China Robot Industry: Three tailwinds to drive multi-year growth

Initiation China Robot Industry Three tailwinds to drive multi-year growth Primary Analyst: Steve Huang CFA +886 2 35187905 steve.huang@yuanta.com With significant contribution from: George Chang CFA +886 2 35187907 george.chang@yuanta.com Roger Lo +886 2 3518-7939 roger.c.lo@yuanta.com http://research.yuanta.com Bloomberg code: YUTA Industry Update China: Electronic Components 6 Oct, 2015Top recommendations ► Siasun (300024 CH; BUY) with a TP of RMB86, for 52% upside. ► Inovance (300124 CH; BUY) with a TP of RMB51, for 43% upside. ► Boshi (002698 CH; BUY) with a TP of RMB26, for 50% upside. What’s new? ► We initiate coverage on Siasun, Inovance and Boshi, three of the major Chinese robot vendors listed in Shenzhen that are actively involved in robotic business, including industrial robots, key robot components, and medical robots. Industry outlook ► Three tailwinds will drive multi-year growth for Chinese robot vendors, including 1) their strong positioning in a fast-growing market; 2) benefiting from gov’t policy support; and 3) riding on the next wave of import substitution. China Robot Industry Primary Analyst: Steve Huang CFA +886 2 35187905 steve.huang@yuanta.com With significant contribution from: George Chang CFA +886 2 35187907 george.chang@yuanta.com Roger Lo +886 2 3518-7939 roger.c.lo@yuanta.com http://research.yuanta.com Bloomberg code: YUTA Three tailwinds to drive multi-year growth We initiate coverage on Siasun, Inovance, and Boshi, three of the major Chinese robot vendors that are actively involved in robotic business, including industrial robots (IR - Siasun), key IR components (Inovance), and medical robots (Boshi). We expect the three companies to enjoy robust growth momentum in 2016-17F with sales CAGRs reaching 15-35% on the back of three tailwinds, including: ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE LOCATED IN APPENDIX A. Yuanta does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Figure 1: Companies mentioned Company Ticker Rating TP Siasun 300024 CH BUY RMB86 Inovance 300124 CH BUY RMB51 Boshi 002698 CH BUY RMB26 ► Strong positioning in the fast-growing China market: According to IFR, global IR demand has grown at a 10% CAGR over 2004-14, which we estimate will rise to 16% in 2015-20F. Among global regions, China has the highest potential in 2015-20F with a CAGR of 20% based on our estimate, driven by 1) increasing wages; 2) a low IR density; and 3) strong demand from the EMS, semiconductor, and TFT-LCD industries. Therefore, we believe these local Chinese vendors will benefit from rising demand, as they are located in this fast-growing market. Source: Yuanta Investment Consulting ► Benefiting from government policy support: In order to upgrade its manufacturing industry, the Chinese government has launched a series of policies to support and develop its robot industry, including 1) Made in China 2025; 2) guidance on the development of industrial robotics; and 3) local city governments’ various policy supports. ► Riding on the next wave of import substitution: We believe IRs will benefit from the next wave of import substitution policies in China, following the display, LED, and semi industries previously, in that still 90% of China’s IR demand is fulfilled by foreign suppliers, while the Chinese government has been actively building up its own IR supply chain. Therefore, we expect the Chinese government will gradually lift its local IR insourcing ratio, allowing China’s local IR vendors to continue gaining share from foreign suppliers. Even if we conservatively estimate the local IR vendors’ market share will expand to 25% in 2020 (vs. MIIT’s target of 45%) from 10% in 2014, this already implies a 40% revenue CAGR for China’s local IR industry in 2015-20F, significantly outgrowing the overall China IR market (CAGR of 20% in 2015-20F). China: Electronic Components 6 Oct, 2015 Page 3 of 94 Table of contents Investment thesis.......................................................................................................... 4 Strong positioning in the fast‐growing China market ......................................................4 Benefiting from government policy support ....................................................................8 Riding on the next wave of import substitution..............................