Ningbo Gaofa （NBGF） is a leading domestic supplier of automotivetransmission control systems with c.30% market share among domesticbrands. With a complete pipeline of offerings and excellent operations, theCompany has entered the supply chain of high-quality joint venturebrands, and is on track to further penetrate into other premium automakersgoing forward. Given the good recovery of sales to Geely, SGMW andother customers, we predict that the Company’s EPS in 2020E/21E/22E willbe Rmb0.86/1.03/1.24, corresponding to 20x/17x/14x PE. We initiatecoverage with a “BUY” rating and a TP of Rmb20.6 on 20x 2021E PE.

Leading transmission control system supplier in ChinaThe Company mainly operates in three segments, including automobiletransmission control systems, automobile cables and electronic acceleratorpedals. In 2019, it reported an operating revenue of c.Rmb940mn, inclusive ofc.Rmb450mn from the transmission control shaft and soft shaft business andc.Rmb250mn from automobile cables. From 2014 to 2019, its operatingrevenue increased by 163% （a 10.3% CAGR） and attributable net profitincreased by 185% （a 13.1% CAGR）。 Its customers mainly cover domesticand joint venture （JV） brands such as SGMW, Geely, FAW Volkswagen andSAIC Volkswagen. The actual controller is QIAN Gaofa and his two sons.

Industry: Stable size, low concentration and rising penetrationTransmission control system is a relatively mature segment. We estimate aglobal market of Rmb24.1bn and a domestic market of Rmb9.2bn by 2025 （a5% CAGR in the next 5 years）， mainly driven by increasing penetration ofhigher-priced automatic transmissions which we estimate will reach 90% by2025. The industry concentration is low, with outstanding domestic brands andJV brands dominating the domestic market. We expect top-performingdomestic suppliers to benefit from domestic substitution and enter a period offast expansion.

A complete range of offerings and strong cost control capabilitiesThe Company focuses on R&D and maintains the R&D expense ratio at morethan 4% in recent years. Strong R&D capabilities enable the Company to havea complete pipeline of product offerings and continue to innovate intransmission control products ranging from manual gears to automatic andelectronic gears. In 2019, the Company took about 30% of the domesticmarket share among domestic brands. The high market share guarantees ahigh and stable profit margin. Its overall gross profit margin stood at 33.3%and net profit margin was 19.0% in 2019, both of which remained aboveindustry average.

Continuous client base expansion

The Company’s transmission control shafts are mainly supplied to domesticbrands including Geely and SGMW and benefit from rising penetration ofautomatic and electronic gearshift. Its automobile cable customers include JV automakers such as FAW Volkswagen and SAIC Volkswagen. In 2Q20, the goodsales performance of Geely, SGMW and FAW Volkswagen is likely to drive a rapidearnings recovery for the Company. Moreover, for the transmission control business, ithas accelerated penetration to domestic auto OEMs such as Great Wall Motor andChery, and started to supply to JV brands such as JMC Ford. We expect the Companyto upsell and deepen its partnerships with existing automobile cable clients andextend the cooperation to the field of transmission control systems.

Potential risks

Downside risks to the global automotive industry; Developments of new products fallshort of expectations; Penetration of new customers is slower than expected.

Investment recommendation

Ningbo Gaofa is a leading domestic supplier of automotive transmission controlsystems with c.30% market share among domestic brands. With a complete pipelineof offerings and excellent operations, the Company has entered the supply chain ofhigh-quality joint venture brands, and is on track to further penetrate into otherpremium JV automakers going forward. Given the good recovery of sales to Geely,SGMW and other customers, we predict that the Company’s EPS in 2020E/21E/22Ewill be Rmb0.86/1.03/1.24, corresponding to 20x/17x/14x PE. Considering itsleadership in the transmission control segment which benefits from the risingpenetration of automatic and electronic gearshift, we initiate coverage with a “BUY”

rating and a target price of Rmb20.6 on 20x 2021E PE.