The little giant of industrial control has been deeply involved in the industry for more than 20 years. Established in 2000, the company initially entered the FA field of intelligent control systems through programmable controllers and man-machine interfaces. After years of development, the company's product line runs through the entire process of HMI, PLC, servo/inverter, servo motor/AC motor, and industrial robots, covering the entire process of industrial automation, and has become an excellent supplier of intelligent and automated overall solutions in the domestic industrial control field. In 2020-2023, PLC product revenue increased from 0.49 billion yuan to 0.535 billion yuan, and the CAGR reached 3%, while the revenue of drive systems, mainly servo products, increased from 0.426 billion yuan to 0.729 billion yuan, and the CAGR reached 20%, accounting for a rise of 38% in 2020 to 48% in 2023, making it the company's largest main business.

The PLC market is broad, and the company's market position is stable. China's PLC market maintained a high growth rate until 2023. The scale grew from 11.2 billion yuan in 2017 to 17 billion yuan in 2022. The CAGR reached 8.6%, which is significantly higher than the global growth rate. Based on years of PLC product development and customer resource accumulation, the company's PLC business has maintained a rapid growth trend. The revenue scale grew from 0.08 billion yuan in 2011 to 0.535 billion yuan in 2023, with a CAGR of 17%. The share in the domestic small PLC market in 2023 was about 7%, ranking second only among domestic brands, after Huichuan.

Servos are developing at an accelerated pace, and domestic substitution continues to accelerate. China's servo industry has experienced great fluctuations in recent years. Benefiting from the explosive growth of the new energy and semiconductor industry, compounded by the upward cycle of the traditional industry, the industry ushered in rapid growth in 2019-2021. The market size grew from 13.9 billion yuan to a phased high of 23.3 billion yuan. In the downward cycle of the industry, domestic manufacturers bucked the trend and expanded to accelerate domestic substitution. As a leading domestic servo manufacturer, Huichuan's domestic market share increased from 6% in 2019 to 28% in 2023, and has taken a leading position in domestic general servos. In addition to Huichuan, Hechuan/Xinjie/Raysai/Weichuang all achieved significant growth in servo business revenue in 2023, with a year-on-year increase of 6%/23%/33%/78%.

Industrial automation is gradually picking up, and industry segments present structural opportunities. Regarding 2024-2025, we believe that in terms of advanced manufacturing, the new energy industry may face a decline in growth due to a high base, while the 3C industry may stem from Apple's major innovations and significant recovery in the next two years; traditional industries, such as textiles, machine tools, and mining, will clearly recover due to continued strong overseas demand. Therefore, overall, there is uncertainty about the recovery of the OEM market, and the project-based market will grow steadily.

Profit forecast: As an excellent domestic industrial control enterprise, the company is expected to develop more downstream fields in the future and further enhance its market position. We expect the company to achieve net profit of 2.44/ 2.89/ 0.352 billion yuan in 2024-2026, corresponding PE 16/ 13/ 11 times. The company was given a valuation of 20 times in 2024, corresponding to a target price of 34.7 yuan. It was covered for the first time, and a “buy” rating was given.

Risk warning: Downstream demand falls short of expectations, profit forecasts and valuation judgments fall short of expectations.