High investors interest on promising industrial growth

Kstar is one of the largest uninterruptable power supply (UPS) brands in Chinaand is gaining QF investors' attention recently due to its (30% EPS CAGRin 2017-2020E) industrial growth on robust data center setup in China. Thecompany generates most of its UPS revenue from financial institutions (30-40%of UPS revenue), government agents, transportation infrastructure and IDC,which feature high entry barriers. Given its continued high-power UPS marketshare gain from international brands (Schneider), Kstar is confident of postingongoing market expansion from its current 35% level. Investors also like Kstar’ssolid balance sheet (net cash, positive FCF) and promising EV charging growth;reiterating Buy.

Delivering 30% EPS CAGR in 2017-2020E on industrial growth (IDC UPS, EVcharging)

Kstar expects a 30% EPS CAGR in 2017-2020E driven by strong high-power(20kVA+) on-line UPS growth on IDC proliferation in China and robust EVcharging demand. Propelled by its continued R&D investment in premium UPSand the support from the Chinese government, Kstar keeps gaining sharefrom international UPS brands (eg. Schneider, Eaton) in China. Managementanticipates its market share will expand from 15-16% now to 20-25% in two years,which supports a 20%+ UPS revenue growth in both 2018E and 2019E. Kstarhas also begun to ship its integrated UPS (combining self-made high-precisionair conditioner UPS battery into a cabinet) to IDC customers, which carries a 40%GPM, given its increased value-added.

Kstar is confident of sustaining 35%+ GPM from UPS (despite rising raw materialcost) in the long-run due to continued product mix improvement (integrated UPS,large IDC).

Promising inverter + booming EV demand

Kstar delivered a 100%+ YoY inverter revenue increase in 2017 due to its newpoverty reduction projects win from the government. Management indicatesthat the local government keeps building inverter stations in rural regions (eg.hills), which is viewed as a long-term electric infrastructure investment with 3-5years order visibility. Therefore, Kstar guides a 30-40% inverter revenue CAGR in2017-2020. Kstar also enjoys strong EV charging demand in China by leveragingits power efficient charging pile (featuring 96-98% conversion efficiency ratio vs.the industry average of 91-93%). The company’s EV charging revenue ramped to RMB150m in 2017 vs. RMB70m in 2016. Management is confident of posting100%+ YoY EV revenue growth in 2018 given the strong orders forecast fromkey customers. Kstar is also developing a vehicle carry charger with auto OEMs(Brilliance BMW, according to management), which will support its long-term EVgrowth.

Valuation and risks

Our target price of RMB21 is still based on 30x one-year FW EPS, in line withthe Asian cloud computing peer average. Risks: slower EV/UPS demand andunfavorable FX.

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