Kstar:Access China conference highlights

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,

    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

    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.