Sensor and intelligent instrument industry: support from related policies and optimization of industrial structure lead to extensive downstream demand. 1) China has put forward a series of supportive policies since 2016 to encourage the digitalization and intelligent development of manufacturing industry. 2) Growth of sensor industry in China is higher than global average, with a stable share of intelligent sensors. We expect market size of sensor in China to increase from Rmb218.9bn in 2019 to Rmb404.5bn in 2023, with a CAGR of 17%, higher than the global average of 8%. The intelligent sensor takes account for >35% of overall market in 2021 (vs. global average of 24%)。 3) Sensors can be applied to a wide range of downstream industries, including energy, water conservancy, transportation, smart cities, geological disasters, etc. Energy: remarkable trend of renewables with capacity of grid-connected wind power plants (≥6000kW) increased from 29.58mn kW in 2010 to 328.48mn kW in 2021, with a CAGR of 24.5%. Stable growth of water conservancy/road construction: water conservancy construction investment/fixed asset investment increased from Rmb345.2bn/1.26tn in 2011 to Rmb757.6bn/2.60tn in 2021, with a CAGR of 8.2%/7.5%. Rapidly-developed smart-city market: market size increased from Rmb3.5tn in 2017 to Rmb21.1tn in 2021, with a CAGR of 56.7% and forecasted 2021-23 CAGR of 16.4%.
Core competitiveness: independent R&D, high technical barriers, broad layout of service, and outstanding customer resources. 1) Product: four main categories for intelligent monitoring devices: monitoring sensors, data collection equipment, safety management software and G-cloud platform. Comparing with peers, GeoKon enjoys significant advantages in more adaptable sensors, stronger collector compatibility, and more effective supervision of G-cloud platform with lower cost and higher efficiency. 2) Technology: with five core technologies and further innovation, GeoKon enhances the stability, adaptability, and reliability of the vibrating string sensor, and improves the sensitivity, transmission distance and anti-interference of the fiber grating sensor, as well as the accuracy, compatibility, and applicability of the collection device through the application of IoT integration technology and cloud platform. 3) Service: for sub-fields of monitoring sensor, GeoKon continues to expand the scenarios and geographical scope of specific use. GeoKon has a high market share in water conservancy and energy sectors, and still has great potential in the development of transportation and smart city. 4) Client: SOE, government departments and institutions constitutes GeoKon's major and stable clients. Number of customers remains stable as 923/866/956 in 2019-21, mainly from the water conservancy, energy, and transportation sectors. GeoKon's products are mainly for industrial use, of which clients pay more attention to the production capacity, quality and after-sales service, with less emphasis on brand.
Earnings Forecast & Rating: We expect Geokon to achieve sales of Rmb290/310/340mn in 2022-2024, with YoY growth of 11.2%/8.6%/7.4%, and net profit of Rmb70/70/80mn in 2022-2024, with YoY growth of 29.1%/12.5%/12.0% and corresponding P/E at 14x/13x/11x. We initiate with the Buy rating.
Risks: Limited market size, slowdown of downstream infrastructure investment, fluctuation of raw material price, low turnover of accounts receivables.