The company plans to acquire 65% of Modoli Transmission's shares in cash. The transaction consideration is tentatively set at $205 million.

Modoli Transmission focuses on precision planetary reducers. After years of technology development and process accumulation, Modoli Transmission has mature and advanced production technology and process plans, and has established large-scale production lines and a complete quality assurance system. Its products with servo motors can be used in laser cutting, machine tools, robots/robots, and various high-end special equipment. Through this acquisition, the company can quickly enter the precision planetary reducer sector. It will further improve the gearbox layout and empower Modoli Transmission through strong sales resources. The two sides will create synergy and achieve long-term development. As the overall recovery of the domestic general manufacturing industry fell short of expectations, we adjusted the company's net profit for 2023/24/25 to 427/5.37/663 million yuan (the original forecast was 4.94/5.77/680 million yuan). Referring to the comparable company's medium power and Shuanghuan Drive, we conservatively gave the company a valuation level of 30 times PE in 2024, corresponding to the target price of 24 yuan, maintaining a “buy” rating.

Incident: On November 8, 2023, the company signed a “Share Transfer Intent Agreement” with Modoli Transmission shareholders Guan Xiang, Li Zemin, Ge Yihuai, and Modoli Transmission. The parties reached a preliminary agreement on the company's intention to acquire 65% of Modoli Transmission's shares in cash. After the transaction is completed, the company expects to achieve financial consolidation with Modoli Transmission.

Main points: Transaction method: The company plans to acquire 65% of the shares of the target company held by the target companies Guan Xiang, Li Zemin, and Ge Yihuai in cash, and the three will separately transfer 41%/20%/4% of the target company's shares. Transaction consideration: According to the provisional valuation of the target company, the overall valuation of the target company is 315 million yuan, and the provisional transaction consideration is set at 315*0.65 = 204.75 million yuan. Performance commitment: This transaction sets the three fiscal years 2023/2024/2025 as the performance commitment period. The target company must achieve a cumulative net profit of not less than 21 million/44 million/72 million yuan within three years, respectively.

Modoli Transmission focuses on precision planetary reducers, which are mainly used downstream in the high-end market. Modoli Transmission is engaged in R&D, production and sales of precision planetary reducers. The products can be used in conjunction with servo motors and are widely used in laser cutting, machine tools, robots/robots and various special equipment. As the trend of transformation and upgrading of China's intelligent manufacturing industry continues to accelerate, transmission devices in many high-end equipment in the industrial manufacturing process can no longer continue to use traditional speed reducers, and the advantages of precision speed reducers have gradually become prominent. From a downstream perspective, laser cutting has great advantages over traditional cutting. In the machine tool sector, due to the processing of the machine tool itself, the conditions of the load inertial system vary greatly. It is necessary to install a precision reducer to increase torque and improve inertial matching at the load end, so that inertial operation is smooth. Domestic replacement trends and renewal requirements in the machine tool industry have brought more demand for precision reducers. In the robotics sector, high-end robots have ushered in an important window of import substitution due to increased downstream demand for new energy sources and limited foreign investment delivery capacity, leading to an increase in demand for domestic robot parts, mainly RV speed reducers. At the same time, precision speed reducers are also important accessories for humanoid robots. Tesla and domestic humanoid robots are expected to bring new opportunities after launch.

Collaborate resources to improve business layout. Through this acquisition, on the one hand, the company can further improve the general speed reducer product line, and on the other hand, it can use Modoli transmission to quickly enter the field of precision planetary reducers and improve the company's layout in downstream industrial automation fields such as laser cutting, CNC machine tools, and robotics/robots.

The company is able to empower Modoli Transmission in terms of customer resources and sales network. Modoli Drive established a French joint venture, Reckon Drives International in 2016, dedicated to promoting its products to high-end overseas customers. So far, it has successfully accumulated many well-known overseas customers, which has helped the company establish a layout in overseas markets and promote the company's long-term development through two-way collaboration.

Risk factors: risk of macroeconomic pressure; risk of increased competition; risk of acquisition integration falling short of expectations; downstream demand falling short of expected risk.

Profit forecasting, valuation and rating: Modoli Transmission has mature and advanced production technology and process plans, and has established large-scale production lines and a complete quality assurance system. This acquisition can help the company quickly enter the precision planetary reducer sector, improve the gearbox layout and mechatronics strategic puzzle, and promote the company's long-term development in terms of resources. As the overall recovery of the domestic general manufacturing industry fell short of expectations, we adjusted the company's net profit for 2023/24/25 to be 427/5.37/663 million yuan (the original forecast was 4.94/5.77/680 million yuan), corresponding to EPS of 0.64/0.81/1.00 yuan (the original forecast was 0.75/0.87/1.03 yuan), respectively. After laying out precision reducers, the company's main business structure is more similar to that of speed reducer companies such as Zhongdailide and Double Ring Drive. Since Modoli Transmission also showed some uncertainty in 2023, using the 2024 profit forecast, according to Wind's unanimous expectations, on November 24, 2023, the PE valuation levels for China Dalide and Double Ring Drive in 2024 were 52 times and 22 times, respectively, with an average of 37 times. Considering that the company's valuation has a certain discount compared to current major humanoid robot reducer manufacturers, we conservatively gave the company 2024 The valuation level of 30 times PE corresponds to the target price of 24 yuan (the original target price is 22 yuan), maintaining the “buy” rating.