JINPAN SMART TECHNOLOGY(688676)3Q23 EARNINGS REVIEW：RAPID GROWTH CONTINUES ALONG WITH IMPROVING PROFITABILITY

　　Benefiting from the boost from new energy-related areas and increasingly evident growth in overseas markets, Jinpan's main business has sustained its high growth trend. Based on supply and demand factors, we expect the tight supply of transformers overseas to persist. Considering the time required for qualification certification, overseas factory construction, brand reputation accumulation, and channel building, we believe Jinpan stands to benefit from its first-mover advantage over a period of 2-3 years and 2023 will mark the maiden year of rapid overseas revenue growth. As the proportion of overseas market revenue increases, the Company's gross profit margin (GPM) and net profit margin (NPM) will likely maintain an upward trend. We maintain our 2023E/24E/25E EPS forecast of Rmb1.32/1.98/2.88 and reiterate the target price of Rmb54 along with the "BUY" rating.
　　3Q23 earnings growth beats expectations.
　　Jinpan released its 3Q23 earnings report on Oct 19, announcing that it achieved 1-3Q23 revenue/attributable net profit (ANP) of Rmb4,773mn/333mn (+49.74%/+98.30% YoY), with 3Q23 revenue/ANP at Rmb1,880mn/142mn (+54.96%/+96.14% YoY). The rapid earnings growth in 1-3Q23 was mainly attributed to product expansion in new energy-related areas and customer & market expansion overseas. 3Q GPM and NPM both saw significant increases to come in at 22.78% and 7.51%, respectively, confirming that the decline in 2Q23 mainly reflected quarter-to-quarter differences in the product revenue mix. Looking ahead, we expect the Company's profitability to gradually improve as the proportion of overseas revenue increases, while its energy storage and digital factory businesses will gradually generate revenue. As such, we expect the Company's results to further improve QoQ.
　　Supply tightness in overseas transformer markets offers an expansion window for domestic suppliers.
　　Coming into 2023, overseas transformer markets, such as in the US, have shown a high level of prosperity. On the demand side, factors such as continuous growth in wind and solar power installations, the increasing penetration of new energy vehicles (NEVs), the internet data center buildout, manufacturing reshoring, and aging power grid renovation requirements have fueled robust demand in overseas transformer markets. On the supply side, overseas transformer supply is dominated by foreign manufacturers such as ABB, Siemens, and SGB-SMIT, whose production expansion is slow. At the same time, factors such as qualification certification, operating track records, and channels also make it difficult for new domestic manufacturers to quickly enter overseas markets. In the context of tight supply and demand, overseas suppliers' delivery cycles for dry-type and oil-filled transformers have significantly increased, providing an expansion window for domestic manufacturers with deep accumulation in overseas markets.
　　Long-term contracts continue to be signed.
　　Jinpan has emphasized global market expansion since its establishment. It has established local subsidiaries and transformer factories in the US and Mexico and maintained long-term cooperative relationships with overseas clients such as Siemens, Vestas, and General Electric. During 1H23, the Company received Rmb1.048bn in new overseas orders, representing a YoY increase of 157.49%. In addition, the Company also signed two long-term contracts with overseas customers in Aug 2023. One customer signed a five-year contract (with orders estimated at Rmb1.08bn-1.44bn), while the other customer signed a six-year contract (with orders over the past three years exceeding Rmb0.8bn). The continuous signing of long-term contracts not only confirms the tight supply and demand situation in overseas transformer markets but also demonstrates that Jinpan has achieved significant brand recognition overseas. Considering the time required for qualification certification, overseas factory construction, brand reputation accumulation, and channel building, we believe Jinpan stands to benefit from its first-mover advantage in the US over a period of 2-3 years, with Jinpan poised to embrace rapid growth in the US in 2023 after it accelerated its expansion into the US market in 2022. Based on the GPM for its overseas revenue in the past two years (27.24% in 2021; 27.41% in 2022), we expect the profitability of the Company's main business to continue to rise.
　　Potential risks: Sharp fluctuations in raw material prices; market expansion of its energy storage products missing expectations; disappointing business expansion for its digital factories; international geopolitical risk; increased market competition; sharp exchange rate fluctuations.
　　Investment recommendation: Benefiting from the boost from new energy-related areas and increasingly evident growth in overseas markets, Jinpan's main business has sustained its high growth trend. Based on supply and demand factors, we expect the tight supply of transformers overseas to persist. Considering the time required for qualification certification, overseas factory construction, brand reputation accumulation, and channel building, we believe Jinpan stands to benefit from its first-mover advantage over a period of 2-3 years and 2023 will mark the maiden year of rapid overseas revenue growth. As the proportion of overseas market revenue increases, the Company's GPM and NPM will likely maintain an upward trend. We maintain our 2023E/24E/25E EPS forecast of Rmb1.32/1.98/2.88. Coming into 4Q23, we see valuation rollover as justifiable and take 2024E earnings estimates as our valuation basis. Factoring in the valuation of comparable peers, with Sinexcel Electric (300693.SZ), Sieyuan Electric (002028.SZ), and Windsun Science Technology (688663.SH) trading at 16x 2024E PE based on Wind consensus estimates and at 0.48x PEG with their ANP CAGR at about 33% in 2023-25, as well as Jinpan's high earnings growth prospects and visibility (we expect an ANP CAGR of 63% in 2023-25), we keep the target price unchanged at Rmb54 on 0.43x 2024E PEG, corresponding to about 27x 2024E PE, out of prudence (considering that its overseas expansion will gradually translate into earnings contribution) and reiterate the "BUY" rating.
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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。