margins are expected to recover to normal levels of 37-38%, up significantly from around 27-28% in 2Q21 and 30% in 3Q21. This is primarily attributable to: a) ASP hikes, b) stabilising material costs, c) launch of new products with more localised components leading to better cost structure, d) ongoing reforms in operations, and e) localising the production of Trio controllers. As a result, we expect blended gross margins to recover to 35.2% (+1.0ppt qoq) in 4Q21.
• Profitability will be added as a core KPI in 2022, along with the ongoing goal of market share gains. Estun has always focused on the integration of M&As and market share gains as core KPI in past years, while profitability has been relegated to the side-lines, leading to the underwhelming bottom-line performance in past years. Given the lack of further M&A stories, and the smooth progress in achieving its major milestone of 10k robot sales target, the investors have been shifting their focus to profitability, and this eventually led to the sharp sell-off after the disappointing 2Q21 results. As such, adding profitability as a core KPI in 2022 will be the first step towards recovering investor confidence, and any improvements in Estun’s operation efficiency and profitability going forward will be crucial for further rerating.
• Due to one-off expenses, 4Q21 will likely miss market expectations. One-off expenses booked in 4Q21 include stock incentives. However, even excluding the one-off items, Estun is unlikely to outperform consensus’ estimates in its bottom line, as its focus in 4Q21 remains on delivering the 10,000 robots shipment target. This is marginally offset by the stronger-than-expected margins in the core automation parts business (37-38% vs our expectations of 35%).
• Nevertheless, management has remained transparent on this issue and the buy-side should already anticipate weak 4Q21 results. The current focus will be on Estun’s revenue and gross margin performance in 4Q21, as well as whether the company can patch up its profitability from 2022 onwards.
• Moderating material costs in 2022 may support margin expansion. The raw material prices (ie steel and copper) should moderate into 2022, given the abnormally high base in 2021. At the same time, chip shortage should also ease in a more meaningful manner from 2Q22 to 3Q22, given no further disruptions from unpredictable events (such as more COVID-19 outbreaks), which should help lower component costs.
• We cut our 2021 net profit forecast by 16.4% to Rmb140m to factor in the one-off expenses, which is partially offset by a higher core automation parts margins assumption in 4Q21. Our 2022-23 earnings estimates remain largely unchanged.
• Maintain BUY and keep target price at Rmb34.00, now based on 84x 2022F PE, 0.5SD below mean. We are now turning more positive on Estun, as the management is looking to weigh more resources into improving its profitability, which we view as a key re-rating catalyst. At the same time, the moderating material costs will likely provide support for midstream equipment manufacturers like Estun through 2022.