Siasun Robot &Automation:We expect earnings growth to recover from low levels despite absence of cash flow improvement

More new entrants good for development of China's robotics industry

    We see more and more Chinese manufacturers entering the robotics sector, and thetop four global robotics players are all expanding production capacity in China. Weestimate China's annual robot sales will maintain rapid growth (estimated CAGR of22% in 2015-18) despite the many new entrants, which should not lead to fiercecompetition. Also, we note that domestic players have begun to invest in keycomponents, and tough competition means that only the fittest will likely survive in therobotics industry. In our view, domestic companies are likely to boost margins byreplacing component imports with local production, helped by policy support.

    Faster rev/profit growth in next 2years on demand recovery, capacity addition

    Siasun's 2015revenue growth missed expectations due to capacity restraints and aslowdown in demand. However, we are optimistic on its growth in 2016, as: 1) withgrowth in downstream (e.g., 3C electronics and logistics) automation demandaccelerating, China's industrial robot output rose 24% YoY in 4M16(2015: +16%YoY); 2) the company's new capacity came on stream, eliminating the capacitybottleneck and laying the foundation for revenue growth; and 3) YTD, the companyhas carried out strategic cooperation with Siemens, Omron and JD.com, supporting itsorder growth. We expect the company to log 2016/17/18revenue growth of25%/37%/29% YoY and profit growth of 21%/31%/27% YoY.

    Working capital situation worsening; operating CF remains under pressure

    As system integration is the company's main business, its inventory/receivables turnoveris slow. Given cash turnover days of 400+ in 2015, we expect the company to maintainc400cash turnover days in 2016-18. We estimate demand for working capital willincrease as the company expands the scale of its businesses, putting further pressure onoperating cash flow. Due to the disappointing 2015results, we are cutting our 2016-18E EPS 6%/8%/10% to Rmb0.32/0.41/0.52.

    Valuation: Lowering price target to Rmb22.2; maintain Sell rating

    We derive our new price target of Rmb22.2based on 70x 2016E PE. The stock istrading at 83x 2016E PE. We believe the market is too optimistic about the company'svaluation and maintain our Sell rating.