Core views:

Guoanda is a leading producer of automatic fire extinguishing devices in the domestic transportation and power generation/grid industry, with an expanding presence in lithium battery boxes for new energy vehicles (NEVs), ultra-high-voltage (UHV) converter stations and electrochemical energy storage. We are optimistic about its long-term development prospects in the power generation/grid and energy storage industries. We assign 1x 2022E PEG to derive a target price of Rmb68 and initiate coverage with a "BUY" rating.

Abstract:

A domestic leader in automatic fire extinguishers

Guoanda focuses on automatic fire extinguishing devices, with its products mainly used in the field of transportation. Going forward, it will focus on products for power grids and energy storage. In 2021, Guoanda achieved revenue of Rmb254mn, a YoY decline of 8.05%, and attributable net profit (ANP) of Rmb26mn, with a YoY drop of 57.43%, showing that its earnings were temporarily under pressure, affected by the spread of Covid-19 in parts of China and the promotion of new products.

Technical and customer advantages in the broad market of power grids

Various government agencies and the State Grid have issued policies and standards of electric firefighting equipment requirements. The large number of substations and the acceleration of UHV electricity transmission in the 14th Five-Year Plan (FYP) period (2021-25) promise a broad market in this field, which will be nearly Rmb100bn in estimation. Guoanda boasts unique advantages for its in-depth cooperation with the State Grid on product R&D. Coupled with its technical advantages, it is well-positioned to build solid barriers to competition.

Cutting into energy storage firefighting to create a second growth curve

The energy storage fire protection market is about to take off due to the rapid development and higher standards of fire protection in this field. We estimate that the market may reach Rmb11.1bn in 2026 by growing at a CAGR of 75% in 2022-26. Guoanda has successfully developed relevant products and established a dedicated business department. With efficient solutions and first-mover advantage, the energy storage business may boost its earnings in the long run, creating a second growth curve.

Vast potential for special firefighting and multiple emerging scenarios

With China's economic development, the fire protection market will have broad growth prospects. As the application scenarios of fire protection continue to increase, the demand for high-end fire protection products will increase. Guoanda actively develops products like firefighting systems for bicycle charging stations and micro fire rescue stations, which will become its new earnings growth drivers in the future.

Potential risks

R&D failing to meet market demand or achieve the expected results; continuous deterioration of the spread of Covid-19 affecting the transportation business; excessively high expenses during the reporting period and disappointing earnings growth; raw material cost fluctuations weighing on its profitability; downstream demand for energy storage missing expectations and its products failing to be approved; the installation/transformation of power grid fire protection systems not up to expectations.

Investment recommendation

We forecast 2022E-24E attributable net profit of Rmb135mn/231mn/368mn, equivalent to EPS estimates of Rmb1.05/1.81/2.88. Considering the valuation of comparable peers and Guoanda’s leadership in the industry and high earnings growth prospects, we assign 1x 2022E PEG to derive a target price of Rmb68.00 and initiate coverage with a "BUY" rating.