Industrial Robots. Breakthrough for core components; import substitution accelerating. Equity Research Machinery. Jun 21, 2018
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1 Equity Research Machinery Industrial Robots Breakthrough for core components; import substitution accelerating Ou Yafei SFC CE No. BFN GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Contribution from the GF A-share research team: Luo Libo * luolibo@gf.com.cn * Please note that Luo Libo is not a registered licensee with the Securities and Futures Commission of Hong Kong and is not allowed to conduct regulated activities in Hong Kong. Breakthrough for core components; import substitution accelerating Reducers are mainly used to adjust the speed and transmission of loads, with a high level of accuracy. They have high technical barriers and are the most important factor in the cost of domestic robots. At present, the overall quality of domestic products is improving, and has reached the international level in terms of some core indicators. Orders of domestic reducers have been on the rise since last year, and import substitution has accelerated significantly. Shanghai Huanyan and Efort have purchased 18,000 reducer units from Nantong Zhenkang, and Bourunte ( NEEQ) has purchased 30,000 reducers from Zhongda Leader Intelligent Transmission ( CH). In addition, Suzhou Leaderdrive, CTKM ( NEEQ), and Laifual Harmonics Drive developed a series of products and entered mass production. Servomotors can be divided into direct-current and AC motors. High performance servo systems generally uses synchronous motors. At present, leading domestic manufacturers include Inovance Technology ( CH) and Estun Automation ( CH), and 15% are private companies. The controller, in essence, is a data processor, and there is little difference to foreign products in terms of hardware. The key difference is the algorithm and compatibility. Domestic suppliers of controllers include Googol Technology, Estun Automation ( CH), Guangzhou GSK. Estun Automation acquired TRIO to become a high-end motion control solutions provider. With the advancement of part and component companies from small-batch production to high-volume supply, localization of core components has enabled competitive companies to have greater flexibility in pricing. The wave of localization needs to penetrate the equipment industry at the bottom, which would be the only way to improve the industry s competitiveness. What impact does localization of core components have on domestic companies? We see three key impacts of localization: 1) For companies, it will lower the cost of production and expand production capacity. Localization will not necessarily lead to higher profit margins. Chinese companies are focusing more on market share growth rather than profit. 2) For integrated system manufacturers, lower costs will be positive for the popularity of robots, as it allows more companies to use robots. Rising downstream demand will also enhance the industry position of integrated system players. Moreover, there should be sales growth, which in turn will benefit the development of integrated system manufacturers. 3) In terms of business models, it will allow domestic companies to explore integrated models. Drawing on experience from international players, the big four companies have adopted an integrated model. We think the comprehensive industry chain model will be the development trend for industrial robot companies. For companies focused on core components, they should be able to secure higher profitability via this model. Investment highlights Foreign manufacturers have long dominated the industry dividends brought about by the potential in China s industrial robots. The domestic industry should increase focus on import substitution of core components. In terms of investment, we see three key themes: 1) companies that have R&D capabilities and a comprehensive industry chain with mass production. We highlight Estun Automation ( CH) and Siasun Robot & Automation ( CH). 2) Companies that put more effort into core component layout, which are likely to make breakthroughs in technology, such as Zhongda Leader Intelligent Transmission ( CH), Shanghai Mechanical and Electrical Industry ( CH), Shuanghuan Driveline ( CH) and Inovance Technology ( CH). 3) Downstream companies with advantages in terms of economies of scale and that are expanding upstream. We recommend watching Topstar Technology ( CH). Risks: More intense competition in the robots industry; less-than-expected localization of core components; macroeconomic fluctuations. This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.
2 Figure 1: Industrial robot cost breakdown Others Controller Reducer Ontology Servo motor Sources: Robot.ofweek.com, GF Securities Development & Research Center Figure 2: China s industrial robot demand for reducers and market size estimates E 2018E 2019E 2020E Existing robots in China (10k units) Robot sales in China (10k units) Industrial robots sales breakdown (10k units) Six-axis articulated robot SCARA robot Articulated robot Collaborative robot Delta robot Matched reducers sales breakdown Demand for RV reducer (10k units) Avg. price of RV reducer (Rmb 10k) RV reducer market size (Rmb 100m) Demand for harmonic reducer (10k units) Avg. price of harmonic reducer (Rmb 10k) Harmonic reducer market size (Rmb 100m) Estimations of total demand for reducers Total demand for reducers (10k units) Reducer market size (Rmb 100m) Sources: IFR, Wind, GF Securities Development & Research Center 2
3 Figure 3: Estimates of China s industrial robot demand for reducers (10k units) Harmonic reducer (10k unit) RV reducer (10k unit) Sources: IFR, Wind, GF Securities Development & Research Center Figure 4: China s industrial robot output (units/suits) Output (unit/suit) YoY growth Sources: NBS, GF Securities Development & Research Center Figure 5: Sensitivity analysis of impacts of precision reducer and robot body s price change on profitability Impact on prices Price changes in precise reducers Sources: Robot.ofweek.com, IFR, GF Securities Development & Research Center Note: Only change the prices of reducer, other costs remain constant Sensitivity analysis Robot body price 0% -1% -3% -5% -10% -15% -20% 0% 0.00% -1.01% -3.09% -5.26% % % % -3% 0.78% -0.22% -2.29% -4.44% % % % -6% 1.57% 0.57% -1.48% -3.62% -9.37% % % -10% 2.61% 1.63% -0.40% -2.52% -8.21% % % -15% 3.91% 2.94% 0.94% -1.14% -6.76% % % -20% 5.22% 4.26% 2.29% 0.23% -5.31% % % -25% 6.52% 5.58% 3.63% 1.60% -3.86% -9.97% % -30% 7.83% 6.90% 4.98% 2.98% -2.41% -8.44% % -40% 10.44% 9.53% 7.67% 5.72% 0.49% -5.37% % -50% 13.05% 12.17% 10.36% 8.47% 3.39% -2.30% -8.69% 3
4 Figure 6: Estimation of China s industrial robot recycling period Item E 2018E 2019E Robot sales (10k units) Industrial robot sales (units) 22,987 36,560 57,000 68,556 87, Avg. price of robot (Rmb/suit) Price changes in robots CAGR-4.18% -4% -4% -4% Disposable income per capita (Rmb) Income growth 7.75% 8.98% 8.15% 7.76% 8% 8% 8% The number of replaceable workers per one robot Total labor cost (Rmb) Year of depreciation Depreciation costs (Rmb) Maintenance costs (Rmb) Total cost (Rmb) Cost savings (Rmb) Period of cost recovery Sources: Wind, Bloomberg, NBS, GF Securities Development & Research Center 4
5 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: 5
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