Acquiring 56% stake in Shanghai Lai''en, rising to 60% after capital increaseThe company announced today that it will acquire a 55.5556% stake in ShanghaiLai''en Precision Machine Tool Parts Corporation from Shanghai Rabbit CNC MachineTools for Rmb50m in existing cash. At the same time, it will expand the capital ofShanghai Lai''en with Rmb10m in existing cash (bringing its final stake to 60%) andconsolidate Shanghai Lai''en into its books. After the equity transfer and capital increaseare completed, Shanghai Rabbit (32.4% stake) and five individual shareholders(combined 7.6% stake) have pledged that Shanghai Lai''en will deliver cumulativerevenue of at least Rmb120m in 2016-18. If this condition is not met but ShanghaiLai''en does not post a cumulative loss over the 3year period, the these parties willtransfer a total 5% stake in Lai''en to Inovance for nil consideration, or a maximumconsideration of Rmb1. According to unaudited financials, Shanghai Lai''en recordedRmb19.69m in revenue and Rmb2.59m in net profit in 2015.

No material earnings impact, but should improve presence along value chainWe expect the acquisition to have no material impact on Inovance''s 2016earnings.Shanghai Lai''en was founded in Feb 2006as a JV between Shanghai Rabbit CNCMachine Tools and NTN China, a wholly-owned subsidiary of NTN Japan. NTN Japan isone of the world''s biggest manufacturers of bearings. Shanghai Lai''en mainly makeshigh-precision ball screws, a key mechanical drive component for industrial automationthat is used in CNC machine tools. China''s ball screw market has long been dominatedby foreign brands. Shanghai Lai''an''s production base will be relocated into Inovance''sSuzhou factory in the future. We believe this acquisition will improve Inovance''sproducts and overall solutions in the mechanical drive segment and advance itsindustrial automation strategy.

We expect high growth to continue in 2016-18We forecast revenue growth at 24%/27%/20% and net profit growth at27%/20%/17% in 2016/17/18, implying a 21% net profit CAGR. This growth shouldbe mainly driven by policy support for the new-energy vehicle sector and rapid growthof the universal servo business.

Valuation: Rmb23.40price target, maintain BuyOur price target is based on 36x 2016E PE. We view the current valuation as attractiveand maintain our Buy rating. 轴承展-2017年广州国际轴承及其装备展览会-2017 China(Guangzhou) Int’l Bearing and Equipment Exhibition