Investment positives

We initiate coverage of Hangzhou Shenhao Technology Co., Ltd.(Shenhao) with an OUTPERFORM rating and a target price of Rmb43.18.

Why an OUTPERFORM rating?

Robots to be widely used in the power grid sector, implying ample growth upside; Shenhao competitive in technologies and　channels. We believe inspection robots meet the needs of the smart grid, given their distinct advantages over a labor force. We estimate its penetration rate will rise to 20-30% in 2025 from less than 10% in 2020, and its market share will exceed Rmb20bn over 2021-2025.Shenhao is more competitive and has larger business scale and earnings than most of its peers in this field, in our view. It is focusing on optimizing products and innovation. The firm upgraded its inspection robots and rolled out extreme weather-adapted substation inspection robots and underwater inspection robots. The firm is also diversifying robot products for the power grid sector. It delivered 10 units of switchgear manipulation robots over 1-3Q21, and obtained orders of over Rmb200mn from the State Grid Zhejiang Electric Power and the State Grid Jiangsu Electric Power as of end-2021.Shenhao focuses on optimizing services. In 2020, it had 40.19% of services outside Zhejiang. We expect revenue from power grid robotics to grow at a CAGR of 39% over 2020-2023.

Expanding robotic business into diversified markets; seeking higher growth. Shenhao is penetrating into public health, railway, and petroleum and petrochemical sectors by developing pandemic prevention and control, railway inspection, train bottom inspection, and explosion-proof inspection robots. Based on the operating mileage and the number of trains in China at end-2020, we calculate that the existing market for railway inspection and train bottom inspection robots is around Rmb40bn. The firm has received its first order in this field. It is building new capacity with financing proceeds to bolster its business development in the railway market. We expect its robotic businesses in non-power grid sectors to generate additional revenue in 2023 and become new growth drivers.

Fixed-point power system monitoring and controlling robot business　to grow solidly. In our opinion, the variety and number of electric equipment will increase, the power system will turn complex, and smart operation will be needed. As a result, demand for robotic systems will be strong moving forward, in our view. We expect the firm’s related business to maintain solid growth.

How do we differ from the market? The market focuses on robot tenders in the power grid sector and Shenhao’s leading market share. We are optimistic about its mobile and fixed-end robot businesses on the back of advanced technologies and channel advantages. We also expect its robotic businesses in non-power grid sectors to develop rapidly.

Potential catalysts: Ramp-up of bids for robots in the power grid sector; growth of orders for railway inspection and train bottom inspection robots.

Valuation and recommendation

Our EPS forecast is Rmb1.22 for 2021, Rmb1.60 for 2022 and Rmb2.12 for 2023, implying a CAGR of 32%. We initiate coverage of Shenhao with an OUTPERFORM rating, a target market cap of Rmb6.3bn, and a target price of Rmb43.18 (implying 27x 2022e and 20x 2023e P/E with 29.4% upside). The stock is trading at 21x 2022e and 16x 2023e P/E.

Risks

Smart grid investment lower than expected; downstream clients concentrated; intensifying competitions.