Shenzhen Inovance Earnings: Overseas Business a Key Focus for Growth

Our fair value estimate for narrow-moat Shenzhen Inovance 300124 remains at CNY 64 per share after the company reported third-quarter results that were largely on track with our full-year projections. Inovance is fairly valued in our view, but upside surprises are likely with government stimulus and as more news surfaces about the planned spinoff of the electric vehicle arm.

Revenue grew 31.2% year over year to CNY 7.67 billion, while gross margin fell 26 basis points to 35.0%. Less-profitable EV component sales nearly doubled year over year to CNY 2.3 billion, accounting for 30% of the quarter’s sales. We make no changes to our revenue and EPS forecasts based on the results, and management is maintaining its target of 20%-40% revenue growth and 10%-30% net profit increase.

Inovance’s execution in electric vehicles and general automation remains commendable under weak macroeconomic conditions in China. The company continues to impress, while the rest of the industry suffers from sluggish capital spending in China. Like previous quarters, Inovance benefits from a combination of an ongoing localization push, especially in industries where state-controlled entities dominate, like petroleum; faster-than-expected growth in EV-related revenue (especially from non-Chinese automakers), offsetting slightly slower automation momentum; more comprehensive offerings of controllers and servo motors, making it the one-stop choice when customers upgrade their production lines.

Overseas development is one of Inovance’s unique drivers compared with local peers. Europe and Southeast Asia are key focuses of Inovance. While overseas revenue should continue to grow faster than China, we think geopolitical risks and difficulties in replicating its fast fulfillment overseas may jeopardize management’s five-year target of 20% non-China sales contribution.