Holystar is a domestic “little giant”-a name given by the Ministry of Industry and Information Technology to specialized and technologically advanced small & medium-sized enterprises （SMEs）-focusing on fusion equipment for primary and secondary power equipment integration. It mainly sells in Zhejiang Province and is now accelerating expansion to other key regions amid new power system upgrades. We believe Holystar will continue to lead and benefit from the promotion of primary and secondary fusion equipment on the back of its leading product technology and adoption. We initiate coverage with a “BUY” rating and a target price of Rmb155 on 30x 2022E PE.

A “little giant” focusing on power grid fusion equipment

Holystar, listed on the Shanghai Stock Exchange （SSE） STAR Market in Oct 2020, is a “little giant” enterprise specializing in the R&D and production of primary and secondary fusion equipment and has been developing with smart distribution network upgrades as its core. The Company’s main products include smart pole-mounted switches, fault indicators and ground/earth fault monitoring devices, etc. Among them, smart pole-mounted switches, the new smart power distribution equipment for primary and secondary equipment integration, have been adopted in Zhejiang Province and continuously expanded to other key regions amid new power system upgrades, becoming the core driver for the Company’s development.

Promising prospects for primary and secondary fusion equipment

Smart power grids differ from traditional ones in enabling the grid access of renewables, real-time dispatch management and two-way information flows.Guided by the carbon peaking and carbon neutrality goals proposed by the Chinese government, the construction of the new power supply system will accelerate structural investment in power grids to promote capacity expansion & intelligent upgrades and scenario integration & digitization on top of ensuring stable and sound investment growth. In our view, growing grid upgrade needs in key regions will constantly boost the demand for the new generation of primary and secondary fusion equipment that provides support for the safe and stable operation of power grids, and there remains upside in the automation of power distribution networks. According to Holystar’s IPO prospectus, replacement demand still added up to 291,000 sets in Zhejiang Province as of 2020; beyond Zhejiang Province, its products were adopted in Shandong, Henan, Shaanxi, Jiangsu, Fujian and other provinces in 2021, leading us to forecast that the procurement demand for smart products in core power grid areas will likely be released continuously.

Building first-mover advantage on technology barriers

As one of the earliest domestic producers to launch primary and secondary fusion equipment with smart pole-mounted switches, Holystar gives full play to its power grid data technology advantage built on its fault indicator products and first-mover advantage in developing and providing operation and maintenance services to the power grid in Zhejiang Province to quickly establish a foothold at the early developing stage of the industry, build a sound reputation and continuously sell its superior products to power grids in other　key regions. At the same time, Holystar seeks a forward-looking presence in product upgrades （integration with 5G） and diversification （development of primary and secondary fusion equipment with ring main units） to form a competitive moat and a new growth driver for future development.

Potential risks

A slowdown in new power supply system construction; disappointing investment in smart grids; the promotion of primary and secondary fusion equipment in economically developed areas missing expectations; personnel changes regarding executives and R&D/sales teams; product purchase price changes; intensified industry competition.

Investment recommendation

As a “little giant” focusing on the rapid penetration of fusion equipment for smart power distribution networks in core provinces, Holystar has a leading edge in product technology and adoption as well as complete supporting services and may continue to lead the promotion of primary and secondary fusion equipment and benefit during the process. We forecast 2021E/22E/23E net profit of Rmb414mn/515mn/636mn, equivalent to EPS of Rmb4.14/5.15/ 6.36 and 27.9x/22.5x/18.2x PE at the current price. Considering the current average valuation of 19x 2022E PE for its comparable peers such as Nari Technology （600406.SH）， Xuji Electric （000400.SZ）， Sifang Automation （601126.SH） and Yijiahe Technology （603666.SH） and their valuation during the past year as well as the Company’s advantages in business model and profitability and high-speed earnings growth prospects, we initiate coverage with a “BUY” rating and a target price of Rmb155 on 30x 2022E PE.