Woer Heat-Shrinkable Material is a comprehensive enterprise of "new materials + new energy", whose business covers four major segments: electric power + electronics + wires + new energy. The Company's traditional businesses are growing steadily, while the proportion of high-margin businesses has continued to increase. The new energy business also shows booming growth. With the bottom reversal of traditional markets + the continuous expansion of high-margin markets + the surging demand for charging guns/high-voltage line connectors/thermal insulation materials, Woer's future earnings will embrace a breakthrough. Considering the rapid growth of the Company, we assign 15x 2023E PE to arrive at a target market cap of Rmb12.1bn and a target price Rmb9.6. We initiate coverage with a “BUY” rating.

With the continuous expansion of diversified product portfolio, the new energy business will grow exponentially.

Woer was founded in 1998 and started off with heat-shrinkable materials. Its three major traditional businesses, namely, electronics, electric power and wires, have maintained steady growth, and the Company has been expanding the proportion of high-margin businesses by venturing into new niches.

Meanwhile, Woer enters the field of new energy horizontally through organic growth and acquisitions. Over the past decade, its performance and profitability have grown steadily: it achieved operating revenue of Rmb2.539bn in 1H22, with a 2012-2021 CAGR at 26.17%, where electric power, electricity, wires and new energy contributed 38.57%/18.43%/29.39%/10.74% of the total revenue, respectively. Woer's gross profit margin （GPM） reached 39.32%/32.49%/31.17% in 2020-1H22, respectively. We expect the high oil prices may weigh on its GPM over 2021-1H22, and the downtrend of oil prices and the venturing into new niches may reverse the market bottom of traditional businesses, as well as continuously expand high GPM markets. Coupled with the surging demand for guns, high-voltage line connectors and thermal insulation materials, Woer's profitability will enter an uptrend.

New energy: Driven by charging guns/high-voltage connectors, thermal insulation materials for lithium batteries builds the second growth pole. 1） Charging guns: Woer mainly focuses on direct current （DC） charging guns, with significant advantages in high customer recognition and high gross profit. The sustained rise in new energy vehicle （NEV） ownership drives up the demand for charging piles. Among them, DC charging guns, as one of the core supporting facilities for fast charging, boast higher technical barriers with a clear trend of market share expansion: DC charging piles accounted for 41.6% in China in 2021, up by 12.9ppts compared to 2017. Woer has the core technology of high-power liquid-cooling charging guns, and its customers include Luneng Group, TELD, XJ Electric, etc. 2） High-voltage connectors: Woer has fully benefited from the booming high-voltage market with high-quality orders in hand. The electrification of vehicles presents an opportunity for high-voltage connectors. Currently, the domestic manufacturers account for about 25% in the market and may overtake its peers amid the rapid growth. Woer has customers including leading car　　manufacturers, such as Dongfeng Liuzhou Motor and Brilliance Shineray, and we expect it to fully benefit from the rapid growth of the industry. 3） Thermal insulation materials for lithium batteries: With Shanghai Keter New Materials as the leading player, "safety anxiety" drives the exponential growth of thermal insulation materials. Thermal insulation materials are produced by its subsidiary Shanghai Keter New Materials （part of its electric power business）。 As NEV-related market jitters shift from "mileage anxiety" to "safety anxiety", the innovation of battery technologies will push thermal insulation materials to expand, and the consumption of thermal insulation materials in NEV will increase by 200% to 300% compared with traditional vehicles （for details, please refer to our report “NEV Thermal Conductive Structural Adhesive and Components Thematic Report: Frequent structural innovation and accelerated import substitution”， published on Aug 10, 2022）。 Woer's customers include top lithium battery players, and we expect that it will fully benefit from the rapid growth of niche sectors.

Wires: With the continuous expansion of high & new tech businesses, Woer’s three major wire products may benefit from the growth of auto driving and robots.

In 2013, Woer acquired the consumer electronics cable business of the five subsidiaries of LTK Cable and ventured into three new niches, namely, high-speed communication wires, automotive industrial wires and industrial robot wires. With the surging demand for auto driving and industrial robots, we expect both the shipments and profits of all these three niches to rise. 1） Electrification and automation of vehicles: Automation has driven the growth of high-speed wires to double due to the spike in sensors per vehicle and the heightened requirements for data transmission. Electrification has expanded the market for high-voltage wires. We predict that the market size of high-speed communication wires/high-voltage wires will rise to Rmb16.6bn/39bn in 2025, corresponding to a CAGR of 21.17%/31.55% over 2022-2025. Woer’s auto driving electrical wires business covers high-speed wires, such as high definition multimedia interface （HDMI） cables and high-speed USB cables, as well as automotive wires, such as charging piles and high-voltage battery wires. We expect that it will benefit from the rapid growth of the auto driving industry. 2） Industrial robots: Intelligentization has improved requirements for industrial robot wires. The indigenization rate of industrial robot wires is less than 30%, indicating vast headroom for import substitution. Woer's highly flexible industrial robot wires can be used for industrial robots, and it may fully benefit from the trend of import substitution.

Electric power: Cable accessories benefit from the beta of power grid construction, and its subsidiary leads in the market share of ceramic refractory materials.

Woer's electric power business includes cable accessories and special polymer materials from its subsidiary Shanghai Keter New Materials. 1） Traditional cable accessories: Woer has fully benefited from the beta of the power grid industry, with a rise in both the shipments and profit of cable accessories. The new power system construction kick-started a new round of power grid investment. High-voltage and intelligent power grid stimulate the demand for ultra-high voltage and intelligent cable accessories: We predict that the domestic market size of cable accessories will reach Rmb66bn in 2025, corresponding to a CAGR of 12.8% over 2021-2025. We expect that downstream demand will boost both the shipments and profit of cable accessories. 2） Special polymer materials: Woer is a leading company in refractory materials with a focus on thermal insulation materials for lithium　　batteries. Its subsidiary Shanghai Keter New Materials is the leading player of ceramic silicone rubber refractory materials with an edge in the domestic market share, whose output has been favored by Far East Cable, TBEA, etc.

In the future, it will focus on thermal insulation materials for lithium batteries.

Electronics: Consumer electronics will reverse from the bottom with a clear trend of import substitution for high-end markets. 1） The traditional electronics market: Consumer electronics is waiting for the recovery with an already-set dominant market pattern. Woer dominates the market, and its market share has increased significantly after acquiring 75% equity of Changyuan Electronics in 2018. We expect that the demand for consumer electronics will rebound and raw material prices will fall in 2023, so the traditional electronics business will recover. 2） The emerging electronics market: Woer gradually releases its potential and breaks overseas dominance. We see a clear trend of import substitution for high-end markets, such as nuclear power, automobiles, and rail transit. The market researcher Forward （aka Qianzhan Industrial Research Institute） predicts that the market size of heat-shrinkable materials will reach Rmb22.7bn in 2024, corresponding to a CAGR of 8% over 2022-2024. The Company breaks through the dominance of US Raychem and Japan’s Sumitomo, and actively expanded its market share. Overall, Woer's electronics posted a relatively high GPM of 45.4%/35.6%/32.5% in 2020-1H22, respectively. We expect that as downstream consumer electronics continues to recover and raw material prices fall, the Company's electronics business will refuel its growth.

Potential risks: NEV sales missing expectations; surging battery prices affecting short-term market demand; intensified sector competition; construction of charging piles failing expectations; production and sales of thermal insulation materials for lithium batteries falling short of expectations; sustained weakness in consumer electronics; fluctuations in raw material prices; disappointing new customer base expansion.

Investment recommendation: Considering the bottom reversal of Woer’s traditional markets and the continuous expansion of the high-GPM market, we expect the Company to resume rapid growth in 2023. Coupled with the rising demand in downstream new energy and the ramp-up in the shipments of its high-quality products, we expect its earnings to grow rapidly. We estimate its 2022E-2024E attributable net profit （ANP） to be Rmb0.604bn/0.806bn/1.096bn, respectively, equivalent to EPS forecasts of Rmb0.48/0.64/0.87, corresponding to 13x/10x/7x 2022E-2024E PE at the current price. Considering the valuation of comparable companies and the Company's subsequent growth potential, and combining both PE and PEG valuation methods, we assign 15x 2023E PE to arrive at a target market cap of Rmb12.1bn, corresponding to a target price Rmb9.6. We initiate coverage with a “BUY” rating.