Shenzhen Inovance Earnings: Electric Vehicles and Global Expansion Prolong Impressive Prospects

We maintain our fair value estimate for narrow-moat Shenzhen Inovance 300124 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.

Management targets 20%-40% revenue growth and 10%-30% GAAP profit growth for 2023 despite flat first-quarter sales and that GAAP profit was up 4% from the previous year. Inovance’s targets are consistent with guidance or targets that other automation plays in our coverage have alluded to, which we believe presumes a strong economic recovery in China in the second half of 2023.

We forecast Inovance can barely reach the low end of its targets at CNY 28 billion revenue and CNY 4.91 billion in GAAP net profit, up 22% and 14% from 2022, respectively. Our forecast is based on heightened pricing pressure on EV components as automakers struggle to maintain profitability amid inflationary pressures and expectations of lower car prices after Tesla’s multiple price cuts. Consequently, we presume EV component sales growth will moderate to 10% in 2023 from 58% in 2022 before rebounding to 35% in 2024 as revenue from non-Chinese automakers ramps up and Inovance grows its share of 3-in-1 drivetrains relative to single-function components. On a brighter note, we continue to expect the general automation segment to grow 30% year on year thanks to the company’s ability to sell controllers and accompanying systems to more large enterprises (mostly state-owned) in China which are pushing for local replacements.