Company Reports

We lower our fair value estimate for narrow-moat Shenzhen Inovance to CNY 60 per share from CNY 64 to reflect management’s more conservative 2024 outlook and a worse-than-expected product mix due to a higher proportion of revenue from electric vehicles, which have lower profitability. We have trimmed our gross margin assumptions. We think Inovance is fairly valued as intensifying pricing pressures in the general automation and EV segments could be offset by a budding macroeconomic recovery in China.

We think Shenzhen Inovance has a narrow moat driven by intangible assets and switching costs. Inovance established a reputation of being a reliable supplier by offering maintenance parts and comprehensive solutions over the lives of elevators. Elevator customers are sticky due to safety requirements and programs behind elevator systems are tightly integrated with hardware. Inovance now offers a suite of cable, car, cord and human machine interface products, fortifying its lead over local peers. Inovance is setting up a factory in Hungary, which helps it strengthen its relationships with global elevator brands.

We maintain our CNY 20 fair value estimate for no-moat Han’s Laser and CNY 64 fair value estimate for narrow-moat Shenzhen Inovance, ahead of both firms reporting 2023 results in April. We believe both companies are fairly valued. While Han’s Laser and Inovance benefit from their customers ramping up exports of electric vehicles, lithium batteries, and photovoltaic products, we believe margin pressures in EVs and battery equipment, and an unimpressive outlook in other sectors limit upside to the stocks.

Our fair value estimate for narrow-moat Shenzhen Inovance remains at CNY 64 per share after the company reported third-quarter results that were largely on track with our full-year projections. Inovance is fairly valued in our view, but upside surprises are likely with government stimulus and as more news surfaces about the planned spinoff of the electric vehicle arm.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

We retain our fair value estimate of CNY 64 per share for narrow-moat-rated Shenzhen Inovance in the absence of both material model and company target changes. Our base case on long-term electric vehicle sales growth near 30% CAGR fueled by both content growth and EV shipments is unchanged. The stock is trading at 30 times 2024 P/E. Inovance is fairly valued in our view, but there are chances of overshoot if government stimulus restores confidence in corporate investments, lifting the outlook for general automation.

We maintain our CNY 64 fair value estimate for narrow-moat Shenzhen Inovance after attending the company’s annual general meeting. Management maintained its 2023 revenue and profit growth outlook at 20%-40% and 10%-30%, respectively. It made qualitative comments on its strategy, which bolstered our confidence in the company’s ability to deliver a 21% revenue compound annual growth rate in the next five years. The stock appears fairly valued, but we think government stimulus on consumption could be Inovance’s upside catalyst as the company serves consumer goods manufacturers like packaging and garments.

We maintain our fair value estimate for narrow-moat Shenzhen Inovance at CNY 64 per share despite moderating our gross margin assumptions in electric vehicles on higher pricing pressure and the elevator businesses as the company may need to entice customers in Europe with lower prices initially. Our base case on long-term EV sales growth near 30% CAGR fueled by both content growth and vehicle shipments is unchanged. The stock is trading at 33 times 2023 P/E. Inovance is fairly valued in our view, but there are chances of overshoot if EV demand recovers before 2024, or the company manages to grow overseas sales faster than we project.

We think Shenzhen Inovance has a narrow moat driven by intangible assets and switching costs. Inovance established a reputation of being a reliable supplier by offering maintenance parts and comprehensive solutions over the lives of elevators. Elevator customers are sticky due to safety requirements and programs behind elevator systems are tightly integrated with hardware. Inovance now offers a suite of cable, car, cord and human machine interface products, fortifying its lead over local peers. Inovance is setting up a factory in Hungary, which helps it strengthen its relationships with global elevator brands.

We retain our fair value estimate for Shenzhen Inovance at CNY 64 per share after the company announced preliminary 2022 figures. The numbers largely meet our expectations except for some noncore items. We intend to update our forecasts once Inovance announces full-year 2022 and first-quarter 2023 results at the end of April. The investment thesis for Inovance to achieve above-industry average growth in the industrial automation and electric vehicle segments is unchanged. We are confident that Inovance can deliver about 25% top-line growth in 2023 due to expansion of its elevator business in Europe, recognition of electric-vehicle-related revenue from more models (and brands), and possible price hikes following competitors’ adjustments after the lunar new year.

We maintain our fair value estimate on narrow-moat Shenzhen Inovance at CNY 64 per share after slightly trimming the growth rate of the 2022 new energy vehicle, or NEV, segment in view of short-term product mix shifts in its customers. Our base case on long-term NEV sales growth at over 30% CAGR fueled by both content growth and vehicle shipments is unchanged. The stock is trading at 35 times 2023 adjusted P/E. Inovance is fairly valued in our view, but there are chances of overshoot if the Chinese government relaxes pandemic control measures or introduces new infrastructure projects.

We lift our fair value estimate on narrow-moat Shenzhen Inovance to CNY 64 per share from CNY 60 after adjusting several noncore items and increasing 2022 gross margin estimate due to better-than-expected profitability in automation and industrial robots segments. The stock is trading at 34 times 2023 adjusted P/E. Inovance is fairly valued, in our view, but there are chances of overshoot if the Chinese government rolls out tangible policies to support consumption and investments.

We think Shenzhen Inovance has a narrow moat driven by intangible assets and switching costs. Inovance established a reputation of being a reliable supplier by offering maintenance parts and comprehensive solutions over the lives of elevators. Elevator customers are sticky due to safety requirements and programs behind elevator systems are tightly integrated with hardware. Inovance now offers a suite of cable, car, cord and human machine interface products, fortifying its lead over local peers. Inovance is setting up a factory in Hungary, which helps it strengthen its relationships with global elevator brands.

Shenzhen Inovance Technology derives just over half its revenue from moatworthy businesses: elevators, new energy vehicles, or NEVs, and railways. In elevators, Inovance offers comprehensive solutions to elevator firms and supplies maintenance parts over the lives of elevators in use. Elevator-related customers are sticky, as they value their safety records, and programs behind elevator systems are tightly integrated with hardware. Through acquiring BST, a supplier of electronic components for elevators, Inovance now offers better car, cable, cord and human machine interface products, fortifying its lead over local peers. We believe Inovance will gain market share with its larger product portfolio through Chinese operations of global elevator firms. We are confident in Inovance’s outlook with BST as a means to strengthen its relationships with global elevator brands.

We lift our fair value estimate on narrow-moat Shenzhen Inovance to CNY 60 per share after incorporating more upbeat revenue forecasts but more conservative gross margin assumptions, especially for 2022. Despite a sell-off in China tech names due to concerns on the economic toll from lockdowns, we view Inovance’s valuation and fundamentals have improved to justify a buy. The stock is trading at 36 times 2022 adjusted P/E and 27 times 2023 adjusted P/E. We regard Inovance as a high-quality ticker which would be among the first to rebound when sentiment bottoms out.

We retain our fair value estimate on narrow-moat Shenzhen Inovance of CNY 48.5 per share after the company announced preliminary figures. The numbers largely meet our expectations, save for some noncore items. We intend to update our forecasts once Inovance announces full-year 2021 and first quarter of 2022 results at the end of April. While we think Inovance is on track to achieving above-industry growth in industrial automation, robotics and electric vehicle segments, the stock still appears overvalued after plunging 7% in Thursday morning trade, as the market seems to overlook macroeconomic risks in China and execution risks in overseas expansion.

Shenzhen Inovance Technology derives just over half its revenue from moatworthy businesses: elevators, new energy vehicles, or NEVs, and railways. In elevators, Inovance offers comprehensive solutions to elevator firms and supplies maintenance parts over the lives of elevators in use. Elevator-related customers are sticky, as they value their safety records, and programs behind elevator systems are tightly integrated with hardware. Through acquiring BST, a supplier of electronic components for elevators, Inovance now offers better car, cable, cord and human machine interface products, fortifying its lead over local peers. We believe Inovance will gain market share with its larger product portfolio through Chinese operations of global elevator firms. We are confident in Inovance’s outlook with BST as a means to strengthen its relationships with global elevator brands.

We leave our fair value estimate on Shenzhen Inovance at CNY 48.50 per share, and 2022-25 forecasts little changed. With electric vehicles already comprising 20% of China’s new vehicle sales, Inovance appears overvalued with lofty expectations of 60% CAGR over the next five years compared to our forecasts of 30% by 2025. Given Inovance’s current valuation of 46 times 2022 P/E, we prefer Delta Electronics and Han’s Laser, both are trading closer to our fair value estimates and have comparable exposure to electric vehicle, or EV, growth. Potential downward catalysts of the stock are interrupted elevator-related sales should property developers slow operations, and an eventual end of pandemic allows overseas peers to regain market share.

Shenzhen Inovance revealed preliminary revenue and net income numbers for the September quarter, which are ahead of our expectations. We intend to update our forecasts and fair value estimate once Shenzhen Inovance publishes full results for the third quarter of 2021 at the end of October. However, potential changes to our forecasts do not affect our view that the stock is overvalued, with the market being overoptimistic about Inovance’s electric vehicle, or EV-related outlook. We believe the market still expects Inovance’s EV-related revenue to grow at over 50% per year (from 60% previously) for the next 10 years compared to our forecasts of 30% CAGR up to 2025. In the short term, negative sentiment around the property sector--which potentially affects Inovance’s elevator revenue--and a potential breach of the placing price at CNY 58 may add to selling pressure.

Shenzhen Inovance Technology derives just over half its revenue from moatworthy businesses: elevators, new energy vehicles, or NEVs, and railways. In elevators, Inovance offers comprehensive solutions to elevator companies and supplies maintenance parts over the lives of elevators in use. Elevator-related customers are sticky, as they value their safety records, and programs behind elevator systems are tightly integrated with hardware. Through acquiring BST, a major supplier of electronic components for elevators, Inovance now offers better car, cable, cord and human machine interface products, fortifying its lead over local peers. We believe Inovance will gain share with its larger product portfolio and through developing new products to tackle the high-speed elevator market. We are confident in Inovance’s outlook as BST becomes a way to strengthen its relationships with global elevator brands and expand its overseas wing.