Investment positives

We initiate coverage on Ankura Smart Transmission Engineering Technology (Ankura) with an OUTPERFORM rating and a target price of Rmb59.70, implying 33x 2022e P/E.

Why an OUTPERFORM rating?

Opportunities and challenges coexist for urban power grids, which play an important role in driving shift from traditional energy sources such as coal and oil to electric power. While power demand has kept　growing in cities, the expansion of capacity for power transmission and transformation has been restrained by a lack of usable land resources, posing a major challenge for urban power grids. We expect this demand to be met by technologies such as gas-insulated lines (GIL) and substation modularization. We expect increased use of high-voltage, high-capacity, underground, and safer power transmission facilities, as well as smart, small-size, modular and underground power transformation facilities.

With GIL applications accelerating, we are upbeat on Ankura’s high growth visibility secured by comprehensive advantages. A new　technology for underground power transmission, GIL are safer, more efficient, more environmentally-friendly, and more durable compared with traditional underground cables. They can reduce costs and boost profitability, and the use of shared corridors can save additional construction costs. We think the GIL technology is applicable for various purposes such as relocating urban overhead lines underground, ultra-high voltage (UHV) lines, as well as for power transmission used in industrial parks, energy storage, and power generation. Among these applications, we see most market potential in GIL-backed relocation of urban overhead lines underground. We estimate the market is worth Rmb20bn in eastern China alone, and Rmb100bn nationwide. GIL commercialization has been accelerating in recent years due to cost reductions and worsening shortages of power transmission capacity. Leveraging its technological strength, cost advantages, and solid track record, Ankura has achieved swift growth. We expect its GIL revenue to hit Rmb967mn in 2023 (56% of total revenue), a CAGR of 74% over 2021-2023.

Cable connector business a solid foundation; early deployment in new technologies to create additional growth engines. Ankura initially　focused on localization of high-voltage and UHV cable connectors, into　which barriers to entry are high. The business offers a stable gross margin of over 50%, and will likely maintain steady growth thanks to recovering investment in power grids and the firm’s improved incentive programs for sales team. We expect Ankura’s cable connector revenue to grow at a CAGR of 15% over 2021-2023. Moreover, Ankura is expediting its expansion into GIL and modular substations to create new growth drivers, a move we believe will drive the firm’s overall revenue CAGR to reach 47% over 2021-2023.

How do we differ from the market? The market is concerned about the sustainability of Ankura’s GIL order growth. However, we believe the firm’s abundant project pipelines should bolster steady earnings growth.

Potential catalysts: GIL order growth, relocation of overhead lines underground, and construction of urban underground corridors disappoint.

Financials and valuation

Our EPS forecast is Rmb1.16 in 2021, Rmb1.81 in 2022, and Rmb2.61 in 2023, a CAGR of 49.9%. We initiate coverage with an OUTPERFORM rating and a target price of Rmb59.70, implying a market cap of Rmb10.0bn and 33x 2022e and 23x 2023e P/E, offering 44.1% upside.The stock is trading at 23x 2022e and 16x 2023e P/E.

Risks

GIL promotion disappoints; GIL market competition intensifies; low net operating cash flow.