Defense: Jonhon sees limited impact from China's military reform in theform of tenders for military-grade connectors as it has already adoptedopen bidding in the past. That said, due to organizational reshufflingwithin the military headquarters due to the reform and the fact that orderflows are typically slow in the first two years during a five-year-plan period,the company did see a slowdown in terms of defence order intakes in2017. However, management expects new orders to improve in 2018 (2Hin particular, given the seasonality) and to further take off in 2019-20. Telecom: Management expects 5G to become a significant growth driverin 2019-20 as the capex cycle kicks off. Before that, management doessee some pressure for its existing product portfolio as 4G capex continuesto trend down. This, however, could be mitigated by the surging exportorders, which saw 30%+ growth in 2017 (overseas customers include:Samsung and Nokia). NEV: New order growth significantly picked up in 2H17 and theproduction schedule for 4Q17 was extremely busy. Overall, managementexpects this segment to continue to be a key growth driver in the comingyears. Moreover, cooperation with Tesla has been progressing well,with its high-voltage connector product likely entering Tesla’s suppliercatalogue, in addition to the existing EV charge coupler.

An emerging national champion; raising TP According to an ancient Chinese proverb, to win a battle, it requires the right time,right place and right people. In the battle for market share in China's industrialautomation (IA) sector, we believe all these three factors align with Inovance.In terms of timing, the Chinese government's strong push for manufacturingupgrades and promotion of high-end manufacturing should help to sustain robustIA demand in the next 10years. On top of it, local players who focus on hardwareequipment will accelerate their market share expansion, given the government'sintention to promote local champions. Along with management's impressivemarket insights and distinct "vertical-based" strategy, we believe Inovance is wellplaced to top the inverter and servo markets in China by 2025. With sustainablelong-term growth and an industry-leading position, we believe the stock's currentvaluation premium is warranted. We raise target price to Rmb34.3. At the right time "Made in China 2025" was first unveiled in May 2015, at a time when China'smanufacturing industry and IA market were struggling. Thanks to a strong topdownpush from the government, China's IA market started to recover in 2H16,with the recovery positively surprising in recent quarters. We view this round ofIA recovery as structural instead of cyclical, and hence we believe it is highly likelyto persist in the next 10years. Apart from government support, manufacturerswho are facing poor quality, low efficiency, and labor shortages have also startedto voluntarily automate their production facilities. This trend has now spreadinto traditional verticals such as textile machinery, machine tools and metallurgy,signaling that current China's automation upgrades have become broad-based.We expect China's overall IA demand to post a 10% CAGR in 2017-20, whilethe general servo and low-voltage inverter markets, Inovance's two focusedsegments, to register a CAGR of c.20% and 10%, respectively, over 2016-20(vs.+6% and -5% over 2011-16). Over 2021-25, we expect China's general servo andlow-voltage inverter markets to witness a CAGR of 10% and 5%, respectively (vs.China's overall IA market: 5%). In the right place China's current manufacturing upgrades still largely center on hardwareequipment, which has been Inovance's strong suit. In addition, the government'spromotion of localization has been intensifying, which would accelerate localplayers to gain market share. Currently, 65% of China's IA market is still dominated by foreign players. In some of Inovance's focused markets, the ratiocan be as high as c.90%. Leveraging its deeper understanding of local customersand improving the price-to-performance ratio of its products, Inovance hassuccessfully grown into a local leader capable of challenging MNCs' positionsin certain areas. Its low-voltage inverter and general servo already ranked No.3and No.5, respectively, in China. With accelerating import substitution, we expectInovance to become the No.2player in China's low-voltage inverter and No.3inthe general servo market by 2020. By 2025, Inovance is highly likely to lead bothmarkets, based on our estimates.

Near-term growth to further accelerate; long-term visibility improving. Despite c.40% share price appreciation YTD (vs. SZCOMP: +3%), we see furtherupside potential for Jonhon as re-rating continues to accelerate earnings growthalong with improved visibility. Revenue growth indeed accelerated in 3Q. Withorder momentum picking up and revenue conversion coming through, we expect4Q to deliver 38% NP growth. Looking beyond 2017, the upcoming two roundsof capacity expansions will likely lift its headquarter's capacity by c.50%, andthe new capacity will be mainly used for new products and applications thathave substantial import substitution potential. During the previous capacityexpansion cycle (2014-15), Jonhon delivered earnings CAGR of 50%+. We havebeen anticipating an earnings upcycle for the coming three years, and we nowhave higher conviction. We see upside potential to our current assumption of aconstant growth acceleration of 30%+ towards 2020; maintaining Buy. Sales growth accelerated; margin expansion continued. 3Q sales of Rmb1.5bn rose 8% yoy, a visible acceleration from 1H's 1% yoygrowth. High GPM was largely sustained in 3Q, which increased 2.5ppt yoy,leading to a 16% growth in GP. However, this was partially offset by higher opexand finance costs in 3Q. NP was up 13% yoy, which also accelerated from 1H's11% increase. 9M NP amounted to Rmb629m (+12% yoy), which achieved 73%of our full-year estimate (vs. the historical average of 72% during 2007-16). We expect a strong 4Q ahead; full-year earnings likely to beat guidance. During our recent visit to Jonhon's Luoyang headquarters (in mid-September),management indicated that new orders for defense and NEV picked up sincethe beginning of 3Q (see our trip takeaway note). However, the actual signingof contracts took place in late 3Q (especially for defense orders, largely due tomilitary reform), which means revenue conversion will likely be skewed towardsthe final quarter. The company guides for a 0-15% NP growth for the full year, thesame wide range they guided for in 1H and 9M. Its track record suggests that thefinal result tends to come in towards the high end of the guided range. For thisyear we expect full-year earnings growth to beat guidance (DBe: +18% yoy) aswe are projecting a 38% earnings growth in 4Q.

1H result largely inline; strong top-line partially offset by surging finance cost Net profit rose 19% YoY to Rmb101m, on a 36% YoY top-line growth. 1H net profitachieved 19% of our full-year forecast (vs. 1H16: 21%), which was largely inline.Historically, FPI's earnings have been heavily skewed toward 2H, especially in thefirst two years during a five-year-plan period. Strong top-line growth was partiallyoffset by surging finance cost (+174% YoY) as net gearing increased to 27% asof end-1H17from 9% as of end-2016likely due to investment associated withPPP projects. For 2Q alone, sales sustained a 36% YoY growth (vs. +34% YoY in1Q), while NP growth visibly moderated to 15% YoY (from 48% YoY in 1Q), largelydriven by a big jump in finance cost.1H17review by segment Environmental monitoring system (EMS): Since 2H16, installation haswitnessed visible acceleration from the customer side, after a slow 1H16(down 2% YoY). In 1H17, sales growth further accelerated to 17% YoY,from 15% YoY in 2H16. According to management, initial feedback fromsales department suggests order flow for EMS was robust in 1H (30%+YoY), which means revenue recognition is likely to further accelerate in2H when installation is completed. This, along with the contribution fromHuangshan PPP projects (NP of Rmb40-50m guided by management) in2H, should drive a strong 2H for EMS segment. Laboratory analysis equipment: Sales surged 103% YoY in 1H, mainlydriven by the consolidation of Anpel's accounts in 1H17. Addingback Anpel's revenue for 1H16, sales of laboratory analysis equipmentincreased 7% YoY on a like-for-like basis. Highlights for other segments: Sales of industrial process analysiswere down 3% YoY in 1H, as downstream verticals are mainlytraditional heavy industries (mainly metallurgy, petrochemical, etc.).Water conservancy water intelligent system was up 16% YoY while otherbusiness (environment governance, etc.) were up 57% YoY. Maintaining Buy; risks We retain our estimates post 1H results. We keep our DCF-based target price ofRmb45(WACC: 8.5% and TGR: 2%) unchanged and maintain Buy. The valuationlooks compelling at 20x 2018E P/E, against 30% EPS CAGR over 2017-19. Keyrisks: slower-than-expected EMS growth and poor execution of investments.

IA ahead of expectations; passenger NEV has started to make progress。 Inovance's 1H result (NP up 10% YoY) tracks behind our full-year estimates,dragged by surging opex associated with the passenger NEV business. However,underlying operations and management's comments at the analyst call broughtup two positive surprises: 1) stronger-than-expected IA growth in 1H andsustainable 30-50% growth guided by management going forward, and 2) anencouraging breakthrough in the passenger NEV business with 6-7customerssecured in 1H. With continuing strength in IA, an NEV bus recovery, opexnormalization and rising contributions from passenger NEV and industrial robots,we believe earnings growth is set to accelerate. We maintain Buy.。 Strong 1H top-line growth partially offset by margin contraction。 1H net profit of Rmb429m (+10% YoY) achieved 36% of our full-year estimate,which tracks behind the 5-year average of 43%. GP margin contracted 3.3ppt to45.8%, driven mainly by the new energy segment (down 18.2ppt YoY). This, alongwith higher-than-expected opex (R&D expense +75% YoY and selling expense+41% YoY), partially offset strong top-line growth in 1H (+32% YoY). In 2Q alone,sales growth moderated to 29% YoY from 38% YoY in 1Q, while NP growth visiblyslowed to 3% YoY (from 24% YoY in 1Q), largely due to surging opex.。 Stronger-than-expected IA growth a key positive。 Sales of general IA products (servos and inverters) soared 90%+ YoY in 1H, wayahead of China’s overall market growth (15% for inverters and 23% for servosin 1H), management's full-year guidance (30-50%) and our full-year estimates(50-60%). Inovance's "vertical-based" strategy continued to facilitate its marketgains in traditional verticals like textile machinery and air compressors.。 GPM contracted while opex surged。 GPM contraction was mainly because of 1) ASP cuts (10-20% by Yutong), lowsales volume and higher sales rebates in the NEV segment and 2) an unfavorableproduct mix in the inverter segment (i.e. rising contributions from low-marginauxillary elevator products and high-voltage inverters). The big jump in opex wasmainly due to a passenger NEV business expansion, with the R&D expense ratio(as a percentage of sales) rising to a historical high of 14% in 1H. Such a surge,however, is likely to be a one-time event as management expects the ratio tonormalize to 8-10% starting in 2018.。

Analytical instrument trip reaffirmed our positive view on FPI. Policy imperatives to drive EMS upcycle; FPI is well positioned We recently conducted a field trip to China, visiting major analytical instrument players and several of FPI’s major subsidiaries. We walked away with stronger confidence in Focused Photonics Inc. (FPI). Organic growth remains robust across major segments, including environmental monitoring systems (EMS), laboratory equipment and water conservancy. We were particularly impressed by FPI’s strategic vision of becoming an analytical instrument leader and believe its well established platform could facilitate horizontal expansion, which has proved to be a winning strategy for this industry globally. Policy imperatives to drive EMS upcycle; FPI is well positioned . The expanding environmental monitoring network, rising coverage on monitored pollutants and stricter emission requirements are the three structural drivers for EMS that we believe should play out during the 13th FYP period. Industry participants are, in general, bullish on the organic growth outlook, expecting 25-30% growth ahead. The likely change in the government’s procurement behaviour (i.e., centralised procurement and adoption of PPP model) should accelerate industry consolidation, in favour of leading players with a wide range of product/solution offerings and strong balance sheets. We note FPI’s recent winning of two PPP projects (Huangshan and Guangxi) demonstrates its competitiveness. Robust growth outlook at subsidiary level; a proven acquirer and integrator. We visited FPI’s three subsidiaries, Jitian (laboratory instruments), Anpel (laboratory consumables) and Dongshen (water conservancy and water intelligent systems). They are local leaders in their respective niche segments and were previously acquired by FPI. Our takeaways are twofold: 1) on growth, all three companies are aiming to grow their businesses by 20-30%; 2) they expect synergies under FPI’s platform through its strong distribution channels and established customer relationships, which are among the key reasons they chose to join the “FPI family”. We believe FPI’s leading market position could facilitate its future horizontal expansion (via acquisitions).

Strong results; positive conference call takeaways. 2016 results in line; 2017 off to a good start FPI reported strong 2016 results (+63% YoY) and a solid 1Q17 (+48% YoY) last night. We hosted a post-results conference call today and came away with positive takeaways. Management expects organic growth to be sustained at 20-30% driven by the EMS up-cycle and import substitution for laboratory instruments. Further upside might come from environmental PPP projects with Huangshan project starting to contribute in 2017. Against a 31% EPS CAGR over 2017-19, the current valuation of 19x 2018E P/E looks compelling. Buy. 2016 results in line; 2017 off to a good start. 2016 NP of Rmb402m, up 63% YoY, was in line with our estimate. By segment, sales of EMS (+7% YoY) were shy of expectations as project executions are typically slow in the first year of a five-year-plan period. This, however, was more than offset by strength across other segments including laboratory (+69% YoY), environmental governance instruments (+152% YoY), industrial process analysis (+32% YoY). The strong growth momentum was largely sustained in 1Q17, with NP up 48% YoY on 34% YoY top-line growth. Growth outlook remains encouraging; PPP projects to drive further upside. At the post-result conference call, management guided for organic growth of 20-30% for 2017 driven by: 1) 20-30% growth for both EMS and laboratory; and 2) recovery at the water conservancy segment (back to the 2015 level) as severe flooding in 2H16 in South China should boost instrument demand for water conservancy. On top of this, the execution of the Huangshan PPP project could potentially yield NP upside of Rmb30-40m for 2017. With possible participation in more PPP projects ahead (in a disciplined way), management noted that earnings growth could potentially hit 50% in the coming years. Reiterating Buy on compelling valuation; risks. We keep our estimates largely unchanged for 2017/18 and introduce our 2019 forecasts (31% EPS CAGR over 2017-19E). We retain our Rmb45 DCF-based target price (WACC: 8.5% and TGR: 2%) and our Buy rating. Valuation looks compelling at 24x/19x P/E on 2017E/18E, compared with its mid-cycle average of 36x and global peers’ average of 29x/24x on 2017E/18E with 16% EPS CAGR. Key risks: slower-than-expected EMS growth, poor execution of investments.

A solid start to 2017; Buy on accelerating 2H growth. Despite high comparison base (NP nearly doubled yoy in 1Q16), Jonhon managed to deliver an 11% NP growth in 1Q. The company’s preliminary NP estimate for 1H (0-15% yoy) tracks inline with our full-year estimate. Headline growth looks slower in 1H mainly because earnings were particularly skewed toward 1H in 2016 (54% of full year vs. historical average of 44%). That said, easing comparison base, along with accelerating military orders and NEV sales recovery, should drive a significantly better 2H ahead (likely >40% yoy). Top-line sales inline; flattish growth largely a base effect. 1Q sales of Rmb1.4bn (down 3% yoy) achieved 20% of our full-year estimates, inline with the historical average of 21%. We believe a slowdown in top-line growth was largely a reflection of high comparison base (1Q16 sales: +51% yoy) especially for its defense business as some rush orders placed towards end-2015 (i.e. the final year of the preceding five-year-plan period) were delivered in 1H16. In addition, a temporary slowdown in China’s NEV sales (due to revised subsidy scheme) might also be a driver for its soft 1Q revenue. Bottom-line slightly ahead of expectation thanks to margin expansion . 1Q Net profit came in at Rmb184mn, up 11% yoy. NP achieved 20% of our full-year estimates, compared to the historical average of 16% in 1Q. The solid profit growth was mainly driven by 1) a 3.6ppt yoy GP margin expansion likely a reflection of favorable product mix and 2) stringent opex control (flattish yoy). Preliminary 1H estimate largely inline; expecting a strong 2H ahead. In the 1Q result announcement, Jonhon gave out its preliminary estimate for 1H NP, which looks for Rmb397-456mn or a 0-15% yoy growth. This would represent 43-49% of our full-year estimate, inline with the historical average of 45% and management’s guidance of a back-end loaded 2017 at our post-annual-result conference call in April. More importantly, as military orders pick up momentum in 2H ahead of the 2018 weapon upcycle while NEV sales gradually recover, earnings growth will likely return to the fast lane in 2H. Our full-year estimate implies NP growth of +39-56% in 2H based on the company’s preliminary 1H NP estimate. Maintaining forecasts and reiterating Buy; risks. We base our TP of Rmb46 on a 2017E P/E of 30x (against an EPS CAGR of c.30% over 2017-19), largely in line with its mid-cycle level and the average of its A-share listed connector peers. Key risks: unexpected delay in military orders and higher-than-expected R&D expenses.

1Q results inline; stronger-than-expected IA growth a key positive surprise. Net profit rose 24% YoY to Rmb172m on a 38% YoY top-line growth. 1Q netprofit achieved 15% of our full-year estimate (vs. historical average of 16%). Asexpected, strong top-line growth was partially offset by surging operatingexpenses (+53% YoY) as Inovance continued to heavily invest in the passengerNEV drive business, which we expect to emerge as a significant growth driverstarting 2018. IA growth beat expectation once again, with new order growthfurther accelerating to +60% YoY in 1Q17 (vs. +33% in 4Q16). This more thanoffset the temporary slowdown in its NEV drive business. IA segment: firing on all cylinders. 1Q revenue growth of +38% YoY came in toward the high-end of thecompany’s preliminary estimate (+25-45% YoY), driven by the IA segment. General IA products (incl. inverter, servo and control): Sales of generalinverter and general servo surged by 76% YoY and 106% YoY in 1Qrespectively, way ahead of the company’s full-year guidance (generalinverter: +30-40% YoY; general servo: >50% YoY) as well as our estimates. Sales of control products (incl. PLC and HMI) also nearly doubled in 1Q. Specialized IA products (incl. elevator drive and PIMM servo): Sales ofintegrated elevator drives were ahead of expectations, up 13% YoY in 1Q. This compares to the company guidance of flat to single-digit growth andour estimate of 0%. PIMM servo also recorded a 13% YoY growth in 1Q. NEV drive: a temporary slowdown; growth to recover ahead. On the other hand, 1Q weakness in NEV drive business (down 38% YoY) islargely expected after the announcement of revised subsidy scheme. Lookingahead, we expect the segment’s sales to recover after the dust settles. On afull-year basis, we are still expecting 30% YoY growth driven by 1) increasingpenetration into non-Yutong NEV bus clients; 2) penetration into Yutong’s NEVmotor supply chain; and 3) rising contribution from logistics NEV. Maintaining Buy; risks. We maintain Buy and our DCF-based target price of Rmb26.5 (WACC: 8% andTGR: 2%). Key downside risks: slower-than-expected NEV growth and IAdemand recovery.

Sustained IA recovery to enhance NT visibility; LT growth drivers emerging. While Inovance's 2016 result (+15% YoY) was a non-event after it announcedpreliminary financials in February, management's comments during the postresultscalls painted a solid 2017 outlook. Strong IA recovery in 2H16 shouldsustain into 2017 as manufacturing upgrades continue to gain momentum. Thecompany sees multiple drivers to facilitate resilient NEV growth in 2017. Itsstrategic positioning in passenger NEV powertrain and vertical integration forIA should strengthen mid-to-long-term growth profile. Maintain Buy. Manufacturing upgrades to drive a sustainable IA recovery. IA growth in 2H16 (+35% YoY vs. +18% in 1H) was better than expected,leading to a 4% top-line beat for 2016. Strong IA demand was also the keydriver behind the 25-45% sales growth guided for 1Q17. More encouragingly,Inovance has confirmed that manufacturing upgrades are gradually gainingmomentum. This, along with continued import substitution, should helpsustain high growth for its IA business. For 2017, the company guidance looksfor IA growth of 30-40% YoY. In the mid-to-long term, management expects itsstrategic positioning in vertical integration (industrial robots and precisionmachinery) to bear fruit, further strengthening its IA growth profile. Multiple drivers to cushion Yutong weakness; passenger NEV on track. While the Yutong part of NEV bus drive business will likely face significantheadwinds ahead, management sees three positive drivers to help sustain 30-50% YoY growth for its NEV segment in 2017: 1) increasing penetration (forauxiliary control products) into non-Yutong NEV bus clients, 2) penetration intoYutong’s NEV motor supply chain and 3) rising contribution from logisticsNEV. Passenger NEV powertrain business is on track and managementexpects it to become a meaningful growth driver starting in 2018. Tweaking earnings estimates and target price while maintaining Buy; risks. We trim our NP estimates by 4% for 2017/18 and introduce 2019 forecasts. Our revised 2017 NP growth (+21%) is in line with the midpoint of companyguidance (+10-30% YoY). We tweak our DCF-based target price (WACC: 8%and TGR: 2%) by 1% to Rmb26.5 and maintain Buy. Downside risks: slowerthan-expected NEV growth and IA demand recovery.

Huge potential for China's NEV market and Inovance is well positioned. We visited major NEV (new energy vehicles) powertrain OEMs in Chinarecently, which strengthened our confidence in Inovance. Most powertrainOEMs are upbeat about China's long-term NEV growth potential, despite shorttermheadwinds. While third-party OEMs and automakers equally share thepowertrain market at the moment, OEMs will likely gradually gain market shareas NEV sales rise. We like Inovance's strategic positioning in the NEVpowertrain market, which we believe will be a major growth driver from 2018. Powertrain OEMs remain positive on China’s NEV market. Most OEMs believe China’s NEV market is intact, despite a subsidy cheatingissue. The fall in NEV subsidies creates short-term headwinds but many view itas a long-term positive that will help accelerate industry consolidation. OEMsfocusing on passenger NEV are more bullish, guiding 70-100% sales growthfor 2017, while commercial NEV-focused OEMs (including Inovance) expect30-50% growth, driven by logistics NEVs. Margins are under downwardpressure in 2017 on ASP cuts (10-20%), but rising economies of scale andproduction process upgrades could potentially mitigate this. External sourcing vs. in-house production. The current market share split is 50%/50%, but third-party OEMs are likely toprevail over automakers, going forward. Automakers’ intention to master thecore technology is obvious but most local NEV automakers are final assemblersthat lack the R&D capability to support in-house production. Moreover, whenproduction volume ramps up significantly, substantial quality risk and costpressure would emerge, which would make in-house production less optimal. By building a world-class supply-chain system, partnering with Brusa tostrengthen its technology in motors and reduction drive, and leveraging on itssharp market insights, Inovance is well positioned for the rising NEV market. Reiterating Buy; risks. We retain our earnings forecasts and our DCF-based target price of Rmb26.8(WACC: 8% and TGR: 2%). We reiterate Buy as Inovance’s medium-term growthoutlook has strengthened with a continuing recovery in China’s IA market and anemerging passenger NEV drive business (c.25% of sales by 2020). Downsiderisks: slower-than-expected NEV growth and an IA demand recovery.

Preliminary 2016 results +60-90% yoy; Buy for strong growth prospects FPI announced, after today’s market close, its preliminary results for 2016. Thecompany expects its net profit to come in the range of Rmb395-469m for 2016(+60-90% yoy), with its mid-point of Rmb432m 6% ahead of our estimate(DBe: Rmb409m). For 4Q on a standalone basis, net profit rose by 56-136%yoy to Rmb143-217m following a 121% yoy jump in 3Q earnings. We believethis strong growth might be driven by continued strong sales forenvironmental monitoring system (EMS) and laboratory equipment. Lookingahead, we expect FPI to register an EPS CAGR of 33% over 2017-18E, withpotential upside coming from environmental PPP projects. Huangshan project in the pocket; PPP projects an emerging growth driver The company announced in mid-November 2016 the signing of Huangshanproject. We estimate the project will likely enhance our current 2017 earningsforecast by 10%. In our recent report dated 10 November 2016, (FocusedPhotonics: A hidden PPP play; raising earnings and target price), we havetaken a deep dive into FPI’s business model for PPP projects and believe itcould potentially drive further upside. We like FPI’s unique positioning inenvironmental PPP projects as it stays selective in terms of project screening,aiming to maximize instrument sales out of these projects. Valuation looks compelling against strong growth; risks The stock now trades at 24/18x P/E on 2017/18E against 33% earnings CAGRin the coming years, the strongest within our China industrial automationspace. Our DCF based target price of Rmb45 assumes a WACC of 8.5% andterminal growth of 2%. Key risks: slower-than-expected growth in the EMSmarket and poor execution of investment

Focused Photonics (FPI) attended our Access China Conference on 9-10 January. We summarize below our key takeaways from investor meetings: Strong growth supported by EMS investment upcycle FPI is bullish on China’s environmental monitoring system (EMS) market and expects rising coverage on monitored pollutant especially VOCs to generate a total market size of Rmb tens of billions during the 13th FYP period. This, along with an expanding monitoring network and stricter emission requirements, may yield a total market size of close to Rmb hundreds of billions over 2016-20. Overall, management expects top-line revenue to grow at a CAGR of 30% in coming years, with upside potential coming from PPP projects. A niche market leader with strong R&D capabilities FPI believes its key competitive advantage lies in its strong R&D capabilities, with its R&D staff accounting for 15-20% of total employees. In many niche instrument segments, FPI is capable of challenging MNCs' market position and leading the import substitution. Management noted that technology for each niche segment within the analytical instrument market is quite different hence horizontal expansion via internal development often requires strong R&D commitment, which takes years. Given the small market size for each niche segment, this nature has led to a very favorable market structure with very few new entrants, which in turn enables existing players to enjoy high profitability. The company is committed to an annual R&D spending of around 10% of total sales. Compared to its local peers, FPI has more diversified coverage in terms of product portfolio and geographic exposure. DB view We retain our positive view on the stock. Within our China industrial automation coverage, we expect FPI to deliver the strong organic growth in the coming years (+43% CAGR over 2016-18). Our DCF-based target price of Rmb45 assumes a WACC or 8.5% and a terminal growth of 2% (reflects long-term horizontal expansion potential). Key risks include slower-than-expected growth for China's EMS market and poor execution of M&A and PPP projects.

Inovance attended our Access China Conference on 9 January. We summarize below our key takeaways from investor meetings: Growth outlook by segment Overall, Inovance expects its top-line growth to remain at 20-30% in thecoming years.Net profit growth will likely come in slower than top-line during2017-18 driven by its committed investment in passenger NEV drive business(Rmb1bn in total). By segment: Inverter: Management expects 40% top-line growth for its general invertersales driven by accelerating market share gains in verticals like aircompressors, air conditioners, packaging and printing, machine tools, etc..。 Servo: Management expects 50% growth in the coming years. For generalservos, Inovance is positive on verticals like 3C, LED, mechanical arms,textile, machine tools, industrial robot in addition to lithium battery. ForPIMM servo, Inovance has managed to significantly outgrow the marketdriven by increasing penetration of its servo motor products and marketshare expansion in Haitian’s supply chain.n。 NEV drive: Following the release of revised NEV subsidy scheme, Inovancehas been in negotiation with Yutong Bus on a potential ASP cut for itsdrive product (up to 25%), which might put pressure on its NEV bus drivebusiness going forward. On the other hand, its passenger NEV drivebusiness is progressing on track with the sales of controller and powertrainproducts likely kicking off in 2017 and 2018 respectively. Logistics NEVdrive is also expected to start contributing in 2017. As a result, thecompany is aiming to grow this segment by 30% in 2017.n。 Industrial robot: Inovance has been actively positioning itself in the SCARArobot segment. With the launch of a precision machinery JV last year, thecompany hopes to make technology breakthroughs in ball screw andspeed reducer to further raise the domestic content of its SCARA robot.。 DB view。 We retain our positive view on the stock and expect Inovance to lead theongoing import substitution in China’s industrial automation market. We arealso constructive on the development of its passenger NEV drive business OurDCF-based target price of Rmb26.8 assumes WACC of 8% and terminalgrowth of 2%. Key risks include slower-than-expected NEV sales in China andnew products development.

Best proxy to China's weapon modernization; civil market to drive re-rating Rising electronic content in modern weapons is a secular trend and makesJonhon our preferred way to invest in the China army modernization theme. Ontop of that, our deep dive into China’s connector market leads us to believeJonhon is well positioned to expand its presence in the civil market. In theabsence of an asset injection story, Jonhon has long been known as a “cheap”outlier in the A-share defense sector, but its successful transformation into aconnector industry leader should help drive a re-rating; reiterating Buy. Defense business to grow at c.2x China’s weapon spending With rising electronic content in modern weapon systems and Jonhon’sincreasing penetration of non-aviation defense markets, we expect thecompany to record a CAGR of 22% for its defense business over 2016-20,nearly double our projected weapon spending growth for China (12% CAGRduring the same period). We also see upside potential from its newly-launchedintegrated product (i.e. aircraft equipment racks). Civil business to post a 26% CAGR vs. 10% for its addressable market China’s civil connector market is big but highly fragmented. Jonhon haspositioned itself in the high-end segment, with a unique focus on harshenvironments, where the competitive landscape is more favorable and importsubstitution potential is substantial. We expect the total size of Jonhon’sfocused civil markets to post a 10% CAGR to reach Rmb64bn by 2020. With astrong pipeline of new products and accelerating import substitution, weproject a 26% CAGR for its civil sales over 2016-20, accounting for c.50% oftotal by 2020 vs. 45% in 2015. Strong gov’t support, new capacity rollout andits management incentive scheme should facilitate civil market penetration. Reiterating Buy and target price of Rmb50; risks We make minor changes to our earnings forecasts. Our target price remains atRmb50, which is based on a 2017 P/E of 30x (vs. c.30% EPS CAGR over 2017-18E), largely in line with its historical mid-cycle level and the average of itsA-share listed connector peers. Key risks include an unexpected decrease inChina’s military spending and slower-than-expected civil market penetration.