The industrial control business is growing steadily, and the small PLC field has significant advantages.

Xinjie Electric is a well-known domestic enterprise focusing on the development and application of industrial automation products. It has long been at the top of the domestic small PLC market share. The main products include PLC, driving systems, HMI, intelligent equipment, etc., to provide customers with “overall industrial control automation solutions”. Drive systems account for nearly half of the company's largest business in 2023, and programmable controllers account for more than 1/3 of revenue. In 2023, Xinjie Electric's small PLC accounted for 7% of the Chinese market, ranking fourth and second among domestic manufacturers. At present, it has a great advantage in the field of small domestic PLCs.

The actual controller subscribes to raise capital in full, strengthening the existing business and enhancing market confidence.

With the support of national policies, domestic enterprises are expected to gradually seize foreign market share in the field of industrial automation products; according to Fortune Business Insights, the global industrial automation market will grow from 205.86 billion to 395.09 billion in 2022. There is a high incremental market. The company is expected to expand its marketing network, increase direct sales efforts, and increase product market share.

In May 2024, Xinjie Electric plans to issue shares to specific targets, and plans to raise no more than 0.5 billion yuan of capital for the second phase of the enterprise technology center construction project, marketing network and product display center construction projects, and supplementary working capital. Mr. Li Xin, the controlling shareholder and actual controller of the company, subscribed to all of the shares issued, fully demonstrating his determination to support the company and his firm confidence in the company's future development.

There is broad scope for development in medium and large domestic fields, and product characteristics help improve valuation.

Foreign-funded companies maintain a high share of the domestic PLC market. Siemens (Germany) has a market share of more than 40%, and Mitsubishi (Japan) has a market share of about 12%. Especially in the medium and large PLC sector, the pattern of a high share of foreign capital is more clear, and European and American companies are in a monopoly position. Overall, the domestic PLC market still has plenty of room for domestic replacement, and the upper limit of development is high.

The characteristics of PLC itself determine that it is more software-oriented, has high user barriers and strong downstream stickiness; PLC customers' high requirements for stability and efficiency have contributed to the exclusivity of product brands; it may increase the valuation of industry companies in the future.

Profit forecast and valuation: The company's total revenue for 2024-2026 is expected to be 1.73/2/2.32 billion yuan, up 15%/16%/16%; gross margin is 37%/36.7%/37.1%, respectively; and net profit to mother is 0.25/0.29/0.34 billion yuan, respectively, up 26%/16%/17%. The compound growth rate of the company's performance is expected to reach 15% in the next 3 years. Referring to the 24-year average PE of comparable companies, considering that the company's small PLC business is second in the industry and the performance growth rate is rising steadily, we gave the company industry an average 24-year PE valuation of 26X, corresponding to a target price of 46.24 yuan, covered for the first time, and gave a “buy” rating.

Risk warning: the recovery of the automation industry falls short of expectations; competition increases risks; management risks brought about by the expansion of company size; risk of implementing fund-raising projects and capital management risks; estimating subjective risks.