?: ?; ?(?)? (?) ? 2018 ? ? ? ? ? 2018 ? ? 1) ?2) ? ? ?3) ? 1978 ? ? ? 12 ? ? ?ABB? ?/? ? ? ? 1) ? ? ?2) ? ? ?3) ? ? ? *? ? ? ? ? ?A ? ? 2020 ?/? ? 2013-16 ? CROCI ? ? 23%? ? ? ? ? 2013-16 ? CAGR ? 29%? ? 22%? ? ? ?/? CAGR ? ?2013-16 ? 33%? CROCI ? ? ? 17%? ? ?CROCI ? ? ? 5%? ? 57% ? 12 ? ? 4%? 29.30 ? ? 12 ? ? Datastream? ? ? IFR (2013?) ? ? (300124.SZ) ?: ? ?2015 ? 3 ? 4 ? ? (?)?12?/? ? ?HOLI?1,072?US$ 29.357% 300124.SZ?4,466?*Rmb 43.923% 002527.SZ?1,232?Rmb 23.922% 1882.HK?3,453?HK$ 16.0-5% 300024.SZ?4,579?Rmb 36.5-17% *?437323 28215214212511630050100150200250300350400450500?2013 ?: 62 ?/10,000 ?Table of contents Overview: Factory automation on rise, robots gaining momentum; CL-Buy Inovance 3 Factory automation: Highest growth in machinery space over the next decade 5 Industrial robots set to make their move: Three major growth tailwinds 6 Tailwind #1: Higher manufacturing productivity required for China to stay competitive 6 Tailwind #2: China has passed payback inflection point for robotics demand, in our view 7 Tailwind #3: Strong government policy support for factory automation industry 9 Japan case study: 20 years of growth; similarities between “Golden stage” and China 12 We see opportunities in system integration and low-barrier components for local firms 14 We identify three long-term strategies for China local FA companies 19 Strategy #1: Enhance system integration capabilities to drive robot market share (client access) 19 Strategy #2: Innovate to pave the way for entry into the more lucrative key components segment (product breakthrough) 21 Strategy #3: Become a low-cost manufacturer (cost advantage) 22 Global comparison: Local companies are smaller but offer higher growth and returns 24 Key risks: Weaker demand, overcapacity, slower technological breakthrough and FAI 35 Inovance (300124.SZ): Chinas industrial automation Innovator; initiate at CL-Buy 36 STEP (002527.SZ): Transforming into a diversified automation company; initiate at Buy 38 Hollysys (HOLI): Recent underperformance represents good entry point; reiterate Buy 48 Siasun Robot (300024.SZ): Robust growth and returns but looks priced in; initiate at Neutral 50 Haitian Intl (1882.HK): Q1 CROCI, but value appears fair; initiate at Neutral 60 Product Glossary 71 Disclosure Appendix 72 All prices are as of February 27, 2015 close, unless otherwise stated. Gao Hua Securities acknowledges the role of Tian Lu, CFA, and Frank Shi of Goldman Sachs in the preparation of this product. Overview: Factory automation on rise, robots gaining momentum; CL-Buy Inovance We have an attractive sector stance on the industrial automation industry given its highest growth potential and attractive risk-reward profile among our China machinery coverage universe. Within the industrial automation industry, we prefer the factory automation (FA) segment over process automation (PA) owing to its superior growth outlook. Specifically, as one of the fastest-growing factory automation products, we expect industrial robot sales to more than triple from 37k units in 2013 to 118k units by 2018E and we see three major tailwinds: 1) Higher productivity is needed for China to stay competitive in global manufacturing amid a shrinking labor force. 2) China has passed the payback inflection point for robotics, in our view, which should drive industrial robot demand. 3) Strong government policy support for factory automation, with an industrial robot density target of 100 units per 10,000 manufacturing workers by 2020 (vs 30 units in 2013). We believe China s robotics industry is in the early phase of Japan s Golden stage in the 1970s when Japan witnessed a decade- long period of high industrial robot sales which led to one of the highest levels of industrial robot penetration in the world. We see opportunities in system integration and lo