Shenzhen Inovance Alert:Strong 1Q IA growth ahead of expectations

1Q results inline; stronger-than-expected IA growth a key positive surprise.

    Net profit rose 24% YoY to Rmb172m on a 38% YoY top-line growth. 1Q netprofit achieved 15% of our full-year estimate (vs. historical average of 16%). Asexpected, strong top-line growth was partially offset by surging operatingexpenses (+53% YoY) as Inovance continued to heavily invest in the passengerNEV drive business, which we expect to emerge as a significant growth driverstarting 2018. IA growth beat expectation once again, with new order growthfurther accelerating to +60% YoY in 1Q17 (vs. +33% in 4Q16). This more thanoffset the temporary slowdown in its NEV drive business.

    IA segment: firing on all cylinders.

    1Q revenue growth of +38% YoY came in toward the high-end of thecompany’s preliminary estimate (+25-45% YoY), driven by the IA segment.

    General IA products (incl. inverter, servo and control): Sales of generalinverter and general servo surged by 76% YoY and 106% YoY in 1Qrespectively, way ahead of the company’s full-year guidance (generalinverter: +30-40% YoY; general servo: >50% YoY) as well as our estimates.

    Sales of control products (incl. PLC and HMI) also nearly doubled in 1Q.

    Specialized IA products (incl. elevator drive and PIMM servo): Sales ofintegrated elevator drives were ahead of expectations, up 13% YoY in 1Q.

    This compares to the company guidance of flat to single-digit growth andour estimate of 0%. PIMM servo also recorded a 13% YoY growth in 1Q.

    NEV drive: a temporary slowdown; growth to recover ahead.

    On the other hand, 1Q weakness in NEV drive business (down 38% YoY) islargely expected after the announcement of revised subsidy scheme. Lookingahead, we expect the segment’s sales to recover after the dust settles. On afull-year basis, we are still expecting 30% YoY growth driven by 1) increasingpenetration into non-Yutong NEV bus clients; 2) penetration into Yutong’s NEVmotor supply chain; and 3) rising contribution from logistics NEV.

    Maintaining Buy; risks.

    We maintain Buy and our DCF-based target price of Rmb26.5 (WACC: 8% andTGR: 2%). Key downside risks: slower-than-expected NEV growth and IAdemand recovery.