Innovation in advance；initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Industrials Manufacturing Company Shenzhen Inovance Date 11 July 2016 Initiation of Coverage Innovation in advance; initiating with Buy Reuters Bloomberg Exchange Ticker 300124.SZ 3000124 CH SHZ 300124 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 2,242.6 2,770.5 3,507.9 4,245.9 5,103.5 EBITDA (CNYm) 749.4 912.0 1,145.1 1,384.7 1,670.4 Reported NPAT (CNYm) 666.3 809.3 977.8 1,170.4 1,397.9 DB EPS FD(CNY) 0.43 0.51 0.61 0.74 0.88 DB EPS growth (%) 18.2 20.1 19.9 19.7 19.4 PER (x) 34.4 42.3 30.9 25.8 21.6 EV/EBITDA (x) 28.4 36.2 25.0 20.1 16.1 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Best proxy to play China's intelligent manufacturing theme ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 8 Jul 2016 (CNY) 19.00 Price target - 12mth (CNY) 23.20 52-week range (CNY) 26.26 - 15.60 Shenzhen Index 2,105 Sky Hong, CFA Research Analyst (+852 ) 2203 6131 sky.hong@db.com Nick Zheng, CFA Research Analyst (+852 ) 2203 6198 nick.zheng@db.com Price/price relative 10203040507/141/157/151/16Shenzhen Inovance TeShenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute -0.3 0.0 -3.7 Shenzhen Index 4.9 5.1 6.8 Source: Deutsche Bank This report accompanies our FITT research report – China Industrial Automation: Dawn of the Machines With the widest product coverage in China’s industrial automation (IA) field, Inovance offers the best exposure to China's manufacturing upgrades and robotics themes, in our view. Leveraging its advanced technology know-how and market insights, Inovance is likely to lead the ongoing import substitution in China's IA market, which should support a 20% earnings CAGR over 2016-18E. Therefore, we are initiating with a Buy rating and target price of Rmb23.2. Why has Inovance succeeded in the past? Inovance, founded in 2003, achieved 65% revenue CAGR over 2004-15. Although the pick-up in China’s IA market certainly contributed, our in-depth analysis of its history suggests that this phenomenal growth was more driven by a combination of its core-technology-centred (i.e., control technology in the drive field) expansion strategy and accurate market insights on downstream verticals (such as elevators, NEVs, etc.). This has enabled Inovance to quickly penetrate and build up its dominant position in a number of IA sub-segments (such as being number three in China’s inverter market). Why will Inovance succeed in the future? After multi-year positioning via internal R&D and acquisitions, Inovance has developed the widest range of products of all the domestic players in China’s IA field. This should allow it to capture the major change in customers’ buying behaviour (i.e., from product adopters to solution seekers). We remain optimistic about Inovance’s expansion into industrial robots and believe its penetration via components should enable it to enjoy high growth in robot sales, but at the same time, avoid fierce competition. We also like its early positioning in Industry 4.0—its elevator solutions and customer base offer excellent potential. Valuation and risks Our TP of Rmb23.2 is derived based on a DCF valuation (WACC: 8.0%, terminal growth: 2%), corresponding to a P/E of 38x/32x on 2016E/2017E. This represents a c.10% premium to its mid-cycle level, supported by its strong long-term growth potential in China’s IA sector. Key risks: an unexpected slowdown in China’s EV and elevator sales and poor execution of M&A. Distributed on: 07/11/2016 15:03:58GMT 11 July 2016 Manufacturing Shenzhen Inovance Page 2 Deutsche Bank AG/Hong Kong Model updated:06 July 2016 Running the numbers Asia China Manufacturing Shenzhen Inovance Technolog Reuters: 300124.SZ Bloomberg: 3000124 CH Buy Price (8 Jul 16) CNY 19.00 Target Price CNY 23.20 52 Week range CNY 15.60 - 26.26 Market Cap (m) CNYm 30,218 USDm 4,518 Company Profile Founded in 2003, Shenzhen Inovance mainly focuses on R&D, manufacture and sales of industrial automation products. The company's product portfolio