Shenzhen Inovance: Annual Meeting Affirms Our View on Robots, EVs, and Automation Growth

We maintain our CNY 64 fair value estimate for narrow-moat Shenzhen Inovance 300124 after attending the company’s annual general meeting. Management maintained its 2023 revenue and profit growth outlook at 20%-40% and 10%-30%, respectively. It made qualitative comments on its strategy, which bolstered our confidence in the company’s ability to deliver a 21% revenue compound annual growth rate in the next five years. The stock appears fairly valued, but we think government stimulus on consumption could be Inovance’s upside catalyst as the company serves consumer goods manufacturers like packaging and garments.

Inovance is mulling diversification of its robotics business beyond industrial robots, which poses upside potential to our 18% CAGR revenue forecast for the business. While robots catering to both commercial and consumer segments are considered, we reckon commercial segment is a more viable route. It is more feasible for Inovance to offer one-stop multiproduct solutions (and aftersales services) that can be tailored to commercial customers. We see warehouse robots as one of the many examples where operators have incentives to stay with Inovance’s robots and back-end software because engineers prefer to stick to the same software to reprogram robots frequently for optimized operations. Conversely, users of consumer robots (such as robot vacuum cleaners) tend not to require customization, and hence potential peers compete on pricing.

Inovance said work to spin off the electric vehicle business is ongoing, but the timing of the initial public offering is still highly uncertain. We believe the spinoff could occur in 2025 at the earliest based on historical IPO schedules. The EV business remains on track with our forecast for a 25% top-line five-year CAGR. Inovance achieves such growth by expanding its customer base from novel EV makers into more established automakers like Dongfeng and GAC Group domestically and Audi overseas.