Deutsche Bank highlights equipment manufacture and supply as keys to China’s IM future

But latest report also warns development of the domestic intelligent manufacturing sector is still well behind global rivals

PUBLISHED : Wednesday, 13 July, 2016, 5:49pm
UPDATED : Wednesday, 13 July, 2016, 10:20pm

China’s rapid development of intelligent manufacturing (IM) presents attractive investment opportunities, according to a new report from Deutsche Bank.

But those will only be realised, if the country urgently addresses key issues within the industry, and further promotes the sector, which the report warns is under-explored and still well behind the development stage of global leaders.

IM refers to advanced manufacturing systems and business modes that possess self sensing, intelligent optimisation, and accurate control and execution functions.

The Deutsche study suggests, for instance, that China’s levels of numerical control penetration and industrial robot adoption are still 30 years, and 25 years, respectively, behind Japan.

This explains why Chinese manufacturers have been struggling with lower efficiency and quality, the study said.

IM equipment offers imminent investment opportunities and this market can grow by 17 per cent annually over the next five years
Sky Hong, a research analyst at Deutsche Bank

And with manufacturing costs such as labour continuing to creep up, China’s lower-cost model has also become increasingly unsustainable.

The study concludes that China is only half-way through its Industry 3.0 stage of development, which features industrial automation, while the global manufacturing sector has stepped into Industry 4.0, which features cyber-physical-system integration.

And that current status will make it even less competitive during the Industry 4.0 stage, the report added.

The Chinese government has prioritised creating the right environment for technology innovation in recent years, by providing more financial and fiscal support.

It released its “Made in China – 2025” plan in May last year, which heavily pushes the IM theme within an overall blueprint to transform the manufacturing sector towards higher value-added development.

Sky Hong, a research analyst at Deutsche Bank, said the government’s intention is clear: that by promoting IM, China is striving to close the gap during Industry 3.0, while hoping to stay competitive in the upcoming Industry 4.0 stage.

But Hong says the priority should lie in the development of IM equipment manufacture and supply, which can serve as its base and which if successfully promoted, could be worth 1.9 trillion yuan by 2020.

“IM equipment offers imminent investment opportunities and this market can grow by 17 per cent annually over the next five years,” added Hong in the report.

Amid the potentially huge growth of the IM sector, Deutsche Bank is now tipping three Chinese firms, US-listed Hollysys Automation Technologies, Shenzhen Inovance Technology and Focused Photonics, as showing the strongest potential.

Hong described Hollysys, a leading provider of automation and control technologies and applications in China, as its top pick after the company underperformedthe Nasdaq 100 by 22 per cent in the past year.

With its valuation hitting a three-year trough, Hong believes the market has overlooked its rising levels of after-sales services and new product launches.

Deutsche Bank also favours Shenzhen Inovance, which focuses on R&D, manufacture and sales of industrial automation control products, for its wide product coverage compared with its industry peers, which is said makes the firm an ideal player to be used as an model example of China’s growing global IM presence.

“We have a positive view of its penetration into the industrial robot supply chain via the company’s core component strategy, and think it holds great potential to succeed,” said Hong in the report.

Focused Photonics, one of the country’s leading analytical instrument providers, is also recommended, with Hong noting the company is well positioned to reap the benefits of rising levels of capital expenditure associated with China’s environmental monitoring market.

“As the largest downstream application of analytical instruments in China, the environmental monitoring market accounted for half of Focused Photonics ’s earnings,” said Hong in his report. “With the widest product coverage, the company is well positioned to ride China’s environmental monitoring investment upcycle, which in our view is being driven by further penetration of the monitoring network and stricter regulations.”

However, Deutsche Bank warned, too, of the potential risks involved in the sector, including “an unexpected slowdown in China’s economic activities” and “slower-than-expected manufacturing upgrades”.

The recommended companies also have their potential downside risks, namely slower-than-expected development of new products and market penetration, or if they choose poor merger or acquisition targets.