Unavoidable Near-term Headwinds Provide Golden Opportunity For Share Gains
Focus in 1Q22 again shifted to the logistics and supply disruption due to the COVID-19
outbreak in China, but the bulk of the impact is only expected to arrive in 2Q22, dragging
China’s automation demand down with the lockdown measures. That said, we believe
this is an opportunity for domestic leaders like Estun and Inovance, as this will drive
another round of share gains while foreign brands suffer from an unbearably long order
lead time. Downgrade to MARKET WEIGHT to factor in near-term headwinds.
WHAT’S NEW
• 1Q22 results were a mixed bag. Amid the recent COVID-19 outbreak, China’s automation
demand grew 1.4% yoy in 1Q22, missing market expectations. As such, automation names
faced varying degrees of impact in the quarter, of which Shenzhen-based manufacturers,
such as Han’s Laser (HL) and Leadshine (002979 CH/Not rated), were worse off due to a
week of complete lockdown. Key automation names outside of Shenzhen mostly maintained
normal production as they adopted a close-looped system during 1Q22, but the impact on
logistics, supply chain and even end-demand was apparent, as shown in Leader Harmonious
Drive’s (688017 CH/Not rated) top-line miss. Nevertheless, the results of Inovance and Estun
remained solid, with robust demand growth and ASP hikes offsetting the rising costs.
• Guidance has generally turned conservative due to near-term headwinds on logistics
and supply. For domestic names, while almost all companies remained optimistic on full-year
2022 and the mid- to long-term demand, their tone has turned more conservative in April.
Inovance has the most positive tone, and stated that its deliveries, production and orders
have remained unaffected so far, and expects another quarter of yoy growth in 2Q22. Estun
kept its industrial robot shipment target of 16,000-18,000 units, but stated that the lockdown’s
impact on demand has become more apparent in April, and cut down revenue guidance from
Rmb4.5b to Rmb4.0-4.5b. HL on the other hand expects a 10ppt impact on its top-line growth
(vs +30% yoy in its previous target) if the lockdown in Shanghai drags on to May.
• For foreign names, all major foreign brands we checked with were cautious with the Chinese
market in 2Q22, given the lack of visibility amid the COVID-19 outbreak and lockdowns. This
is especially the case with Japanese names as most have production bases located in
Shanghai.
• On the bright side, the order backlog remained robust. In 1Q22, almost all industrial
automation (IA) names (domestic and foreign) reported strong order backlogs. Of which,
Estun reported a 50% yoy growth in new robot orders, Wuxi Lead’s (300450 CH/Not rated)
backlog grew 18% yoy from a high base, and Inovance’s full-year top-line guidance of
25-50% yoy growth remains promising. On the other hand, the leading foreign robot
manufacturers either reached new quarterly highs or remained elevated, and the order
delivery cycle is as long as eight months (vs 1-2 months under normal circumstances), due to
a combination of robust demand, China’s lockdowns, and component shortage.
• As such, we believe the IA upcycle is far from over, but the sector’s near-term performance
will be constrained on the supply side. Also, we note that in China, there is shift in demand
structure, with renewables sectors (solar, EV-related) carrying the bulk of the growth; while
the 3C industry will turn sluggish as Apple is shifting its capacity out of China. We also see
accelerated share gains for domestic robot makers, entering high barrier sectors such as
automotive value chain, due to the foreign names’ abnormally long delivery cycle.
• The chip shortage will likely last longer than expected, but there is light at the end of
the tunnel. As opposed to a gradual recovery from 2Q22, the delivery cycle for foreign names
have actually increased, while that of domestic names remained largely unchanged. The
consensus is now expecting chip supply for the IA sector to improve from 3Q22 onwards, vs
gradual improvements through 2022.
ACTION
• Downgrade to MARKET WEIGHT. While we remain positive on the sector’s mid- to longterm secular growth story, we believe the near-term dynamics are getting increasingly
unfavourable amid the COVID-19 outbreak in China. Given the high base effect in 2Q and the
ongoing lockdowns in China, we now expect China’s automation demand to fall yoy, before
recovering in 2H22. As such, we cut our full-year automation demand growth from 5% to 2%.
• Han’s Laser (002008 CH/BUY/Target: Rmb41.30). We believe the market’s concern on the
slowdown of its IT business is overdone, as its major US client will still purchase from HL for
its overseas expansion. Moreover, HL’s PCB business has already surpassed its IT business
as the largest top-line contributor in 2021 at 25%, and the PCB is expected to register another
23% yoy growth on a high base thanks to import substitution and improvements in product
mix. On the other hand, its Li-ion battery business is also expected to register a 50-100% yoy
growth with expanding profitability thanks to strong end-demand and expanding applications.
• To factor in the more unfavourable macro environment in the near term, we cut our target
price from Rmb54.50 to Rmb41.30, based on 19x 2022F PE (0.5SD below mean). Our
earnings estimates remain unchanged. Maintain BUY. HL is our preferred pick amongst our
two BUY calls, as: a) we like its cheap valuation at 12.8x 2022F PE, which is lower than 1SD
below mean, b) it has less exposure to Europe compared to Estun, and c) there have been
meaningful improvements in profitability for its high-power laser (from 2% net margins in 2021
to 5% in 2022) and EV battery (from 2% net margins (from 2% net margins in 2021 to 7% in
2022).
• Shenzhen Inovance (300124 CH/HOLD/Target: Rmb60.30). We see Inovance as one of the
best-positioned names in the China IA sector, given their leading technology and scale –
Inovance is now the largest servo motor and low current inverter manufacturer in China with
17% and 16% market share respectively. On the other hand, according to MIR, Inovance is
also the third largest EV electric control/motor maker in China with 10% market share, behind
BYD and Tesla, with exposure to all EV startups and traditional auto OEMs.
• However, due to fair valuation, we downgrade our recommendation to HOLD. Our target price
of Rmb60.30 is based on 40.3x 2022F PE, 1SD above mean. We believe Inovance deserves
to trade at a premium valuation due to its leading position in China’s industrial automation
sector, and its rapidly growing EV controller/motor business.
• Estun Automation (002747 CH/BUY/Target: Rmb18.20). We re-iterate our view that Estun
will see limited risk from the slowdown in IA/IR demand, as Estun is rapidly gaining share with
their new welding robot lines (Cloos, EWAS, QWAS) in the big robot consuming sectors such
as EV, and auto, and even the slower growing sectors like heavy equipment and 3C, primarily
thanks to their significantly shorter order lead time at ~3 weeks compared to foreign leaders’
eight months. The finalisation of their supply chain localisation in 2021, and their growing
operating scale (target robot shipment of 16,000-18,000 represents +45-64% yoy) will
continue to drive margins expansion as well.
• Estun’s share price dropped recently due to market concerns on its capability in passing down
cost (which was alleviated as Estun did raise ASP in 1Q), high exposure in Europe (Estun is
trading lower than 1SD below mean), and the unfavourable macro environment in China.
Given that currently its share price is trading lower than 1SD below mean, we believe the
negatives are already reflected in the share price. As such, we maintain BUY and target price
of Rmb18.20, based on 70.6x 2022F PE, 1SD below mean.