科士达(002518)

Local UPS king is gaining its power over international peers in China

We visited Kstar's SZ UPS factory. The company is upbeat on its UPS market share expansion in both China (especially on 20kVA+ UPS) and overseas, thanks to its high precision and cost/performance products. We feel comfortable with its 20%+ online UPS sales CAGR in 2017-2020E and 38-40% GPM thanks to favorable product mix change (integrated/higher power UPS). We also believe international UPS brands (Riello, Schneider, Emerson) will accelerate their outsourcing to qualified ODMs like Voltronic, given rising competition from local kings. Voltronic and Kstar are our top picks in Greater China UPS fields; we reiterate our Buy ratings on both names.

Upbeat 2017 outlook driven by online UPS/inverter strength

Kstar is upbeat on its 2017 outlook and targets a 30%+ earnings CAGR in 2017-2019E driven by online UPS and inverter strength. Propelled by continued inverter order wins for the Chinese government’s poverty reduction projects in rural areas, Kstar expects a 100% YoY inverter revenue increase this year, with GPM ramping to 35-36% vs. 30-33% before. For UPS, Kstar expects continued market share expansion in 20kVA+ orders thanks to its R&D strength and promotion from the Chinese government. Kstar is also offering an integrated UPS solution (battery + UPS + high-precision air conditioner) to China’s IDC , helping drive potential 20%+ online UPS revenue CAGR in the next three years.

Kstar’s ongoing UPS gain implies rising pressure on international competitors

Kstar expects its Chinese UPS market share to ramp up to 20-22% in two years’ time, vs. 15-16% currently. Management attributes the faster expansion to its take-off in 20kVA+ UPS. By leveraging its good relationship with local government (in high-speed railway/governmental projects) and high cost/performance products (10-15% lower price vs. international competitors), Kstar continues to gain market share from international peers (e.g. Schneider, Emerson) in China. Besides the domestic market, Kstar is promoting its ownbrand products in emerging countries (e.g. South East Asia) by setting up 10 branches overseas. The company believes its good customization capabilities in small-power UPS manufacturing will help it outperform international brands in emerging countries (lack of power standard) going forward.

Valuation and risks

We raise our 2017 EPS estimate by 12% to factor in stronger UPS/inverter demand. We lift our TP to RMB18.6 from RMB16.4 as we roll over to one year FW EPS vs. 2017E EPS before (still based on 30x 2017E P/E, or 1.0x PEG). Risks: weaker China UPS demand, price competition, and unfavorable FX.