ROBOROCK TECHNOLOGY(688169)：PLANS TO BUILD A MANUFACTURING CENTER TO MOVE TOWARDS AN INTEGRATED VALUE CHAIN

　　What's new
　　Roborock Technology (Roborock) announced plans to use some of the excess proceeds raised from share offerings to build a manufacturing center.
　　Comments
　　Roborock plans to use some of the excess proceeds raised from share offerings to build a manufacturing center: 1) According to the announcement, the firm plans to use Rmb460mn of the excess proceeds raised from share offerings to increase investment in Huizhou Roborock, a wholly-owned subsidiary of the firm, to build a manufacturing center. 2) The firm plans to build the center in the Zhongkai High-tech Zone in Huizhou, Guangdong, with a planned construction period of 23 months. 3) Historically, the firm has been focusing on R&D, and outsourcing its production to two contract manufacturers Sunwoda Electronic and Dongguan Great Wall due to the lack of its own production base. After building its own manufacturing center, the firm plans to shift toward a model of in-house production supplemented by outsourcing to integrate R&D, production and sales.
　　Integration of R&D, production and sales to enhance competitiveness in value chain: 1) R&D: We believe self-built production bases could help the company conduct flexible product upgrading and experiments while improving technical confidentiality and launch new products efficiently. Take Ecovacs Robotics, which mainly focuses on in-house production, as an example. After Narwal launched its self-cleaning product J1, Ecovacs launched its self-cleaning product N9+ in March 2021, leveraging its advantages in integrated value chain. Although the N9+ adopts visual navigation, it offers upgraded functions such as integrated sweeping and mopping and an electronically controlled water tank. Ecovacs was the first brand to launch new products after Narwal in the industry. Dreame, another well-known company in the industry, also has a smart factory in Suzhou. We expect Roborock’s in-house production model to further improve the flexibility of R&D and accelerate new product launches. 2) Delivery: With this model, the firm can independently and flexibly schedule production according to demand, which should help reduce delivery risks and improve responsiveness, in our view. 3) Costs: We expect the shift from raw material procurement by OEMs to independent procurement to help the firm cut cost and improve quality control and achieve profit growth from an integrated value chain.
　　Leading position in a promising robot vacuum industry. 1) We believe the robot vacuum industry is set to grow globally. Data from Euromonitor International shows that the global retail sales of robot vacuums reached about US$5.9bn in 2021, with a CAGR of 19% over the past five years. According to iRobot’s annual report, the penetration rate of robot vacuums now stands at about 15% in the US, only about 10% among urban households in China, and below 20% in most countries in the world. We think robot vacuums can help address cleaning and housekeeping duties, and we foresee a tenfold increase in their global penetration rate. 2) Roborock is a leading brand in the global robot vacuum market, and it continues to take over the market share from iRobot in overseas markets. In the domestic market, the firm’s market share has continued to double since its launch of self-cleaning products in September 2021, increasing from 10% to about 25%. 3) The firm's plan to build its own production base also showcases its confidence in the outlook for the robot vacuum market, in our view.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts, OUTPERFORM rating, and target price of Rmb864.58. The stock is trading at 26.6x 2022e and 19.9x 2023e P/E. Our TP implies 35.0x 2022e and 26.3x 2023e P/E, offering 31.8% upside.
　　Risks
　　Fluctuating market demand; intensifying competition.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。