Asia Automation:Strong demand,new products and margin expansion;upgrade Hiwin to Buy

Strong automation demand to continue: According to automation players includingHiwin, Airtac, TBI (4540 TT, Not rated), Awea (1530 TT, Not rated) and Goodway(1583 TT, Not rated), automation equipment demand is likely to remain strong in2H17e, driven by semi, display, OLED, automobile and aerospace industries.

    Automation companies guide for 15-20% y-o-y overall growth in 2017e revenue withvisibility to 4Q17e (vs. c. 3 months forward visibility in 2016).

    Limited capacity leads to CAPEX expansion: Thanks to robust demand fromChina, Airtac and Hiwin reported 21% and 32% y-o-y growth in revenue y-t-d,respectively. However, both companies are in a tight capacity situation. To supportstrong orders, Airtac raises its CAPEX guidance by 15-25% (from TWD2.2bn) forfactory expansion, and Hiwin targets to invest TWD4-5bn in vertical integration,capacity expansion and robot manufacturing in 2017e.

    Margin expansion in 2H17e: Amid strong demand, Hiwin has raised the sellingprices by 5-10% and increased its utilization rate. Mass production of in-house linearguides and switches can save 40% of costs from the original supplier, and electricparts’ ramp-up should bode well for the gross margin by selling electric andpneumatic parts in the same package.

    New products a catalyst for 2018e: Airtac plans to sell electric part products(no contribution now) directly to clients from 2018 onwards and can leverage itsexisting sales channels and clients (70-80% of clients also have demand for electricparts) in a c.USD8-9bn market. Hiwin’s management is confident about its robotbusiness growth in the next 3-5 years as the company continues to upgrade its robotproducts and increase capacity, especially in multi-axis robot.

    Upgrade Hiwin to Buy (from Hold) and maintain Buy on Airtac: We raise our2017e-19e earnings for Hiwin to reflect the potential margin expansion as a result ofthe price hike and full utilization rate. We upgrade Hiwin to Buy (from Hold) with TP ofTWD257 (from TWD204) based on a 27.4x PE to 2H17e-1H18e earnings. For Airtac,we maintain our Buy rating on the stock, as we are positive on the automationoutlook in China, the company’s strategy to develop mid-to-high end products andthe potential earnings growth from electric parts. Our TP TWD418 (from TWD400) isbased on a 24.3x PE to 2H17e-1H18e earnings.

    With this note, Bruce Lu is assuming primary coverage of Airtac and Hiwin.