Ningbo Hengshuai is a global leader in automotive cleaning pumps, with its main business focusing on automotive cleaning systems and automotive micromotors. With the trend towards electrification and intelligentization of automobiles, the content per vehicle (CPV) of automotive cleaning systems and micromotors continues to increase, providing new driving forces for the industry. The Company has been deeply involved in the micromotor industry for years and has established stable supply relationships with major downstream customers. We are optimistic about its growth prospects backed by a further increase in global market share and a rise in CPV under the release of production capacity, as well as its prospects of improving profitability brought by new technologies to reduce costs and increase efficiency and self-produced raw materials. We put our 2023E/24E/25E attributable net profit (ANP) estimates at Rmb205mn/246mn/294mn. We assign 36x 2023E PE to derive a target price of Rmb92 and initiate coverage with a "BUY" rating.

An invisible champion of automotive cleaning systems starting with automotive micromotors.

The Company's predecessor, Hengshuai micromotor factory, was established in 2001, initially focusing on various types of automotive micromotors, then gradually expanded from motors to downstream cleaning pumps and cleaning system products, and has now grown into a global leader. It achieved revenue of Rmb341mn/584mn/739mn (+3%/+71%/+26% YoY) in 2020/21/22, and ANP of Rmb66mn/116mn/146mn (+2%/+74%/+26% YoY) over the same periods. Cleaning system and micromotors are the two core businesses of Hengshuai, accounting for 54% and 37% of the total revenue in 2022, respectively. The Company has provided matching products as the tier-1/-2 supplier to both domestic and international carmakers, including BMW, Mercedes-Benz and other North American new energy companies, as well as NIO, GAC, Geely, and so on.

Cleaning business: Intelligentization trend brings incremental demand, and we are optimistic about Hengshuai's global market share increase and production ramp-up of new products.

Hengshuai's cleaning business primarily focuses on cleaning pumps and cleaning systems, offering relevant products to the domestic and international customers as tier-1/2 supplier. Traditional cleaning systems mainly include windshield cleaning systems and headlight cleaning systems, with a CPV of Rmb60. With the advancement of automotive intelligence and the evolution of advanced driver-assistance system (ADAS) levels from Level 2 (L2) to Level 4 (L4), there are higher requirements for the data quality and reliability of cameras and lidar sensors, which has led to the emergence of new demand for sensor cleaning systems. The CPV of ADAS cleaning systems is likely to reach over Rmb1,000. The highlights of the Company's cleaning business are as follows: 1) Hengshuai is jointly developing ADAS cleaning systems with international automotive component giants. With the launch of ADAS cleaning system products, the Company is likely to benefit from the increasing demand in the intelligentization market. 2) In the domestic market, with the rise of domestic brands, the Company provides complete cleaning systems to automakers as a tier-1 supplier. The value of supporting components is likely to increase significantly. 3) The Company has proactively established factories in the US and Thailand, with a visible further increase in overseas market share.

Micromotor business: Expanding product categories amidst the trend of electrification, strengthening cost advantage through new technologies and raw material coverage.

With the increasing electrification and intelligentization of vehicles, the categories of micromotors in automobiles have expanded from the early starter motors to including functions such as windshield wipers, power windows, seats, steering assistance, and brake assistance. The number of micromotors used in vehicles has gradually increased. Compared to traditional fuel vehicles, new energy vehicles (NEVs) have higher level of intelligence, which is driving the price reduction of intelligent configurations and leading to a greater demand for micromotors. The electrification of "four doors and two lids" (ie the four car doors, hood, and trunk lid) is one of the areas where the micromotor demand is likely to increase in the future. The Company originated from the field of automotive micromotors and has been deeply rooted in this industry for many years. It has established partnership with top-tier international customers such as Stabilus in the downstream sector, and is benefiting from the industry growth driven by the expansion of categories.

Additionally, the Company has independently developed new underlying technologies for harmonic magnetic field motors and has matched them with self-produced core magnetic materials for motors. This positions the motor products to achieve cost reductions and efficiency improvements.

Potential risks: Weaker-than-expected automotive consumption; the trends in automotive electrification and intelligentization not up to expectations; the product development progress of downstream customers missing expectations; rising costs of raw materials; the construction progress of overseas factories falling short of expectations.

Investment strategy: Ningbo Hengshuai has been deeply involved in the micromotor industry for years and has established stable supply relationships with major downstream customers. We are optimistic about its growth prospects backed by a further increase in global market share and a rise in CPV under the release of production capacity, as well as its prospects of improving profitability brought by new technologies to reduce costs and increase efficiency and self-produced raw materials. We put our 2023E/24E/25E ANP estimates at Rmb205mn/246mn/294mn, implying 29x/24x/20x 2023E/24E/25E PE. We select automotive components and micromotor companies including Sanhua Intelligent Controls (002050.SZ), Tuopu Group (601689.SH), Wuxi Best (300580.SZ), Leili Motor (300660.SZ) and Kinco Automation (688160.SH) as comparable companies. Given the average valuation level of 36x 2023E PE of these companies, we assign 36x 2023E PE to derive a target price of Rmb92, and initiate coverage with a "BUY" rating for Ningbo Hengshuai.