Gova Technology is a leading domestic supplier of high-reliability sensors.

Its main products include pressure, temperature, humidity, acceleration, and displacement sensors, sensor network systems, etc. These are applied in fields such as aerospace, weaponry, rail transportation, engineering machinery, and metallurgy. Given its advanced technological capabilities and long-term experience in both military and civilian supporting products, we expect that the Company will benefit significantly from the boom in aerospace and the process of import substitution of high-end industrial sensors. Furthermore, its venturing into sensor network systems promises potential headroom for continued growth. We initiate coverage with a “BUY” rating with a target price at Rmb48.

High-reliability sensor leader has posted rapid growth in recent years.

Gova Technology focuses on R&D, design, manufacture and sales of high reliability sensors and sensor network systems. Its main products include pressure/temperature and humidity/acceleration/displacement sensors and sensor network systems, which are applied to aerospace, weapons, rail transit, engineering machinery, metallurgy, etc. The Company has independent R&D capabilities and core technologies in high reliability sensor design, packaging and testing, and sensor network systems, which can meet the requirements of various application scenarios. Benefiting from the high prosperity in the aerospace field and the import substitution in the industrial field, the Company's revenue has grown rapidly in recent years, and its profitability has improved significantly. Its operating revenue grew rapidly from Rmb130mn in 2019 to Rmb276mn in 2022, with a CAGR of 28.5%; its attributable net profit （ANP） increased from Rmb21mn in 2019 to Rmb81mn in 2022, with a CAGR of 56.8%; its net profit margin （NPM） increased from 15.9% in 2019 to 29.4% in 2022.

The sensor market is growing rapidly, with vast headroom for import substitution in the industrial sector.

Sensors are the bridge between the physical world and the digital world, and micro-electro-mechanical system （MEMS） sensors, as a major technology trend in the industry, are miniature integrated systems consisting of sensors, information processing units, actuators and communication/interface units, characterized by small sizes, low costs and low power consumption.

Benefiting from the demand for industrial and automotive electronics, the domestic sensor market size is about Rmb251bn in 2020 （+15% YoY）， while MEMS market size is about Rmb73.67bn （+23% YoY）。 We expect the domestic MEMS market size to be about Rmb104.47bn in 2022 （according to CCID Consulting）。 Benefiting from the high boom in the aerospace field, domestic military sensor demand is rapidly increasing. Meanwhile, the industrial localization gap is significant, with more than 90% of high-end intelligent sensors remaining dependent on imports （according to LeadLeo Research Institute）。 The competitive landscape of the sensor industry is relatively fragmented, with main players in the military field including subordinate research institutes of military industrial groups, which imposeshigh requirements for product adaptability to environment, leading to high industry entry barriers and strong supplier continuity. Foreign manufacturers in the industrial field have technology and cost advantages, while local manufacturers mainly focus on developing non-standard products based on customer needs in different scenarios, thereby forming a competitive advantage of differentiation.

Military products lay a solid foundation for growth, and civilian products create secular growth upside.

Gova Technology is entering the sensor industry. The core team has a deep technical background, with technologies and channels building core competitive moats. In the military field, the Company has been long cooperating with major military groups and has been involved in manned spaceflight and other major projects for multiple times. Its product indicators are consistent with that of the top national military research institutes, allowing it to benefit from the robust demand from the aviation sector. In the meantime, commercial spaceflight, missiles, and other high-growth areas boast greater potential. In the civilian field, the Company's pressure sensors, temperature and humidity sensors and other products have technical indicators. Its market share is relatively high with leading customers including Zhengzhou Coal Mining Machinery and CRRC. Meanwhile, the Company and Sany Heavy Industry, Baowu Steel Group and other leading customers have built in-depth cooperation. We expect it to continue to benefit from the wave of localization in engineering machinery, metallurgy, rail transit and other sensors. At the same time, Gova has been expanding sensor network systems along the value chain, which may create further growth upside. In addition, the Company's fundraising projects via initial public offering (IPO) proceeds and the construction of R&D centers bode well for consolidating long-term competitiveness. In addition, we see a rosy picture for the subsequent capital operation and product expansion given sufficient funds on hand. The shareholding ratio of core executives is relatively high, along with the strategy of aligning the interests of the core team with the Company, which may further gather strength for long-term development.

Potential risks: Requirements for weaponry equipment falling short of expectations; slower-than-expected progress in the import substitution of high-reliability sensors; market competition; technology R&D missing expectations; the risks in fundraising and investment projects.

Investment recommendation: Benefiting from the shipment ramp-up of aerospace and weaponry equipment, the military high-reliability sensor sector is poised for rapid growth. Under the trend of self-reliance, we see broad prospects for the import substitution of high-end industrial sensors. Leveraging its leading technical know-how and extensive experience in military and civilian supporting products, the Company stands well to reap substantial benefits from the aerospace boom and the import substitution of high-end industrial sensors. Moreover, sensor network systems may create continued growth upside for Gova. We forecast the Company's 2023E/24E/25E ANP to be Rmb1.20bn/1.70bn/2.29bn, equivalent to EPS forecasts of Rmb0.91/1.28/1.72, indicating that the current share price is trading at 45x/32x/24x PE. With the comps valuation for Ronds Science & Technology (688768.SH), XDLK Microsystem (688582.SH), and Raytron (688002.SH) averaged at 38x 2024E PE with an average PEG of 1.00x for 2024E based on Wind consensus estimates as a reference, we assign 38x　　2024E PE to derive a target market cap of Rmb6.5bn （corresponding to about 1.11x 2024E PEG）， equivalent to a target price of Rmb48. We initiate coverage with a "BUY" rating.