Leading manufacturer of electronic power supply and magneticcomponents. Established in 2004, the Company is a rapidly growingenterprise in the electronic power supply and magnetic componentmarkets, and posted turnover of Rmb740mn and net profit of Rmb59mnin 2014. It is a major supplier of electronic power supply and magneticcomponents in China, and derives 82% of income from export business.

Magnetic components and electronic power supply: anticipatingrapid development on vast potential and exploration of newapplication fields.

These two fields both enjoy vast potential: (a) China has becomethe largest producer/consumer of electronic transformers in theworld, and produced 10.8bn electronic transformers with a totaloutput value of ~Rmb44.4bn in 2012; (b) China’s switching-modepower supply (SMPS) output value reached Rmb104.6bn in 2013and is predicted to log a CAGR of 6.21% during 2014-18E.

Application fields of the Company’s products are expected toexpand from consumer electronics, telecom, meters andcomputers to fields such as AEV charging piles, solar inverters andelectric vehicle batteries going ahead, which will inject new impetusto the Company’s growth. According to Wind, China’s demand forelectric vehicle batteries will log a CAGR of 76% during 2014~18E,and pursuant to the Guidance on Development of the ElectricVehicle Charging Facilities (2015~20), China plans to build 4.30mnnew charging piles and 500k new public charging stations over thenext 5 years.

The Company maintains heavy R&D expenditures. It has alwaysattached great importance to R&D. During 2013, 2014 and 1H15, theCompany’s R&D expenditures amounted to Rmb20.88mn,Rmb22.67mn and Rmb10.97mn, accounting for 3.20%, 3.07% and3.06% of its operating income over the respective period. Theseexpenses were mainly invested in R&D of LED power supply, solarinverter components, charging pile components and components ofelectric vehicle batteries. We expect the domestic market to replaceexport as the Company’s major growth driver in future.

Capacity ramp-up helps to increase the Company’s profitability.The Company intends to raise Rmb290mn to fund ramp-up of thetransformer and power supply capacities as well as construction of aR&D center. These new projects will increase the Company’stransformer and electronic power supply production capacity by 72%and 160%, and allow the Company to tap into the new application fields(such as charging pile, inverter etc.), reinforce its industry position andboost its gross margin and profit.

Risks: Decline in market share or gross margin of traditional businesses, slow development in the newfields, and rise in raw material prices.

Earnings forecast, valuation and investment rating: The Company sustained stable growth againstthe industrial downturn over the recent years, and could gain greater momentum on the back ofdiversifying application fields. Leveraging its solid technology strength and stable product quality, weexpect the Company to boost its market share and operating results. We predict 2015/16/17E EPSestimates of the Company to be Rmb0.38/0.48/0.62, and its last share price (Rmb10.92) translates to28x/23x/18x 2015/16/17E PE. Our target price range is Rmb15.93 (DCF valuation) ~ Rmb16.80 (basedon valuation of comparables), and the median price, Rmb16.37, translates to 43x/34x 2015/16E PE.Initiate BUY.