Hi-Tech Control System (aka Hite Control), with rich distribution expertise, proprietary products, strong brands, and solid market presence, is well-poised to make continuous breakthroughs in a favorable market environment as industrial automation rebounds, intelligent manufacturing thrives, demand for wind power installation recovers, and the energy storage market quickly expands. The Company is likely to accelerate its business transformation and embrace rapid earnings growth. Given such factors, we forecast its 2023E/24E/25E attributable net profit (ANP) to be Rmb224mn/394mn/521mn, equivalent to EPS of Rmb0.62/0.84/1.07. Based on PE and taking DCF valuation method as a reference, we assign a target price of Rmb21 for 2024E, corresponding to market cap of Rmb10.1bn after the completion of acquisition and follow-on public offering (FPO). We initiate coverage with a "BUY" rating.

A promising intelligent manufacturer and industrial network solution provider.

Hite Control focuses on intelligent manufacturing and wind power storage. It implements a synergetic strategy between digitization and going green, and its three major segments of electrical automation, IT services, and renewable energy business are highly integrated and mutually reinforcing. The Company has rebounded from policy impact in 2018 and revamped renewable energy business since 2019, entering an accelerated transformation period. As of 2022, the Company achieved revenue of Rmb2.71bn, with a 7.1% CAGR, and ANP of Rmb140mn with a 29.3% CAGR. Additionally, according to Hite Control's announcement, it plans to acquire Thinkstart at a price of Rmb1,278.3mn. The target has strong control system technologies, which will likely enhance the Company's capability reserves with the independent products of input/output (IO) module and wiring harness.

Cornerstone set in industrial electrical automation.

Industrial automation is in a new upswing cycle, aided by import substitution.We expect the sector to recover by end-2023, with general automation rebounding in 2Q-3Q23. Hite Control's industrial electrical automation business primarily focuses on the distribution and support of electrical automation products. In 2022, distribution and support business accounted for over 80% of the Company's electrical automation business, enabling comprehensive product supply for electrical control systems, which includes a wide range of products such as programmable logic controllers (PLCs), sensors and detection equipment, fieldbuses, human-machine interaction devices, etc. Leveraging its diverse product portfolio, Hite Control offers holistic solutions to clients in the manufacturing and infrastructure sectors. The prospective acquisition target, Thinkstart, also integrates products and technologies from major domestic and international automation brands.However, Hite Control is not solely a traditional distributor of automation products; it places great emphasis on independent product research and development (R&D), and has introduced its own proprietary brands and products in areas like large- and medium-sized PLCs and drives. It also boasts a modern electrical manufacturing base covering 45,000 sqm, a well-established supply chain, and a production manufacturing system. This infrastructure supports an annual production capacity of 10,000 sets of products, including transmission systems and PLC control cabinets.

Focusing on intelligent manufacturing and empowering new development through leading exploration.

Intelligent manufacturing plays a crucial role in industrial upgrading. Coupled with continuous policy support for the advancement of intelligent manufacturing and industrial informatization, we anticipate that by 2027, the scale of China's intelligent manufacturing industry will surpass Rmb1trn, with a CAGR of 9.24% over 2023-27. Moreover, in 2018, industrial informatization (digital factories and industrial internet) accounted for nearly 50% of the manufacturing layout, indicating a substantial future scale for industrial informatization. In terms of the proprietary products, Hite Control focuses on assisting clients in establishing the foundational infrastructure for intelligent industrial data, with a specific emphasis on driving the iteration and development of informatization software and edge computing products. In terms of acquisition, the potential synergy between the Company and the intended acquisition target, Thinkstart, is noteworthy. If the acquisition is successfully completed, Thinkstart's proprietary products in IO modules, sensors, and wiring harnesses can effectively complement the Company's existing technological gaps, facilitating a beneficial interaction between software and hardware. Additionally, Hite Control is accelerating its efforts to enhance its capabilities and promote the industrial informatization solution business, aiming to establish a comprehensive competitive advantage through a combination of vertical and horizontal strengths.

Advantaged position in wind energy and storage.

1) In the wind power field: Driven by the trend of larger wind turbines, cost reduction in the industry, and rapid growth in offshore wind installations, we project that the size of China's wind power inverter market will reach Rmb6.4bn by 2025, corresponding to a CAGR of 11.6% over 2022-25. Hite Control possesses leading technological strength and extensive R&D capabilities in the inverter industry. In 2022, the Company further improved the R&D platform for wind turbine inverters at 690V/900V/1140V levels, enabling rapid product development on mature technology platforms. Additionally, the Company successfully completed the development of doubly-fed 7.XMW and full-power 16MW inverters, positioning itself at the forefront of the industry in terms of power coverage. 2) In terms of the energy storage area: Cost reductions combined with electricity pricing reforms are driving the development of the energy storage industry. Considering only the areas of renewable energy generation and power ancillary services, we expect the global energy storage system market to reach Rmb175.3bn/265.2bn/377.1bn in 2023/24/25, corresponding to a CAGR of 47% over 2023-25. The Company has energy storage products of energy storage modules, standard energy storage battery clusters, containerized energy storage systems, commercial and industrial energy storage systems, and energy storage inverters, and it is continuously expanding its production capacity. As of Jun 2023, Hite Control has secured energy storage orders exceeding 1.1 GWh through winning bids and new contracts. The order fulfillment tasks on hand amount to approximately 1.5 GWh, with a focus on centralized energy storage systems.Furthermore, the Company is also pioneering new models for energy storage on the commercial and industrial fronts, aiming to achieve a breakthrough in market scalability for commercial and industrial energy storage. It is also exploring the digital empowerment of energy storage, aiming to imbue the vast data collected by the systems with financial attributes, thereby establishing it as a quantification basis for electricity trading or carbon emission trading. Hite Control is continuously pushing the boundaries in the field of new energy.

Potential risks: Fluctuations in macro economy and industry prosperity; slower-than-expected general automation recovery; disappointing progress in acquisition of Thinkstart; less-than-expected earnings; lower-than-expected progress in new product development and market penetration; intensified competition in energy storage affecting gross profit margins (GPMs).

Investment strategy: Hite Control, with rich distribution expertise, autonomous products, strong brands, and solid market presence, is well-poised to make continuous breakthroughs in a favorable market environment as industrial automation rebounds, intelligent manufacturing thrives, demand for wind power installation recovers, and the energy storage market quickly expands. The Company is likely to accelerate its business transformation and embrace rapid earnings growth. Given such factors, we forecast its 2023E/24E/25E ANP to be Rmb224mn/394mn/521mn, equivalent to EPS of Rmb0.62/0.84/1.07, applying 22.5x/14.5x/11.5x 2023E/24E/25E PE at the current price. According to the Company's announcement regarding the asset restructuring, and given the smooth progress of the current review process, we assume that the acquisition of Thinkstart and the corresponding FPO will be successful by the end of 2023. This will result in an increase of 130mn shares, leading to a significant improvement in performance, and Thinkstart's financials will be consolidated for the entire year of 2024. As we think that the Hite Control will be affected by the non-recurring factor of the asset restructuring in 2023, we take 2024 profit forecast for valuation purposes. Based on the valuation levels of comparable companies, such as Inovance (300124.SZ), Supcon Technology (688777.SH) and Nancal Technology (603859.SH), coupled with DCF valuation methods, we assign 24x 2024E PE to set a target price of Rmb21, corresponding to a market cap of Rmb10.1bn after the completion of the acquisition and FPO in 2024. We initiate coverage with a "BUY" rating.