Rating: BUY (Initiation)
Target price: RMB101.00
Share price (6 Sep): RMB61.99
Market Cap (RMBm): 5,457.4
Up/downside: 62.9%
We are optimistic about the company’s laser-cut system market growth, on top of subsidiary Kaitong Automation’s growth prospects in CNC machine tools. We initiate coverage with a BUY call and a target price of RMB101.
An industrial motion control systems market leader
Weihong’s main products are industrial motion control, servo driver and industrial Internet of Things (IOT) systems, which are usually deployed in computer numerical control (CNC) machine tools. Its motion control products include engraving and milling control (woodworking, 3C, metal), cutting control (laser, water, flame) and manipulator systems. In January 2021, the company acquired Kaitong Automation, which augmented its turning and milling product line and enhanced the company’s competitiveness. Revenue growth reached a fundamental inflection point and grew strongly in 1H21.
Question 1: What is the market scale of laser-cut control systems?
Benefiting from all types of metal and non-metal parts, the laser-cut process equipment market is growing well. A motion control system represents the brains of a laser-cut machine. We expect China's laser equipment market to reach RMB77bn in 2021E, with a laser-cut equipment market scale of RMB19.7bn and annual sales of 72,000 units. We believe the laser-cut control systems market size (RMB1.34bn in 2020) will reach RMB3.72bn in 2025E, with high-powered systems growing faster.
Question 2: What is the outlook for Weihong’s laser-cut products market share?
Shanghai Friendess Electronic Technology, the domestic leader in laser-cut control systems, accounted for 70% of the low to medium-powered market and 15% of the high-powered market in 2020. Weihong’s laser-cut systems differ little from those of Friendess in product structure, control precision and speed. The company aims to differentiate its products with in-depth cooperation with lead customers, and had good results in terms of product development and customer expansion in 1H20. Its low to medium-powered product market share increased to ~20%; in the high-powered 10,000-20,000W segment, its products entered the trial phase. We believe its market share gap with Friendess will continue to narrow and that its market share will increase in the future.
Question 3: How will the integration of Kaitong impact Weihong’s future growth?
Kaitong Automation is positioned in motion control systems in the CNC machine tool market. In a meeting in August 2021, the State-owned Assets Supervision and Administration Commission (SASAC) emphasized technological innovations, ranking industrial 「mother」 machines ahead of high-end chips. China’s CNC machine tools market has grown rapidly but still lags the ones in developed countries. In addition, the localization rate of high-end global CNC machine tools is relatively low, so we see large potential market. We believe that the essence of high-end CNC machine tools is industrial software, especially for CNC systems. The localization of CNC systems is the key to the localization of high-end CNC machine tools, in our view. After acquiring Kaitong Automation, we expect Weihong to step up its products and R&D toward the high-end market, which implies broad headroom for growth.
Valuation and risks
Taking into account Weihong's laser-cut market growth and subsidiary Kaitong Automation’s growth in CNC machine tools, we expect total revenue of RMB439m/615m/819m in 2021/22/23E, with net profit at RMB100m/168m/226m. We initiate coverage with a BUY rating and a target price of RMB101 (target market value of RMB9.2bn). Risks include: industry profitability coming in less than expected; laser-cut product R&D and customer expansion falling below expectations; and intensifying competition. Note: our forecast assumptions are subjective.
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This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.
Rating: BUY (Initiation)
Target price: RMB101.00
Share price (6 Sep): RMB61.99
Market Cap (RMBm): 5,457.4
Up/downside: 62.9%
We are optimistic about the company’s laser-cut system market growth, on top of subsidiary Kaitong Automation’s growth prospects in CNC machine tools. We initiate coverage with a BUY call and a target price of RMB101.
An industrial motion control systems market leader
Weihong’s main products are industrial motion control, servo driver and industrial Internet of Things (IOT) systems, which are usually deployed in computer numerical control (CNC) machine tools. Its motion control products include engraving and milling control (woodworking, 3C, metal), cutting control (laser, water, flame) and manipulator systems. In January 2021, the company acquired Kaitong Automation, which augmented its turning and milling product line and enhanced the company’s competitiveness. Revenue growth reached a fundamental inflection point and grew strongly in 1H21.
Question 1: What is the market scale of laser-cut control systems?
Benefiting from all types of metal and non-metal parts, the laser-cut process equipment market is growing well. A motion control system represents the brains of a laser-cut machine. We expect China's laser equipment market to reach RMB77bn in 2021E, with a laser-cut equipment market scale of RMB19.7bn and annual sales of 72,000 units. We believe the laser-cut control systems market size (RMB1.34bn in 2020) will reach RMB3.72bn in 2025E, with high-powered systems growing faster.
Question 2: What is the outlook for Weihong’s laser-cut products market share?
Shanghai Friendess Electronic Technology, the domestic leader in laser-cut control systems, accounted for 70% of the low to medium-powered market and 15% of the high-powered market in 2020. Weihong’s laser-cut systems differ little from those of Friendess in product structure, control precision and speed. The company aims to differentiate its products with in-depth cooperation with lead customers, and had good results in terms of product development and customer expansion in 1H20. Its low to medium-powered product market share increased to ~20%; in the high-powered 10,000-20,000W segment, its products entered the trial phase. We believe its market share gap with Friendess will continue to narrow and that its market share will increase in the future.
Question 3: How will the integration of Kaitong impact Weihong’s future growth?
Kaitong Automation is positioned in motion control systems in the CNC machine tool market. In a meeting in August 2021, the State-owned Assets Supervision and Administration Commission (SASAC) emphasized technological innovations, ranking industrial 「mother」 machines ahead of high-end chips. China’s CNC machine tools market has grown rapidly but still lags the ones in developed countries. In addition, the localization rate of high-end global CNC machine tools is relatively low, so we see large potential market. We believe that the essence of high-end CNC machine tools is industrial software, especially for CNC systems. The localization of CNC systems is the key to the localization of high-end CNC machine tools, in our view. After acquiring Kaitong Automation, we expect Weihong to step up its products and R&D toward the high-end market, which implies broad headroom for growth.
Valuation and risks
Taking into account Weihong's laser-cut market growth and subsidiary Kaitong Automation’s growth in CNC machine tools, we expect total revenue of RMB439m/615m/819m in 2021/22/23E, with net profit at RMB100m/168m/226m. We initiate coverage with a BUY rating and a target price of RMB101 (target market value of RMB9.2bn). Risks include: industry profitability coming in less than expected; laser-cut product R&D and customer expansion falling below expectations; and intensifying competition. Note: our forecast assumptions are subjective.
免责声明(DISCLAIMER):
此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。
This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.
