1、Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Equity Research ReportTitle of reportMonth 20 xxEquities/SubcategoryIndustrialsFebruary 2021By:Amy Hu(S1700520090001),Corey Cha
2、n(S1700518100001)China AutomationInitiate coverage:Acing Chinas automation ambitionThe pandemic and Chinas push to be more self-sufficient are pushing manufacturers to invest more in automation with domestic automation leaders well-positioned to take market share from global peersInitiate on automat
3、ion leader Inovance at Buy(our top pick),relay-focused Hongfa at Buy,and more slowly growing Siasun at Hold 1 Equities Industrials February 2021 A self-sufficiency story It is well-known that China is seeking to become more sufficient in areas from semiconductors to electric vehicles.However,for thi
4、s to become a reality,manufacturers need to become more automated.And that means a lot more spending on automation equipment like robots,motion controllers,and inverters.Thats the long-term argument for Chinas automation industry and the focus of this report,but the short term is just as positive.Th
5、e pandemic has pushed manufacturers to adjust their supply chains and buy more from local vendors.That means domestic automation leaders are particularly well-placed,given their competitive products,high R&D spend,and faster response times to local customer needs.and a market share gain story.China
6、has a lot of catching up to do to match and beat the latest technology by global peers that currently dominate the industrial automation industry.We think domestic companies will benefit as the local industry is set to grow at 10%in 2021e and 5%in 2022e,driven by the continued recovery in Chinas ind
7、ustrial sector and the pick-up in automation adoption.In particular,we see solid demand from industries like semiconductors and renewable energy.Three initiations Inovance(Buy,TP RMB118.00).Chinas leading industrial automation company(by revenue)and our preferred stock in the A-share industrial auto
8、mation space.It is a major beneficiary of Chinas manufacturing upgrade,import substitution,and rapid growth in new energy vehicles(NEVs).It is one of a few domestic companies that has broken into the high-voltage inverters segment.We have an above-consensus 56%EPS CAGR in 2020-22e.Our PE-based targe
9、t price(73x PE)of RMB118.00 implies 24%upside from the current share price;as such,we initiate at Buy.Potential share price catalysts:market share gains in high-end automation and faster penetration at global NEV brands.Hongfa(Buy,TP RMB67.20).A top-four global company(by market share)in manufacturi
10、ng relays,electrically-operated switches that control the flow of electricity and the largest relay manufacturer in China.This makes it a beneficiary of the rapid growth in NEVs as these vehicles require many relays.We estimate a 22%EPS CAGR in 2020-22e.Our PE-based target price(48.9x PE)of RMB67.20
11、 implies 21%upside from the current share price;as such,we initiate at Buy.Potential share price catalysts:market share gains in domestic and overseas auto relay markets,and a rapid ramp-up of its low-voltage business.Siasun Robot(Hold,TP RMB10.40).The company is a manufacturer of automation equipme
12、nt like industrial robots and automated traffic systems.Its largest shareholder is the Chinese Academy of Sciences,which helps provide it with cutting-edge technology.Our PB-based target price(2.4x PB)of RMB10.40 implies 12%downside from the current share price;considering its potential business rec
13、overy and the solid industrial robot outlook in China,we initiate at Hold.Why read this report?The pandemic and Chinas push to be more self-sufficient are pushing manufacturers to invest more in automation with domestic automation leaders well-positioned to take market share from global peers Initia
14、te on automation leader Inovance at Buy(our top pick),relay-focused Hongfa at Buy,and more slowly growing Siasun at Hold Equities Industrials February 2021 2 Why read this report?1 Chinas domestic automation market 3 Executive summary 4 Accelerating automation 12 Taking on global competition 23 Comp
15、any section 35 Inovance(300124 CH)36 Hongfa Technology(600885 CH)49 Siasun Robots(300024 CH)59 Disclosure appendix 68 Disclaimer 72 Contents 3 Equities Industrials February 2021 Source:IFR,H,MIR,HSBC Qianhai Securities estimates Domestic companiesmarket share of coreautomation products(2019)Key driv
16、ers for China automationMeasured by value,Chinas industrial robot market was worth USD5.7bnin 2019,representing 40%of the global market size2020e2022e2021e5%9188552251872%10%We think Chinas automation sector will grow amid strong demand from technology and new energy sectorsChinas industrial robot d
17、ensity is low compared to developed markets and below the world average of 113 units per 10,000 employees indicating substantial room for growth(2019)WorldaverageSingaporeSouthKoreaUSChinaAutomation market share in China(2018)GlobalDomestic2010201827%73%36%64%Import substitutionRobust domestic marke
18、t and heavy R&D investment will benefit automation suppliersLabour shortagesYounger workers are opting out of factory-floor conditions in favour of higher paid workSmart factoriesManufacturing units will communicate without the need for human input33%Inverters(or drive systems)are the basic componen
19、ts of industrial automation and controls38%Servo-systems are automatic devices that use error-sensing negative feedback to correct the action of a mechanism40%Distributed Control Systems(DCS)are used widely in industrial plants and communicate among themselves and with operator terminals15%Programma
20、ble Logic Controllers(PLCs or the control system)are the brains of automation systems as they are computers used to direct the automated processChinas domestic automation market Equities Industrials February 2021 4 Automation to accelerate If theres one message to take away from this report,it is th
21、at the automation of factories in China is set to accelerate.Adding robots to factory floors isnt anything new;however,the pandemic and a push to become self-sufficient in technology has sped up this trend,while a growing number of emerging industries like electric vehicles(EVs)and renewable energy
22、are boosting demand for everything from sensors to motion controllers.Add to that a solid recovery in the industrial sector and an advanced semiconductor industry,and the result is burgeoning demand for technology that makes production cheaper,faster and more reliable.To put it all into numbers,we e
23、xpect Chinas wide-ranging industrial automation and control market to jump from 2%growth in 2020e to 10%in 2021e and 5%in 2022e.We believe Chinas domestic automation leaders are especially well-positioned,given their increasingly competitive products and faster response times to a rapidly changing m
24、arket.Exhibit 1.The rapidly growing industrial automation and control market in China Source:G,HSBC Qianhai Securities estimates -10%-5%0%5%10%15%20%25%30%0501001502002502005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e2021e2022eIndustrial automation and control market
25、y-o-y growth(RHS)RMBbnExecutive summary The pandemic has increased demand for automation especially from the technology and renewable energy sectors Domestic leaders are set to win market share from global automation giants Robots were already taking over factory floors,but their use is now accelera
26、ting as a result,we see Chinas industrial automation and control market growing 10%in 2021e and 5%in 2022e 5 Equities Industrials February 2021 Four long-term drivers One significant tailwind in favour of automation is import substitution.Beijing is encouraging sectors from semiconductors to medical
27、 device makers to buy equipment domestically so that China is more self-sufficient.Automation is no exception.Coupled with a robust home market and heavy investment in innovation,we believe automation suppliers will benefit.Another boost to the sector is Chinas labour shortage and rising labour cost
28、s that are encouraging more robots,especially for menial tasks.Young workers who might have previously considered working on a factory floor are turning instead to fast-growing emerging sectors like food delivery and social media,given the higher wages on offer and better working conditions.Then the
29、re is the rapidly growing use of internet-based“smart”factories.Factories increasingly need their manufacturing units to communicate with each other,without the need for human input.Such digital technologies and automation mean improvements in productivity and an ability to better customise products
30、.IDC forecasts that,by 2024,60%of Chinese manufactures will utilise internet of things and machine learning to cut operating costs.And,like we mentioned on the previous page,the booming electric vehicle industry is a larger buyer of automation tools.We dive into the details and show that demand for
31、electric driving motors and controllers is growing at an almost 30%CAGR clip and is set to stay that way.We find that companies with faster responses to customer requirements,solid R&D and manufacturing capabilities will likely win more orders.Domestic champions taking on global peers and winning We
32、stern and Japanese brands currently dominate the global automation sector with their wide product range and service solutions,and are leaders in technology and innovation.Still,Chinese industrial automation companies have managed to increase their domestic share from 27%in 2010 to 36%in 2018(Exhibit
33、 46)due to their improving products and better customer service,mainly selling to original equipment manufacturers(OEMs)like industrial robot makers and companies making construction machinery.Their market share gains have accelerated since the pandemic as many end-users sought local producers amid
34、global supply chain disruptions.We provide a competition analysis for key automation products like inverters and servos.Three initiations Inovance(300124 CH,Buy,TP RMB118.00)Shenzhen Inovance Technology is Chinas leading industrial automation company(by revenue)and our preferred stock in the A-share
35、 industrial automation space.Thanks to highly competitive products,it is a major beneficiary of Chinas manufacturing upgrade,import substitution and the rapid growth in the NEV sectors.We estimate a 56%EPS CAGR in 2020-22e.Our 2020-22e earnings estimates are 2.3-3.1%above Wind consensus(Exhibit 108)
36、.Hongfa(600885 CH,Buy,TP RMB67.20)Hongfa Technology is a top-four global company(by market share)in manufacturing relays and the largest relay manufacturer in China.While it also makes low-voltage products and other automation components,relays contribute 88%to its revenue.Hongfa owns the largest an
37、d most technology-advanced relay testing and analysis laboratory,which makes it a major beneficiary of the rapid growth in NEVs globally.We estimate a 22%EPS CAGR in 2020-22e.Our 2020-22e earnings estimate are broadly in line with Bloomberg consensus(Exhibit 126).Import substitution Labour shortages
38、“Smart”factories Electric vehicles Equities Industrials February 2021 6 Siasun Robot(300024 CH,Hold,TP RMB10.40)Siasun Robot&Automation produces automation products from industrial robots to automated traffic systems.The largest shareholder is the Chinese Academy of Sciences,which helps provide it w
39、ith cutting-edge technology and is one of the best in-house R&D teams in China,in our view.Siasun is a leading supplier in China of vacuum robots,which are used in the making of semiconductors and chips.We estimate a-5%EPS CAGR in 2020-22e.Share price performance To provide additional context,we tak
40、e a look at recent stock price moves against the CSI 300 Index,which is up 31%since the beginning of 2020(as of 29 January 2021).Inovance is a significant outperformer,with the shares up 212%over the same period,largely due to its impressive earnings growth(up 132%y-o-y in 9M20)and improved industry
41、 position.Despite the outperformance,we think the growth prospects for its NEV segment as well as further market share gains by penetrating the high-end automation segment are not fully priced in by the market.Hongfa also outperformed the index with its share price up 62%since the beginning of 2020,
42、largely due to an earnings recovery(up 19%y-o-y in 3Q20 vs down 9.4%and down 8.8%y-o-y in 1Q20 and2Q20,respectively)and strong NEV sales in China.We think Chinas booming NEV industry will help boost its relay sales,which is positive for its share price.Siasun underperformed the index with its shares
43、 down 15%since the beginning of 2020,largely due to poor earnings growth(down 53%y-o-y in 9M20).We think there is limited upside to Siasuns share price due to its slower EPS growth rate.Exhibit 2.Share price performance of Inovance,Hongfa and Siasun vs CSI 300 Index Source:Wind,HSBC Qianhai Securiti
44、es.Priced as at 29 January 2021.A lot of positives,but what can go wrong?A downturn in Chinas industrial sector Demand for automation products is closely related to industrial cycles and industry growth momentum.Any major economic downturn would negatively affect industrial companies profit and capi
45、tal expenditure plans,which,in turn,would curb demand for automation products and services.-50%0%50%100%150%200%250%Jan-20Mar-20May-20Jul-20Sep-20Nov-20Jan-21CSI 300 IndexInovanceHongfaSiasun Robot 7 Equities Industrials February 2021 Supply chain disruptions The COVID-19 pandemic caused disruptions
46、 to global supply chains.It is possible that automation companies that rely on imported core components are subject to potential price hikes or could have difficulties in obtaining key products.High exposure to the automotive industry Automation technology has been widely applied in the automotive i
47、ndustry for decades,ranging from robots to motion controls.Automation companies with high exposure to autos could be vulnerable to a downturn in the industry,which would lead to more volatile sales and earnings for automation suppliers.ESG considerations We look to a recent ESG report related to dif
48、ferent industrial sub-sectors(see Asia Industrials:ESG Integrated:10 questions,15 June 2020).We pick the two questions that we think are most relevant to the automation sector to assess the ESG credentials of the three companies in this report.According to our analysis,Inovance seems to be the leade
49、r in terms of ESG considerations.How do Asia industrials companies reduce energy consumption and GHG emissions?Factory automation companies are taking measures to lessen their impact on the environment.This includes increasing their R&D,manufacturing energy-efficient products,and minimising energy consumption and emissions.They are also upgrading their products so they are higher quality,while reducing their overall energy footprint.This includes manufacturing products that adhere to stringent emission norms for engines,improving the efficiency of existing products,and developing products usi
