Key points of investment
It is cutting-edge in industrial control, has the second largest market share of servo systems in China, and has a complete product series and solutions for humanoid robots. Established in 2011, Hechuan Technology entered the industrial control market with PLC controllers, gradually expanded its business into the fields of servos, inverters, etc., and continued to expand to multiple levels of industrial control automation and upstream and downstream of the industrial chain. It has now grown into a first-tier domestic brand for industrial automation control core components and overall solutions. In November 2023, the Bosch Group announced capital and shareholding, and the two sides jointly established a joint venture subsidiary.
In 2018-2022, the company's revenue increased from 280 million yuan to 940 million yuan, and the CAGR reached 35%. In 2022, servo systems, PLC, and machine tools accounted for 80.3%, 12.9%, and 2.5% of revenue, respectively.
The automation industry has a 300 billion dollar market, and the general trend of domestic substitution has led the company to expand rapidly. In 2022, China's industrial automation market is close to 300 billion, and the localization rate of servos and small PLCs has advanced rapidly, reaching 44% and 23%. The company's main orders come from booming emerging manufacturing industries such as photovoltaics, lithium batteries, robotics, and lasers. The company's servo products quickly penetrated by adopting a price reduction strategy, with a market share of over 4%, ranking second in domestic investment; implementing an industry-focused strategy to develop major customers in the lithium battery and photovoltaic industries through dealer channels.
Focus on the industrial automation industry, create five core competencies, and join hands with the world's leading automation brand Bosch Rexroth, and there is plenty of room for growth. The company uses the integration of “R&D, production and marketing” to achieve in-depth manufacturing, and relies on the capital market to actively expand production capacity. Short-term polishing product power, vertical extension, rapid iteration of servos and PLC, and internationally advanced performance; horizontal expansion, layout guide screws, planetary roller screws, and micro inverters will focus on achieving full coverage at all levels in the industrial control field in the future. Build brand power over a long period of time and transform the overall solution provider. The digital transformation of the manufacturing industry is the general trend. The company leverages its product portfolio advantages and has in-depth personalized solutions in various industries such as photovoltaics, lithium batteries, robotics, and lasers. In the future, industrial automation products will be further integrated with information technology such as MES and SCADA to transform the overall solution provider for digital factories.
Investment advice
Short-term: The growth rate of the manufacturing industry is bottoming out. It is expected to recover moderately in 2024, and the company is actively entering traditional industries to find new growth points; long-term: 1) In terms of products, the company's product layout is continuously improved, the servo system continues to increase market share, and products such as medium and large PLCs, inverters, linear motors are gradually being released; 2) In terms of downstream applications, the humanoid robot business is gradually being implemented, opening up room for growth. At the same time, the automation business forms a competitive advantage in some traditional industries.
Profit forecast and valuation: Revenue for 2023-2025 is expected to be RMB 1,19, 15.2, and 1.97 billion yuan, respectively, up 26%, 28%, and 30% year-on-year, with net profit attributable to mother of RMB 1, 160, and 200 million yuan, respectively, and EPS of RMB 0.6, 1, and 1.3, respectively. Taking into account historical valuations, comparable company valuations and performance growth, the company was given a 40 times PE valuation in 2024, corresponding to a market value of 6.2 billion yuan and a reasonable value of 41.09 yuan/share, giving it a “buy” rating.
Risk warning: The recovery of the manufacturing industry fell short of expectations; regulatory approvals were delayed and not passed; product technology development progress fell short of expectations.