With a deep presence in vacuum electronic devices, Guoli Electronic has established cooperation with well-known downstream leaders, running at the forefront in import substitution. We expect its short-term growth to come from new energy vehicles (NEVs), fast charging, and wind and photovoltaic (PV) energy storage. In addition, the commissioning of new production capacity for high-voltage direct current (DC) contactors and vacuum alternating current (AC) contactors will contribute to revenue growth. Its long-term growth may come from the import substitution of high-voltage vacuum devices for semi equipment, aerospace & military (AM) products, and broader science engineering. The Company has been enriching product matrix and expanding application scope via increased investments in R&D, while offering equity incentives to outstanding talents. We believe that Guoli Electronic has great potential for secular growth. Based on the assumption of a smooth completion and timely digestion of incremental production capacity, we forecast 2023E/24E/25E EPS of Rmb1.00/1.75/2.44.

An import substitution pioneer with a deep presence in vacuum electronic devices.

Guoli Electronic’s main products are vacuum devices, including vacuum DC/AC contactors, contact point sets, vacuum relays, vacuum switch tubes, vacuum capacitors and active devices, which are widely used in NEVs and charging piles, semi equipment, AM products, traditional energy, security inspection irradiation, scientific research, etc, directly supporting CATL, Farasis Energy, HUAWEI, Inovance Technology, ADTEC Plasma Technology, NAURA, CMSemicon and other well-known enterprises, and indirectly supporting SAIC GM, Baic Motor, Changan Automobile, Dongfeng Automobile, Jiangling Motors and other automakers. Its revenue posted a CAGR of 28.2% over 2020-2022 yet grew at 3.6% in 1H23, mainly due to capacity constraints and the fact that many new products are still in the R&D stage. Looking ahead, the Company's DC contactors used in NEVs and charging piles, as well as AC contactors for PV and wind power generation and energy storage, are entering a stage of capacity expansion. As downstream demand increases, and the Company's fund-raising projects via initial public offering (IPO) proceeds reach full production, the business revenue may embrace a rapid ramp-up in shipments. A large amount of vacuum relays, capacitors and active devices for supporting semi equipment, AM products, and broader scientific engineering are shipped in small batches, and the revenue may continue to grow significantly going forward.

Short-term growth comes from NEVs, charging piles, and new energy power generation, while long-term growth driven by import substitution.

Characterized by diverse varieties, strong customization, wide downstream applications, and a high reliance of mid- and high-end products on imports, electronic vacuum devices have been developing towards extending product lifespan, improving manufacturing yields, miniaturization, and lightweight products. The future growth of the Company comes from: 1) The rapid growth　　of NEVs and charging facilities, and the demand for core electronic vacuum devices may also embrace rapid development. 2) Semi equipment and AM products require the upgrading of vacuum electronic devices with wider adaptability, higher technical content and better reliability, while achieving the import substitution of existing imported products. 3) High voltage and high overload of PV and wind power generation and energy storage impose higher requirements on domestic devices, and there are sector-wise opportunities for a ramp-up in shipments of existing products and import substitution with domestic products. The Company's main competitors are sector leaders both at home and abroad, such as ABB Installation Products, Panasonic, Meidensha, Comet, Hongfa Technology, and Guoguang Electric, who have a certain edge in both competitiveness and production scale. We believe that the Company's opportunity lies in improving quality and reducing costs to achieve import substitution, such as ceramic vacuum capacitors making breakthroughs in the variable vacuum technology, allowing a shorter production cycle and meeting the requirements from different customers.

IPOs and the issuance of convertible bonds expand capacity, and the future market share may continue to expand.

IPOs and the issuance of convertible bonds raised Rmb703mn for capacity expansion and the building of R&D centers. We expect that the production capacity of high-voltage DC contactors will increase by 9.48mn units, corresponding to the expected output value of Rmb970mn. Besides, 50,000 capacitors, 120,000 relays and 1,000 active devices were added to their production capacity as well, equivalent to an expected output value of Rmb160mn, along with a capacity ramp-up by 1.65mn AC contactors.

Secondly, the Company's equity incentive plan has covered the core management, and the revenue assessment targets for 2023-2024 are no less than Rmb860mn/1.118bn, with attributable net profit (ANP) no less than Rmb105/126mn. As it replenishes capacity, improves R&D levels and offers equity incentives to align the interests of the core management, Guoli Electronic has posted a sustained improvement in comprehensive strength, and we expect its revenue and ANP to embrace rapid development.

Potential risks: Rising raw material prices resulting in a decline in gross profit margin (GPM); uncertainties in the overseas political environment, and slower-than-expected overseas market expansion due to the potential imposition of tariffs; capacity building and digestion failing expectations; customer base expansion not up to expectations; R&D and technological innovation falling short of expectations; the leakage of core technologies; talent attrition; legal risks.

Investment recommendation: With a deep presence in vacuum electronic devices, Guoli Electronic has established cooperation with well-known downstream leaders, running at the forefront in import substitution. We expect its short-term growth to come from NEVs, fast charging, and wind and PV energy storage. In addition, the commissioning of new production capacity for high-voltage DC contactors and vacuum AC contactors will contribute to revenue growth. Its long-term growth may come from the import substitution of high-voltage vacuum devices for semi equipment, AM products, and broader science engineering. The Company has been enriching product matrix and expanding application scope via increased investments in R&D, while offering equity incentives to outstanding talents. We believe that Guoli Electronic has great potential for secular growth. Based on the assumption of a smooth completion and timely　　digestion of incremental production capacity, we forecast 2023E/24E/25E EPS of Rmb1.00/1.75/2.44. Considering that the fresh completion of new production capacity and the uncertainty in the expansion of devices for semi equipment and AM products may cast a greater impact on the Company's future revenue growth, we assign no target price at the moment.