YINLUN MACHINERY(002126)IN-DEPTH TRACKING REPORT：DIGITAL AND ENERGY THERMAL MANAGEMENT BUILDS A THIRD GROWTH CURVE

　　Yinlun Machinery has been deeply engaged in thermal management, providing core components and system-level applications for thermal management systems in commercial vehicles, new energy vehicles (NEVs), and the digital and energy fields. It has built a global presence.
　　With the gradual commissioning of its overseas production capacity, as well as the restructuring of its management, the Company has also achieved cost reduction and efficiency enhancement. In addition, it has been building a third growth curve by expanding automotive thermal management technologies into the data and energy fields. With the rapid development of liquid-cooled data centers and NEVs, Yinlun Machinery stands well to benefit. We reiterate the "BUY" rating.
　　The thermal management veteran is building a new growth curve by venturing into digital and energy.
　　Yinlun Machinery’s predecessor was established in 1958, with a focus on the thermal management of commercial vehicles in the early days, and then it entered the NEV thermal management industry. In 2019, the Company proposed a “second entrepreneurship” strategy and accelerated the presence buildup of the thermal management business in the industrial and civilian fields through establishing a digital and energy department and other measures. This new endeavor is likely to create further growth upside for the Company and take its stock price into a higher territory. In terms of product mix, Yinlun Machinery boasts a large variety of products and a sophisticated product mix, forming a "1+4+N" product matrix, which consists of one thermal management system, four large thermal management modules, and several core parts related to the four large modules. In terms of customer structure, the Company has entered the supply lists of leading players across industries, covering a large number of customers, so the impact of the customer concentration risk is relatively modest. In terms of management structure, Yinlun Machinery has launched equity incentive plans for core employees, aligning its interests with those of talents. This allows the Company to pay more attention to its long-term development.
NEV thermal management posted growth in both prices and shipment, and domestic manufacturers stand well to fully benefit.
　　NEV thermal management systems are more complex than those of traditional fuel vehicles, putting forward higher technical requirements. At present, heat pumps are the mainstream alternative in the industry, which have lower energy consumption and can improve the driving range of NEVs. According to Sanhua Intelligent Controls’ convertible bond prospectus, complex structure and integration have pushed the content per vehicle (CPV) of thermal management systems to increase from Rmb2,230 to Rmb6,410. According to the data from Gaogong Industry Institute (GGII) and ev-volumes.com, we forecast 2023E-25E NEV thermal management market size of Rmb79.9bn/101.2bn/122.8bn. Some domestic manufacturers have successfully ventured into the supply chains of mainstream NEV companies both at home and abroad, and the trend of import substitution is clear.
　　The use of liquid cooling in data centers is accelerating.
　　Rising data center power heightens the requirements for data center thermal management efficiency, and traditional air cooling has been unable to meet the requirements of heat dissipation. Liquid cooling, as an alternative, boasts lower lifecycle costs, better cooling effect and other advantages. According to the prediction by CCID Consulting, the estimated domestic liquid-cooled data center market size is at Rmb128.3bn in 2025. Thermal management in energy storage systems guarantees system operation, and the liquid cooling system also has the advantages of high efficiency, floor space saving, a low failure rate and low noise. We forecast the 2023E-25E market size of electrochemical energy storage thermal management to be Rmb3.7bn/5.7bn/8.2bn.
　　Household heat pumps will likely become a heating alternative going forward, while European demand may be the main industry growth driver. According to the data from chinaiol.com, China's heat pump export shipment reached 1.372mn units in 2022, with the export value up to Rmb7.7bn, up 50.4% YoY.
The resonance between NEVs and the third growth curve creates growth upside in building an international presence.
　　The Company's highlights are as follows: 1) The structure of NEV thermal management products has been continuously improving driven by technological upgrades, developing towards premiumization and integration; commercial vehicle products include heavy-duty truck engine exhaust gas recirculation (EGR) and filter modules, whose shipments are likely to ramp up with the recovery in the demand for natural gas heavy-duty trucks. 2) The establishment of the digital and energy department builds a third growth curve for the Company. Currently, Yinlun Machinery has developed an “integrated data center liquid cooling system”, which could greatly enhance cooling efficiency. According to the Company’s announcement, its digital and energy thermal management business posted new order-intakes of nearly Rmb500mn in 1H23. 3) The Company has been accelerating building an international presence. According to its 1H23 earnings results, its Mexican plant has been put into operation in 1H23, mainly to meet the needs of key customers in North America, and its Polish plant is likely to be commissioned in 1Q24. 4) Organizational restructuring reduces costs and enhances efficiency. Yinlun Machinery has been improving its operation management capabilities through the "contracted operation and profit commission" assessment mechanism to delegate power to each operating unit. In the meantime, the Company streamlines manpower and improves the management level, which then drives the increase in each business indicator.
Potential risks: The cyclical fluctuations in the macro economy; the volatility in raw material prices; the risk of trade and exchange rates; the changes in the industry competitive landscape; the implementation of the Company's new business not up to expectations.
Investment recommendation: Yinlun Machinery has been deeply engaged in thermal management for many years, supplying core parts and system-level applications in commercial vehicles, NEVs, and the industrial and civilian fields. Its core products are heat exchangers, and currently it has been proactively building a presence in data center liquid cooling and other digital and energy businesses. We maintain our 2023E-25E revenue forecasts of Rmb10.85bn/12.35bn/15.89bn, with attributable net profit (ANP) forecasts at Rmb590mn/810mn/1.03bn. We select Sanhua Intelligent Controls (002050.SZ), Envicool (002837.SZ), and Feilong　　Auto Components (002536.SZ) as comparable companies, which are currently trading at 32x 2023E PE on average based on Wind consensus estimates. With the comps valuation as a reference, we assign 28x 2023E PE out of prudence, corresponding to a target price of Rmb21. We continue to recommend the Company 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。