科士达(002518)

Sustainable industrial growth is fuelling 2018-2020 momentum

Despite the recent UPS raw material price rally, we still expect Kstar to post a30% YoY EPS increase in 2017 on rush EV charging pile pull-in from stationoperators. In 2018-2020, Kstar expects to deliver 30% EPS CAGR due to: 1)integrated UPS data center share gains; 2) continued inverter strength fromgovernmental poverty reduction projects; and 3) 50%+ EV charging revenueincrease on new inland customers win (Heilongjiang provinces). We like Kstar’sreasonable valuation (20x 18E EPS), solid balance sheet (net cash, positiveFCF), and high exposure to industrial applications (EV, UPS). Retain Buy.

4Q17: accelerating EV charging momentum mitigates UPS material price hike

We had an update with Kstar on recent UPS headwinds resulting from the rawmaterial price rally (lead and copper price lifted ~10% in Oct-Nov). Kstar raisedits UPS pricing by 5-8% in November to pass the cost burden to its customers.The company expects some short-term UPS margin impact stemming from thesudden change but maintains its 2017 EPS guidance of 30%+ unchangedthanks to stronger EV charging momentum. Propelled by charging stationoperators’ rush orders in 4Q17, Kstar aims to generate RMB150m revenuefrom EV charging vs. RMB40m in 3Q17 and 4Q16. The company will likelysustain 40%+ GPM from EV charging business thanks to its higher powerconversion efficiency. Driven by EV and inverter strength, we expect Kstar topost 4Q17 EPS of RMB0.23 (+38% QoQ, +30% YoY), on revenue of RMB761m(+20% QoQ, +32% YoY).

Integrated UPS + EV charging strength is boosting 2018 momentum

Kstar is confident of delivering 15-20% on-line UPS revenue CAGR in 2018-2020 driven by integrated UPS share gains from data center customers. Kstarstarted to offer integrated UPS solutions (combining on-line UPS, highprecision air conditioner and battery into the cabinet) in 2017 and has receivedstrong orders from data center customers. Management indicates thatintegrated UPS carries a GPM of 40%+ vs. conventional on-line UPS of 33-35%. Kstar also expects a 100%+ YoY EV charging pile revenue increase in2018 thanks to robust order forecasts from charging station operators. Thecompany also targets to bid for new orders from State Power in 2H18, whichcould post additional upside to its aggressive EV charging guidance.

Valuation and risks

We keep our earnings estimates largely unchanged. We lift our target price toRMB21 from RMB18.6 as we roll over to one year FW EPS (still based on 30xP/E multiple or 1.0x PEG, in line with Asian peer average). Risks: weaker ChinaUPS demand, price competition, and unfavorable FX.