We see a clear path of advancement for Yawei, a metal forming machine tool leader, with blockbuster products accelerating its expansion in overseas markets and servo presses poised to overtake on a curve. In our view, its future growth will come from three main sources: 1) growth in main businesses, including bending machines, turret punch presses and automated production lines, which will mainly come from its accelerated expansion in overseas markets backed by its high technological recognition and price-performance advantages; 2) servo presses as a differentiation option for Yawei to develop the crown product of metal forming machine tools, which may allow Yawei to overtake on a curve, promote the adoption of servo presses, and capture market share ahead of peers; 3) its strategic presence in precision laser processing, chip testing equipment and new materials through joint ventures or shareholdings, where revenue from precision laser equipment has been sizable at present and semiconductor main materials, organic light-emitting diode (OLED) light-emitting materials and other businesses may grow into new revenue growth drivers in the future. Considering the Company's growth prospects in the medium to long term, we forecast 2023E/24E/25E EPS of Rmb0.29/0.37/0.40. Factoring in the absolute and relative valuation results, we derive a 2023E target market cap of Rmb5.6bn, implying a target price of Rmb10, and initiate coverage with a "BUY" rating.

A single-item champion of metal-forming machine tools builds a diversified presence to achieve holistic growth.

Yawei has been deeply engaged in metal forming machine tools for more than 40 years, with main products including computer numerically controlled (CNC) bending machines, CNC turret punch presses, automated production lines and laser processing equipment for metal materials, which enables it to take a solid position in the first-tier camp of metal forming machine tools. In recent years, through joint ventures or shareholdings, the Company has been proactively building a diverse presence in presses, precision laser processing, chip testing equipment, new materials, etc. In the short to medium term, servo presses and precision laser processing are the highlights of the Company's growth, and the scale of servo presses has initially reached the market-oriented level, making breakthroughs by starting from small tonnage presses with an endeavor to expand the existing customer base, which so far has been progressing smoothly. The precision laser processing equipment business has fully absorbed relevant technologies from South Korea’s LIS, the former shareholding company, and developed independent development capabilities. Meanwhile, it has been increasing its investment in market resources and is likely to further enhance its market penetration and market share in industries such as display panels.

Yawei’s blockbuster products have maintained a leading position, and the optimization of export mix secures core business growth.

Yawei's blockbuster products are CNC bending machines and CNC turret punch presses, which are two commonly used metal forming machines tools.

According to the Company’s announcements, its economies of scale in the domestic metal forming machine tool industry is ranked the top three, with bending machines validated by the Ministry of Industry and Information Technology (MIIT) as the "National Manufacturing Industry Single-item Champion". Its CNC turret punch presses, coil processing machinery and other products boast significant leading advantages in production and marketing scale, realizing the import substitution of middle- and high-end products. The enhancement in the quality of metal forming machine tools brings the cost-effective advantage of domestic equipment to the fore.According to the data from China Machine Tool & Tool Builders’ Association (CMTBA), the Chinese metal forming machine tool exports have exceeded imports starting from 2020, and the trade surplus continues to expand, where the Company's advantageous products such as CNC bending machines contribute significantly. Starting from 2021, the Company has seized the growth opportunities in South America, Europe, the Middle East, Oceania and other regions. It posted overseas revenue of Rmb395mn in 2022, increasing the proportion of overseas revenue to 21.59%. Yawei also introduced technologies by cooperating with overseas brands in the early years, and its product quality and standards were highly recognized in overseas markets.Looking ahead, the Company is likely to further expand its overseas exposure backed by the good value-for-money of its products, adding new growth momentum to the legacy business.

Significant comprehensive advantages compared with traditional presses with differentiated presence buildup in servo presses.

In 2022, Yawei announced its intention to invest Rmb680mn to build an industrial base with an annual production capacity of about 2,000 sets of servo presses and 100 automated stamping and dropping production lines, with the aim to shake up the competitive landscape dominated by overseas brands.

The construction of relevant projects commenced in early 2023 and has been progressing smoothly. According to the Company’s estimation, the projects will likely be completed by 2024. Servo presses are presses controlled by servo systems, which can accurately control the pressing pressure, speed and other parameters through professionally developed control software to realize full intelligent control and management along the process. Compared with the mechanical and hydraulic presses, servo presses have a number of advantages, such as flexible production, high deep-drawing precision, a prolonged life span, high production efficiency and low energy consumption.

Despite the low penetration rate due to overseas monopoly, Yawei may stir up a wave of servo-driven value chain backed by mature experience.

According to a report regarding the development status quo of China’s servo press industry by Qiao Zilu, Wang Ying, Wen Wu, etc, compared with Japan, Germany and other developed countries, where servo press applications have accounted for 90%, the domestic penetration of servo presses under price pressure is still less than 20% at present, and the mid-end and high-end equipment is highly dependent on imports. Servo system coupling is currently the bottleneck obstacle for the import substitution of servo presses. Yawei mainly expands the penetration of servo presses by seizing the following three opportunities: 1) The process optimization driven by servo presses can significantly enhance efficiency as the Company faces robust demand for flexible manufacture systems (FMS) from its downstream industries. 2) Leveraging mature servo development experience, the Company carried out servo upgrading R&D on bending machines in 2020, and successfully developed new models such as direct-drive servo bending machines and dynamic closed-loop compensation bending machines. 3) Upstream and downstream industries are generating synergies smoothly. Reducing comprehensive costs is of crucial importance to promote the expansion of servo press penetration. As the Company gradually optimizes the costs along the entire value chain, thereby promoting the enhancement in customer recognition of servo presses, servo press penetration rate is likely to increase rapidly. We expect China's servo press market size to be about Rmb7.797bn in 2026, with a CAGR of 50.8% over 2022-2026.

Potential risks: Servo press expansion missing expectations; cyclical fluctuations in the downstream industry; intensified servo press competition; the restricted exports of metal forming machine tools; the introduction of the OLED precision laser technology failing expectations.

Investment recommendation: We see a clear path of advancement for Yawei, a metal forming machine tool leader, with blockbuster products accelerating its expansion in overseas markets and servo presses poised to overtake on a curve. In the short to medium term, the Company will focus on servo presses and precision laser processing. Semiconductor testing equipment and other seed businesses will likely secure its long-term growth momentum. Considering the Company's robust metal forming machine tool business and its medium- to long-term growth trend, we forecast its 2023E/24E/25E attributable net profit (ANP) to be Rmb164mn/205mn/222mn (+2,083.03%/25.23%/8.54% YoY), corresponding to EPS forecasts of Rmb0.29/0.37/0.40. By using the absolute valuation method, we derive a share price around Rmb10.69-12.26. By using the relative valuation method, we arrive at a comps valuation averaged at 34.65x 2023E PE, with the PE for Haitian Precision Machinery (601882.SH) at 23x, Guosheng Intelligence Technology (688558.SH) at 16x, Delphi Laser (688170.SH) at 37x, Huagong Tech (000988.SZ) at 26x and Jingce Electronic (300567.SZ) at 69x based on Choice consensus estimates. Considering the Company's comprehensive advantages in metal forming machine tools and the potential growth rate of servo presses, we assign 35x 2023E PE to derive a target price of Rmb10.31. Taken together, we assign a target price of Rmb10, equivalent to a market cap of Rmb5.6bn, and initiate coverage with a "BUY" rating.