Investment positives

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

Why an OUTPERFORM rating?

Robots to be widely used in power grid management, implying growth upside; Shenhao technologies and channels are　competitive. We believe inspection robots meet the needs of the smart power transmission grid, given their distinct advantages over a labor force. We estimate the rate of penetration of robotics used in the management of the power grid will rise from less than 10% in 2020 to 20-30% in 2025, and the total market size will exceed Rmb20bn over 2021-2025. Shenhao is more competitive, with a larger business scale and earnings, than most of its peers in this field, in our view. The firm is focusing on optimizing products and innovation, having 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 for more than Rmb200mn from the State Grid Zhejiang Electric Power and the State Grid Jiangsu Electric Power at 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 public health, railway, and petroleum and petrochemical sectors by developing pandemic prevention and control, railway inspection, train undercarriage inspection, and explosion-proof inspection robots. Based on the operating mileage and number of trains in China at end-2020, we calculate the existing market for railway and undercarriage inspection robots is about Rmb40bn. The firm has received its first order in this field and is building new capacity with financing proceeds to bolster development in the railway business. 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. Our view is the number and variety of machines used in power generation will increase, complexity will increase, 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 grow at a solid rate.

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 the firm’s mobile and fixed-end robot businesses, on the back of advanced technologies and channel advantages. We also expect the robotics businesses in other sectors to develop rapidly.

Potential catalysts: Ramp-up of tenders for robots in the power grid sector; order growth for robots to inspect railway and train undercarriages.

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.