Kaishan Compressor:From “Made in China” to “Created in China
Investment positives Zhejiang Kaishan Compressor is a leading domestic screw aircompressor manufacturer. We believe it will leverage its growingR&D strength to extend its screw profile technology advantagesacross multiple sectors to become a world-class, integrated solutionsprovider specializing in energy conservation, environmentalprotection and compressor technology. Screw expanders to see strong growth: Against the backdrop of theChinese government’s drive to save energy and reduce emissions, andbusinesses’ need to cut costs and improve energy efficiency, screwexpanders have bright prospects as they can effectively deal with thetechnological issue of low-grade waste energy (heat/pressure)recovery which has not been satisfactorily addressed by traditionalmethods (i.e., waste heat boilers + steam turbines). Breakthroughs likely in gas compressor and refrigerationequipment: We believe Kaishan can also extend its competitiveadvantage in screw profile technology to the gas compressor andrefrigeration fields. More upside potential for Kaishan’s screw air compressor: Whilethe air compressor industry is in a downturn in China, Kaishan stillhas growth potential in this traditional principal business thanks to itsexposure to high-end models and overseas markets. Financials We expect EPS to grow 33.0% YoY to Rmb0.92 for 2013, 50.2%YoY to Rmb1.38 for 2014, and 30.2% YoY to Rmb1.79 for 2015. Valuation and recommendation The stock is trading at 38.3x 2013e P/E, 25.5x 2014e P/E, and19.6x 2015e P/E. We believe it warrants a valuation premium as thecompany is likely to see wide application of its core technologies inmore new fields and its products are environmentally friendly. Therobust growth in orders for new products such as screw compressorsand potential M&A in the medium/long-term are likely to be positiveshare price catalysts. Initiate with BUY. Risks Air compressor market volatility; slow marketing of new technology;capital constraints of EMC business model.