Shenzhen Inovance Technology Co.:FY16pre-report in line;expect IA segment to speed up;remain CL-Buy

What's changed

Inovance pre-announced FY2016 results after market close on Feb 24, withrevenue/net income reaching Rmb3,660/Rmb955mn (+32%/18% yoy), -1%/6% vs. FY2016 GSe, largely in line with our expectations. Implied 4Q16revenue of Rmb1,206mn is 34% yoy vs. 1Q-3Q +31% yoy pace. We seeproduct mix impact as key and more importantly note impact increasingSG&A (including R&D) has had on net margin, down to 22% in 4Q16 from24.8% in 4Q15 and 28.1% as of 1Q-3Q16. FY16 margin recorded 26.1%, 1pplower than prior GSe.

Implications

Based on our recent channel check of major IGBT supplier (inverter/servo/electronic vehicle (EV) controller’s upstream component, of 20-30%market share), and current trends, general inverter industry appears poisedto grow at >20% yoy in 1H17 (from c. 5-10% in FY14-16), with servo muchstronger. This affirms our view that revenue growth in Inovance’s IndustrialAutomation (IA) segment is likely to speed up on improving Chinamanufacturing PMI/capex since 3Q-4Q16 plus company’s strong track recordof market share gains. Additionally, in contrary investor concerns on volumedecline and pricing pressure from EV bus, EV bus customers still appear tobe projecting low single-digit growth in sales volume. Regarding R&D,company disclosed the expansion of Auto Electronics resources (from 300 to500 ppl in 2017E), we believe this may signal further development targets inthe EV passenger segment.

Valuation

We trim 201E7-18E EPS by 4% factoring R&D impact, but leave our 12m TPunchanged at Rmb27.4, still based on 2017E EV/GCI to CROCI/WACC (3.1Xsector cash return with 10% premium). We maintain our Buy rating, on CL.

Key risks

More aggressive price cuts from Yutong on pressure from lower electric bussubsidy (we factor 10% cut starting in 2017 vs. investor concerns of up to25%); margin deterioration.