Date of Report: October 30, 2024
Broker: UOB Kay Hian
Company Overview
Shenzhen Inovance (300124 CH) is a prominent player in the electrical equipment sector, specializing in automation products such as low-frequency converters, servo drivers, and programmable logic controllers. The company has developed a reputation for its strong R&D capabilities, particularly in the new energy vehicle (NEV) and automation sectors, where it holds a competitive edge in China and beyond.
3Q24 Financial Performance
In 3Q24, Shenzhen Inovance’s performance was mixed, with revenue growth but continued margin pressure due to shifts in product mix and heightened competition. The quarter was marked by a significant contribution from the electric vehicle (EV) powertrain business, while general automation and other segments showed weaker results.
Key Financial Metrics (3Q24)
- Revenue: Rmb9,214 million, a 20.1% year-over-year (yoy) increase, but down 4.9% quarter-over-quarter (qoq).
- Gross Profit Margin: Declined to 29.7%, impacted by product mix shifts, particularly the higher contribution from the lower-margin EV powertrain segment.
- Operating Profit: Rmb1,095 million, a decrease of 7.9% yoy and 18.6% qoq, as lower-margin products reduced profitability.
- Net Profit: Rmb1,236 million, roughly flat yoy but down 5.4% qoq, aligning with the company’s guided range.
Revenue Breakdown and Product Mix Impact
Shenzhen Inovance’s revenue in 3Q24 was driven by robust growth in the EV powertrain business, which saw a 90% yoy increase to around Rmb4.4 billion. However, this shift in product mix had a noticeable impact on the company’s overall margins due to the lower profitability of EV components compared to automation products. Other key segments performed as follows:
- General Automation: Revenue declined by 7.9% yoy, reflecting challenges in market demand.
- Elevator Business: Registered a 14.4% yoy decrease, impacted by weakness in China’s property development market.
Strategic Focus on EV Powertrain Growth
The EV powertrain business remains a significant growth driver, with expectations of 40-50% yoy growth moving forward. This growth is propelled by new design wins, particularly in plug-in hybrid electric vehicles (PHEVs), and expanding EV adoption in both China and global markets. Although the EV powertrain business has lower gross margins (below 20%), economies of scale are expected to improve net margins over time, with a long-term net margin target of 8% for this segment.
General Automation and Market Recovery Outlook
The general automation sector faces ongoing demand challenges, especially from the solar and lithium-ion (Li-ion) battery verticals, which have shown monthly year-over-year declines. However, Shenzhen Inovance is cautiously optimistic about a recovery, supported by government policies to stimulate equipment replacement in heavy industries:
- Government Stimuli: Anticipated to drive demand for automation equipment replacements in heavy industries, which are expected to initiate replacement cycles in 2025.
- Li-ion Battery Capex: Indications suggest a potential recovery in the Li-ion battery segment, with overseas markets showing signs of growth.
Cost Controls and Margin Management
To counterbalance the margin pressures from its product mix, Shenzhen Inovance has implemented rigorous cost-control measures. These include:
- Optimizing Operating Expenses: Focused on minimizing operational costs to offset lower margins in certain segments.
- Improving Efficiency: Targeting efficiencies within the supply chain and production processes to preserve profitability.
Earnings Forecast and Financial Outlook
The outlook for Shenzhen Inovance’s revenue and profit growth remains positive, albeit with some caution due to market dynamics. The company expects to achieve a revenue compound annual growth rate (CAGR) of approximately 9% from 2024 to 2026, driven by the expansion of the EV powertrain business and a gradual recovery in automation demand:
- Revenue Projections: Rmb35,850 million in 2024, increasing to Rmb41,200 million in 2025 and Rmb45,650 million in 2026.
- Net Profit Margin: Expected to stabilize around 11.9%-12.0% from 2024 to 2026 as the company manages its cost structure and operational efficiencies.
Recommendation and Valuation
UOB Kay Hian has downgraded Shenzhen Inovance to a “HOLD” rating, maintaining a target price of Rmb56.00. This valuation is based on a forward price-to-earnings (PE) multiple of 26.6x for 2025, which is 0.5 standard deviations below the company’s five-year historical average. This recommendation reflects the fair valuation given current market conditions and the challenges in the general automation sector, balanced by strong growth in the EV powertrain segment.
