Analysts are bullish on Shenzhen Inovance Technology as China embraces robotics and automation.
Shenzhen Inovance Technology is set to benefit from growing demand for automation in China.Photographer: Matthew Lloyd/Bloomberg
One stock that should be on investors buying lists as they prepare for Monday’s launch of the new trading link between Hong Kong and Shenzhen is Shenzhen Inovance Technology.
Shenzhen Inovance Technology (300124.CN) offers a way to invest in two of the hottest technology trends right now: robotics and automation. The stock, which is up 15% since mid-September, is China’s largest maker of servo systems – a type of motion control device – for industrial robots, and produces automation equipment for use in electric vehicles and elevator control systems. The use of technology to offset the rising cost of labor in China, plus Beijing’s desire to grow the nation’s fleet of environmentally friendly electric vehicles, will power earnings growth. While the stock may look pricey at 30 times earnings, it compares favorably with other Shenzhen-listed new economy stocks given analysts expect earnings to grow at roughly 20% a year over the next three to five years.
Not only does the stock offer a way to invest in the modernization of China’s economy, the company has also been stealing market share from rivals. It’s snared itself a bigger share of the pie in industrial automation components, a trend that HSBC analyst Anderson Chow expects will continue into 2017 after stronger than expected sales growth in the first nine months of the year. Chow has a buy rating on Inovance with a CNY24 a share target price, implying around 14% upside. The company is enjoying strong demand from makers of smartphones and electronic devices given the growing demand for more precision manufacturing as the products become more technologically sophisticated. The company expects revenues from servo systems to grow at a 50% pace in 2017. Servo systems account for around 12% of Inovance’s gross profits.
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Given China’s notoriously polluted air, it’s no wonder the government is an enthusiastic supporter of electric vehicles. The trend towards cleaner forms of transport will fuel earnings growth as electric vehicle components account for around 30% of Inovance’s top line. The company’s partnership with China’s largest bus maker Yutong Bus (600066.CN), as well as Beijing’s push to put more electric buses on the road, has buoyed sales of electric vehicle motor controllers in recent years. Demand for electric buses is set to rise as cities in eastern China are required to increase the percentage of electric buses to 80% by 2019 from a current 50%. The possible introduction of a subsidy for electric logistics vehicles before the end of the year could boost revenue growth in 2017, notes HSBC’s Chow.
Inovance has invested in its future by funding research to improve its technology, which will solidify its position in product lines like powertrains. However, the spending has weighed on margins. The company also plans to set up a CNY283 million research and development center in Dongguan’s Songshanhu Ecological Park, which UBS analyst Jean Rao says will bolster Inovance’s long-term growth. Rao expects Inovance to grow revenues at an average 18% annual pace until 2020 and argues the stock’s valuations look attractive relative to its long-term growth prospects. She has a buy rating on Inovance with a CNY23.40 a share target price.
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