Shenzhen Inovance Alert:Access China conference highlights

Inovance attended our Access China Conference on 9 January. We summarize below our key takeaways from investor meetings:

    Growth outlook by segment

    Overall, Inovance expects its top-line growth to remain at 20-30% in thecoming years.Net profit growth will likely come in slower than top-line during2017-18 driven by its committed investment in passenger NEV drive business(Rmb1bn in total). By segment:

    Inverter: Management expects 40% top-line growth for its general invertersales driven by accelerating market share gains in verticals like aircompressors, air conditioners, packaging and printing, machine tools, etc..。

    Servo: Management expects 50% growth in the coming years. For generalservos, Inovance is positive on verticals like 3C, LED, mechanical arms,textile, machine tools, industrial robot in addition to lithium battery. ForPIMM servo, Inovance has managed to significantly outgrow the marketdriven by increasing penetration of its servo motor products and marketshare expansion in Haitian’s supply chain.n。

    NEV drive: Following the release of revised NEV subsidy scheme, Inovancehas been in negotiation with Yutong Bus on a potential ASP cut for itsdrive product (up to 25%), which might put pressure on its NEV bus drivebusiness going forward. On the other hand, its passenger NEV drivebusiness is progressing on track with the sales of controller and powertrainproducts likely kicking off in 2017 and 2018 respectively. Logistics NEVdrive is also expected to start contributing in 2017. As a result, thecompany is aiming to grow this segment by 30% in 2017.n。

    Industrial robot: Inovance has been actively positioning itself in the SCARArobot segment. With the launch of a precision machinery JV last year, thecompany hopes to make technology breakthroughs in ball screw andspeed reducer to further raise the domestic content of its SCARA robot.。

    DB view。

    We retain our positive view on the stock and expect Inovance to lead theongoing import substitution in China’s industrial automation market. We arealso constructive on the development of its passenger NEV drive business OurDCF-based target price of Rmb26.8 assumes WACC of 8% and terminalgrowth of 2%. Key risks include slower-than-expected NEV sales in China andnew products development.