Investment positives

We initiate coverage of Yijiahe Technology (Yijiahe) with an OUTPERFORM rating and a target price of Rmb71.19 (25x 2022e P/E).

Why an OUTPERFORM rating?

Penetration rate of power system robots low, implying large growth potential. We believe inspection robot meets the needs of smart grid given its distinct advantages over a labor force. We estimate its penetration rate will rise to 20-30% in 2025 from less than 10% currently and its market share will exceed Rmb20bn in 2021-2025. Demand for hot-line working robots is strong as they can reduce accidents. We expect its penetration rate to rise from less than 4% currently to 25-45% in 2025, with a market share of around Rmb6bn in 2021-2025.

A leader in power system inspection robot with steady growth and earnings. Yijiahe accounts for around 22% share of the power system inspection robot market. Thanks to its competitive advantage in technology and distribution channels, we estimate revenue from robots will grow with a CAGR of 34.5% over 2020-2023. As robot business’ revenue contribution is high, and Yijiahe’s strong R&D and integration capability can help the firm lower costs, the firm’s gross margin and net margin was as high as 63.4% and 32.8% in 1-3Q21.

Operational robot the new growth driver; establish JV with sector leaders to secure more orders from the State Grid. The firm’s hot-line working robot features high technology barrier and per unit value, and there is no similar product in the market. Yijiahe, NARI and Tianjin Three Source Electrical Equipment established a JV that targets the State Grid business and had secured multiple large orders. We estimate the sales volume of hot-line working robots to rise from 21 units in 2019 to nearly 400 units in 2023. Meanwhile, the firm increased efforts in developing smart robots to expand new high-risk high-frequency scenarios, cultivating new growth drivers.

Expansion to diverse fields unleashes growth potential; a platform-based special service robot leader with promising growth. The launch of fire-fighting robots is progressing smoothly. The firm also plans to build capacity for fire-fighting robots with search & rescue function. We expect the fire-fighting robot business to enter a period of rapid growth in 2023. Meanwhile, the firm established Tuodao Medical to explore surgical robot business.

How do we differ from the market　　The market focuses more on power system robot bids and Yijiahe’s leading market share. However, we are more upbeat on Yijiahe’s transition from a leading power system robot supplier to a platform-based company with large growth potential. We expect Yijiahe to leverage its rich reserve of underlying technology and expand product categories, exploring new growth drivers.

Potential catalysts: Ramp-up of bids for power system inspection and operational robots.

Valuation and recommendation

We estimate 2021-2023 EPS forecasts at Rmb2.2, Rmb2.9 and Rmb3.7, with a CAGR of 30.9%. We initiate our coverage with an OUTPERFORM rating. Given the firm’s distinct competitive advantage, and the large growth potential resulting from its platform-based positioning, we expect it to fully benefit from the intelligent transition in power system and fire-fighting. We assign a market cap of Rmb14.7bn and a TP of Rmb71.19 (25x 2022e P/E), offering 20.3% upside. The stock is trading at 21x 2022e P/E.

Risks

Smart grid investment lower than expected; downstream clients concentrated; intensifying competitions.