Shenzhen Inovance Technology Co Ltd Q3-2024 Earnings Call

Operator

Hello everyone. Welcome to attend the Inovance 2024 Q3 results announcement. Everyone is mute. Please allow me to make the announcement. Now we are inviting the investors. The meeting conference is for reference only, cannot be terminated publicly. Without the authorization, the media is not allowed to do any determination. And without the authorization, the dissemination is an infringement of the right, and we have the responsibility to call your duty. And also, we are not responsible for any losses because of this dissemination of the message. Please be careful for the investment decision.

Before the start, we would like to remind everyone that we are going to have Q&A when we have the presentation finished. Please allow me to introduce the leader. The Vice President, Mr. [indiscernible], and Board Secretary. And now we're going to give the floor to Mr. [indiscernible] to give you the announcement and presentation.

J

Jun En Song

executive

Thank you very much, everyone. Welcome, everyone, to attend the 2024 Q3 results announcement from Inovance. What's happening is that normally, I'm going to give you an introduction about the performance of the top 3 quarters. And then Q&A after that.

Before introducing the business, we had a prelog and I think that there are several key words that are very important. The first is risks and opportunities. Second is tactics and strategies and further more transformation actions. In terms of the risks and opportunities, everybody knows about that. At the current stage, for Inovance Technology, we have 3 major businesses. New energy vehicle, this particular industry is at a very fast growth track so that our new energy vehicle business is keeping a very good growth as well. For the elevator and lift and also the industrial automation, of course, due to the impact of the industrial downgrade and downward trend, we had a decline of the business growth.

For the whole internal environment or I mean external environment, there are risks in front of us. As everybody knows, through the macroeconomic data, but you can see that the overall kind of demand from the other sectors to industrial automation is declining. There are several reasons. First is for the natural automation as a big segment. We had 2 new energies, if battery and also solar industry, we had a sharp drop of the demand from these 2 industries. And second of all, for the rest of the other manufacturing industries like assets and also the traditional manufacturing industry customers. Actually, the demands are quite weak as well. So that the different downstream industries of the industrial automation has reduced their demands, which were impacting also the business of our business.

Of course, as a company, be it how risky the external environment is, we are have to focus on our own business. Of course, now we do have this particular risk. However, I believe that there are still opportunities in the near future and also in the medium and long term as well. For the short-term opportunities, we can talk about several things. The first is that in the short term, the overseas development and also globalization is a very good opportunity for Chinese companies. And also Belt-Road initiative in China has been bringing with us a lot of projects.

I believe that in the short period of time, this is also going to have a very good boost of the demand of the order in China. So we have the grasp that opportunity.

Second point, I would like to say is that there is actually a program about the equipment facility upgrade and transformation. As for some of the companies in Q4 and also next year, they will be bringing with us a lot of incremental business. So the equipment-related upgrade and also replacement is going to be very important to us. And especially for domestic brands, this is going to be boosting their demands of our business.

And third point, everybody knows that for industrial automation, there are a lot of downstream customers and application scenarios. We have been making statistics for the industries that we are managing. Of course, for each and every downstream, there is a little bit slowing down of their growth, but still for some of the other segmented markets. And under each and every industry, there are opportunities for further growth. And we do actually catch some of the structured opportunities from January to September.

For the Industrial Automation business, we had about 4% of the growth overall speaking. And also for those downstream industries that had over 20% of the growth, we had about 20 of them in downstream, meaning that they had about 20% growth in terms of their order demand. So from this standpoint, I do believe that there are lots of structured opportunities across the different downstream industries.

So we do see a lot of opportunities because of how to roll initiative and also globalization opportunities or the opportunities are from the needs to replace or upgrade their existing facilities and equipment. And also, we do have a lot of other incremental structured opportunities in different other segmented markets. This is something about the short term.

Let me be quite brief on the short-term strategy. I mean, long-term and medium strategies and also opportunities for the automated production lines and also digitization. I believe that this is also going to bring with us a long-term driving forces for the growth. So this is pretty much about the interpretation of the words, risks and opportunities. So we are pretty much focused on the intermediate to long term.

Second point, tactics and strategy. So while we are having both risks and opportunities in front of us for our company, what kind of choices where we made in terms of our tactics and strategy. We are talking about tactics versus strategy. Let's talk about strategy first. We know that for the Industrial Automation as a segment. We do have a lot of sub businesses like server PLC or driver. We do have a lot of different products in this big category, while the external environment is not friendly towards us, in terms of the strategic direction and also the strategic products, we started to implement some of the strategies we had meetings and conferences before.

In terms of the medium-sized one and also for the products with a relatively lower gross margin, definitively speaking, we had some of the strategies over those products, by actually having less focus on those products with medium to low gross margin because we still need to have more focus on those higher profitable products. So for instance, we do have lots of future directions. And we do believe that there are a lot of potential ahead of us. What's been lacking is that how we are able to implement seriously those strategies and making those segments bigger.

Now we do have 3 pillar businesses under the Industry Automation, the drivers business, PLC business, which is for general automation. And then the second one is the New Energy vehicle we do have actually the battery and power products. And third is the integration of the smart elevation, I mean, elevator and lift products. So this is actually some of the businesses that we had that believes to be very much potential and also in Inovance, we have been coming out with a lot of strategic business products. and call it the products or the strategic products.

So for instance, industrial robots, we know that at the current stage, it's the total value is less than CNY 1 billion for the total size of the industrial robots, while we're having better intelligence for the industrial robots or robots as a whole. There is going to be a big room for improvement. Currently, this size is less than CNY 1 billion. And I believe that this size is able to be enlarged in the future. So the industrial robot is actually a strategic supportive policy, I mean, business.

And also the electric drivers or electric motor with higher performance, how that we are able to make the best use of this to have the electromotor or motor plus business. For some of the higher performance driver motor, we want to make this bigger. And this is going to be a big and potential market with our laser focus and also, we have a lot of potential as feed business like vision, like sensor, pneumatics and also automation and energy storage, for instance.

So for digitization, we don't really know how large the market is going to become. But for the rest of the others, it's over tens of billions. So how that we are able to have a laser focus for our R&D capabilities and to make these businesses even bigger and then making them, becoming the pillar industries in the future. this is going to be something that we have to consider.

So second point is that we have to have tactics and strategies with a lot of focus and defocus at the same time. So we have some of the trade-offs that we made and focus on the pillar business and also the potential business, making them receiving an tensions.

Third pair of the words is transformation and actions. What we are really good at is adapt ourselves with the change in environment outside and then we are having a lot of organizational restructuring. So that to say that the organizational structure is there to be adapted to the different efficiency of different businesses. as everybody knows, that the 2 major units, one is marketing and the other is product and R&D.

Actually, this year, there is a big shift -- last year, we had also different zones and also -- at the same time, we are focusing more on the establishment of the new products. For instance, especially for some of the new products, we have established a designated team to do sales. And also, we had an operation of the industrial plus so that we are able to have a lot of products with the tailor-made nature to come up with more competitive solutions. So this is the organizational structure that we have established. And also what's been not that well doing is actually a scattered market which means that we have focused on the particular establishments of the channel and also, you know that we are pretty much focusing on developing the discrete markets.

So that is to say that on top of that, on top of the region-based nodes. We have moats. We have also some of the other changes of a lot of different strategies, achieving the fast growth in Industry Automation SBU and Advanced manufacturing SBU and higher manufacturing SBU. So on top of that, we have already realized this. And the basic logic is that Previously, we were operated based on the product line. And at the current stage around this, we have been adjusting this to a solution-based operation manner in order to be adapted to the solution demand from a market. This is a big change for us. We've been already starting to do this. And then I believe that actually we're going to start the organization restructuring that is driven and centered around the most needed solution.

And also just now, we were talking about some of the potential and seeding businesses. And then we're making sure that they're enjoying a very high growth and also to having a breakthrough of the existing organizational structure or establish a designated team or department, so that's to say that we had a lot of restructuring going on in order to be adapted in the external environment, which is changing and also adapted to the change in strategic businesses. And also another thing that we're focusing on is action, which is that we're going to be focusing on the implementation of our different strategies.

For instance, the BP plan should be implemented and enforced this year. So by analyzing those things on this particular slide, with the keywords. We have been already telling everybody that we do have some of the changes in terms of our management style and also strategies that we have implemented. Now please allow me to have an overview of the business performance from the top 9 months, CNY 25.4 billion of the operating revenue increasing by 26% and so from a business increase standpoint, it was pretty good, benefited by the high growth of the New Energy vehicle segment pretty much offsetting the decrease of the traditional vehicle business and also offsetting the slight growth of the General Automation business segment.

So overall business on the overall point, the operating revenue was pretty good. Second one is net income attribute to shareholders, CNY 3.35 billion, increasing by only 1%. And so for the net income attribute to the shareholders, the growth rate is lower than the operating revenue because of 3 reasons. The first is that in terms of the comprehensive gross margin for all the products that we had, this was reducing actually in the past 3 quarters. But of course, the major reason for this to be going down was because that we had a higher contribution to the revenue from the New Energy vehicle business. So the overall gross margin actually reduced for all the businesses. And this was the first reason of having a lower growth for the net income to to shareholders.

And also, we knew the second point was that the capital market wasn't quite good. So the fair value of some of the equity-related investment projects and especially 2 IPOs. We had a fair value change and that had an impact to the split figure in the middle. I think that last year, we had about the impact of the profit of almost CNY 100 million to CNY 200 million because of that. So that was because of the changing of the return on investment and also the reduction of the fair value.

And the third one was because of the income tax. And you can see that the income tax increased a lot, which had around the impact of around $160 million to $170 million units, I mean, million profit. So first of all, we have about 10% of the annual income tax, and this is influential and impactful. So this is the reason why we had a way lower growth of the net income attributed to shareholders than that of the operating revenue. And third of all, we had the wholesale impact. for net profit attributable to shareholders after deducting noncurrent profit and loss of CNY 3.13 million, increasing by 3%. Net operating cash flow was pretty good, CNY 3.9 billion. pretty much higher than that of net income attributable to shareholders. So overall speaking, the operating cash flow was pretty good, increasing by 166% year-on-year gross margin, we had about 4.8 percentage points of decreasing year-on-year, and now it's 31.2%.

For the gross margin, we had 2 reasons of having this slight decline. One of the reasons was because that the -- our automation business. I mean automobile business actually had a low gross margin. So the overall comprehensive gross margin was lower Second reason, as we all know, that the industry demand was pretty much decreasing, and we had a lot of a price war going on in the downstream, so most of the prices of our products actually decreased. But on the overall basis, for the 3 major products of the general automation. The PLC and several frequency and inverter, so pretty good for the top 9 months. The gross margin of the 3 products actually reduced by no more than 1% and the increase in the gross margin for PLC actually for the past 3 quarters.

So we had a very good business performance. But of course, we do have a lot of other products of general automation [indiscernible]. So still, we have also the reason of the restructuring of our products in the general automation so that there is about 1% gross margin dropped because of that. And in terms of the expenses of these 3 1, actually, we have a very good control of the expenses. The selling administrative and R&D expenses are actually controlled actually at general term, we had about expense ratio of 18.2%, increasing by 13% and R&D investment, CNY 2.2 billion and expense ratio, 8.7%. So while finishing the financial figures, that's actually giving you an overview of the businesses of different segments. The first one is the industry automation, including robots and inverter, the robot and serve, we call it 4 core products in the future. the overall kind of revenue, CNY 10.9 billion, accounting for 4% of the overall business, increasing by 4% and accounting for 43% of our revenue. and CNY 10.4 billion, increasing 6% for new energy vehicle, then this has contributed to above 41% to our overall revenue, so that we had a big increase of these particular businesses.

And on one hand, this was quite contributed, right, to our revenue. And second of all, of course, this is driving down the comprehensive gross margin of our business as a whole. Third is intelligent elevator, CNY 3.6 billion of the revenue, decreasing year-on-year by 6%, and the contribution to our revenue is actually reducing. Rail transit, quite small, CNY 340 million.

For the industrial automation, as we have already said, that the major kind of strategy is region based mode and to lines. And also, we have also the strategy of merging into top markets and developing this great markets for the top customers, the most effective way to actually talk to them and sell the products to them is to sell the targeted antidote products. so that we have our solution center and also we have to have industrial line and region-based mode to have a full integration.

So better design the products and the relevant solutions and provide this and deliver this to the customers in the top market. And of course, if we are talking about the penetrating into the deeper markets, we should really now focus on the discrete markets. For instance, some of our dealership stores, helping us to deliver the technology and service to their customers. And this is actually quite effective comprehensively speaking from January to September for some of the big SBUs of the industry automation have been adjusted.

The first is the comprehensive SBU. And also, we have the fast growth with Industry Automation SBU and advanced manufacturing SBU. The GSBU had actually a big drop. This is the only exception. Second one, I want to share some of the colors on the New Energy vehicle business. First of all, we have been seeing a scale effect or economy of scale already. And the profitability is improving with the total revenue of about CNY 10.4 billion and second, improve the natural positioning and enhance our branding several years ago, if we actually went to some of the OEMs of passenger vehicles, people actually care about the other brands, but we have been confirming our positioning in this industry.

And also in terms of the diversification strategy, we have the different scope of application like BAF, plug-in range expanded and also the others, right? We have a lot of diversities. The fourth is designated projects. And now we do have more [indiscernible] products with designated products from January to September in 2024. And also now we are developing the fifth generation platform, including the electric drive drivetrain and also electric motor as well. or intelligent elevator. This has been impacted by the less an ideal development of the property and real estate industry. We do actually see a decrease of the demand of the whole elevator, in the aftersales service market, it is actually difficult for us to offset the loss that we had in the past. So we had about 6% of the revenue decrease for the segment, but of course, performing better than the under [indiscernible]. So there is a sort of growth in the sales revenue of elevator electric accessories.

And also second point is that there is a fast growth in the aftersales service market. as everybody knows that we do have a renovation project of the obsolete and old elevators. And there are a lot of needs and demands there. There is a good growth enough to sell service market, but this is difficult to offset the impact that we had from the real estate industry because of less sales of the new elevators. And third of all, we're talking about globalization, gaining orders from the global giants.

Last not least, let's talk about the globalization and global location. So we had about CNY 1.5 billion of revenue, increasing by 20%. There are several opportunities. First is that newly incoming markets, Europe and America with established office and warehouse centers in the United States with product base on the preparation Indeed, for some of the super giant customers they do actually have a lot of requirements in North America, bets the customers from the elevator standpoint or from the industrial automation, really required us to have the office warehouse center established there locally in the U.S. And they have a strong willingness to do so to asking us to do so. So that's why we have been establishing the offices and warehouse centers there in the U.S.

Second, in Europe, especially for some of the key accounts, we have been making a lot of progress -- and with those in neutral lines, for instance, air compressor, injection motor machine, air conditioning, it in battery makers and engineering machinery companies, we established strategic collaborations with most of them and started a batch shipment.

For non-Europe and American markets, APAC, Middle East, our focus. And also, we are expanding into South American markets with new 4 distributors added and also in terms of the inverter PLC and server while we are actually selling these products, we are also expanding ourselves to robotic products. And there is breakthrough in South Korea, Vietnam and India. All right. So this is pretty much about the overview of the 4 businesses for the outlook of 2024 on in one slide, quite straightforward. This is our target that we set up at the beginning of the year without any changes now from the operating and a revenue standpoint, should be no problem of achieving this, but net income attributable to shareholders, we have a big stress now, but we are not changing the guidance that we provided at the beginning of the year, still. All right. So very briefly give you an overview of our performance from January to September. Now I'm going to open the question to the floor. Thank you.

Operator

[Operator Instructions] Now let's give the floor to the very first investor and please identify yourself. Thank you.

U

Unknown Analyst

So I'm from Goldman Sachs. My name is [indiscernible], the analyst of Industrial segment. So I have 3 questions. The first is that I would like to know that we had actually the gross margin, especially for the industry term automation had about 1% decrease year-on-year. We would like to know what is the overall trend in Q3 and the rest of the year.

My second question is that for the globalization business and also the overseas business percentage against the total for the 3 major business segments, any improvements versus the first half of the year in Q3. And also, can you share with us some of the risks and opportunities that you have encountered?

The third question is that with regards to the potential seating products, I mean, the businesses like robot the big 6-axis products are able to have a very good growth in Q3. So we would like to know that do you think there is a tipping point already realized with regards to this big 6-axis robot?

J

Jun En Song

executive

All right. So thank you very much for this question. First one is about the 1% year-on-year decrease for the gross margin of Industry Automation in Q3. So I would like to know the reasons behind. As I have already said just now, for the industrial automation, we do have a lot of businesses, right, apart from the key 3 products. We have industrial robots and also the precision drivetrain and also the driver motors, et cetera. So actually, from the key 3 products, the gross margin is pretty good actually. Actually, we have seen and experienced a little bit decreased, but primarily because of the product structures. Throw, for instance, for the 6 axis or joints in this robot, the gross margin was lower.

And also for the driver electromotor definitely speaking, the gross margin is lower than of the PLC or server products, so because of this particular kind of final impacts we had an overall decline of the gross margin by about 1.7%. So pretty much about the gross margin from Q3. Talking about the overseas market at the current stage, they are enjoying higher growth than of China market. But still, I think that we only had about 20% of the growth rate in the overseas markets. But in Q3 alone, we had about close to 30% of the growth in the overseas markets. Automotive business is actually quite performing with about 40% to 50% of the growth.

Second is automation with about 30% to 40% of the growth and the elevator is a bit weaker. Only in joining 10 or so or less than 20% of the overall growth in overseas markets. But of course, the elevator in terms of the total business volume is the biggest. This is pretty much about the 3 business segments in overseas. And third of all, the big 6 axis industrial robot, we don't call it actually seating product, our potential product, but this is a strategic supportive and pillar industry.

In Q3, as you are saying whether or not we do see an improvement of the sales of the robots with the 6 joints. We don't have that particular figure. But for this large-sized 6-axis robot, they're starting to picking up the momentum. I know that this product has been launched just now, not long ago, and we have about several thousand units of the sales of the robots with the 6 joints axis. For the large size, it's around 1,000 almost robots sold. So I might think that this is pretty much good in terms of the overall growth. But we don't really know that in this particular industry in Q3, we're going to have a big momentum picking up.

Operator

Now give the floor to the next investor, please identify yourself before.

U

Unknown Analyst

I'm [indiscernible] Machinery. I have a question. So first is that it's almost the end of October. So we would like to know what do you think about the order income situation in October breakdown by industries.

J

Jun En Song

executive

All right. So October, this is not ending, still 3 to 4 -- sorry, yes, 3 days to go. We don't have -- because we don't have the performance or statistics of today. So I can only give you a key and a brief summary. You all know that in Q3, most of the orders are focusing on industrial automation. For the industrial automation, in July to September, we had a little bit of decline year-on-year on the order income. October, wise, we believe that there is going to be a positive growth for the order income. Excluding the impact of lithium battery and server, we will have a higher growth. But still, we have to wait for the final last figure.

This is the prediction that we are able to make. So there will be a positive growth for the order income situation in October. But in terms of the downstream industries, we don't have the figures right now. But overall speaking, for the process automation might be better, and electrification of the industry machinery could be better or ESS will be better.

And also the other consumer electronics, except for the mobile phones, is better, but we don't have a finalized figures yet, so we have to still wait .

U

Unknown Analyst

My second question is that for the lithium battery and solar industry, I mean we had driven down the overall base number. So how do you think about the growth of PLC and servo and also get the businesses I think that servo and PLC as businesses have been impacted the most because of less growth of the solar industry. Anything about this.

J

Jun En Song

executive

All right. So actually, in Q4, we had a lower base number for the lithium battery and solar business or industry. So because of a lower base number, we had less impact from these 2 industries, of course. For lithium battery, we had a slight recovery more overseas projects or consumer electronics battery projects are becoming more, but we now see a recovery from the solar industry, at least from now in Q4 because of the lower base number, the impact has becoming less, but that is also going to be positively contribute to our growth of the Industrial Automation business in Q4, but actually, it is difficult for me to have a very precise prediction.

U

Unknown Analyst

Okay. So my next question is about the industrial robots. We all know that we have been keeping a very good growth of this business in the past. But in Q3, you are slowing down your growth rate. So the question is about the future potential of the growth further. And the next one is about the profitability. As you are saying that we do have some of the incoming like in the robot and also the high-performance electric motor as the potential supported products. So do you believe that the gross margin for these new coming industries or products are going to be as good as the existing ones. How do you think about the profitability?

J

Jun En Song

executive

All right. So for robots in Q3, the major area that we are covering is the mobile phones, for instance, and consumer electronics, lithium battery, automotive and also some of the sales due to the region-based mode a PAN 3C industry is actually the industry that we have the most robots too. So most of the projects of this kind happened in this first half of the year, that's why we have a slow growth rate in Q3. And that is actually because of the features and the economic nature of the robot industry.

So we do see a lot of the impact from the different allocations through the whole year of the project implementation. But on the overall basis, the robot business is actually growing at a much better pace higher than that of the industrial automation. And we are saying that this is actually going to become a pillar industry in the future in terms of the industrial robot. So definitely speaking, we're going to have more strategic resources invested and making sure that the robot is going to be a very supportive industry to our real business.

Right. So just now you're saying about the gross margin of the high-performance electromotor and this robot, talking about the comprehensive gross margin is lower than the inverter, PLC and servo products and larger the product is -- larger the robot is the cost is going to be higher.

High-performance electric motor, it's good in terms of the gross margin, but comparing with that of the PLC and servo still relatively lower. This is the status quo However, the business size of these ones are pretty big and large. So we are able to lower down the management fee by enlarging the scale. And then the robot is having a very good profit and pretty profitable.

U

Unknown Analyst

All right. Let's have a very quick question. At last about the New energy Vehicle business. In Q4 of last year, we we had a very high base of incoming revenue. How do you think about the revenue in Q4?

J

Jun En Song

executive

All right. So as for the vehicle business, everybody knows that the Q4 in every year is the peak season for the sales of the vehicles of any kind -- so the first, this is going to be the same situation this year. Overall speaking, the revenue from the end vehicle business, CNY 14 billion to CNY 15 billion, pretty assumable. So there will be a very good growth in Q4 for this type of business for sure.

From a profitability standpoint, because of the larger scale, of course, the gross margins still relatively lower. And we all know that there is a severe competition going on in the automotive industry and the prices are actually pressed down continuously. So there is actually a big pressure on the gross margin. But still, we can improve our efficiency. So on the overall basis, the profitability is getting better.

Operator

Now let's give the floor to the next participant, and please identify yourself first.

U

Unknown Analyst

This is [ Tuja Yang ] from UBS. So my question is about, first of all, in Q3, the gross margin quarter-by-quarter was quite stable. So quarter-by-quarter, do you think that the gross margin of the automation business has been improved?

J

Jun En Song

executive

All right. So Q-by-Q, quarter-by-quarter, got [indiscernible] wise. For automation, I don't think that this is changing in March, pretty much flat versus that of last quarter, right? If you compare Q3 with Q2 pretty much flat comprehensively. The gross margin increased slightly actually. But I'm not analyzing the reasons probably due to product structure. But for the industrial automation, if you're comparing the gross margin of Q3 versus that of Q2, pretty much flat, all right.

U

Unknown Analyst

But was it because of a better performance of elevator business?

J

Jun En Song

executive

All right. I don't think so. Yes, pretty similar. I don't know the reason probably because of a change in product structure, I am not researching on the reasons yet.

U

Unknown Analyst

All right. Understood. My second question is that -- for the automation, how do you think about the policy stimulating the equipment change and the replacement and update?

J

Jun En Song

executive

All right. So yes, there are actually not 2 kinds of the policies. First is the subsidies of CNY 300 billion. And second one is the policy targeting SOEs and central companies managed by the state council directly in Q4. I think now we are able to see the equipment replacement and update from a yield market.

And next year, I think that it is going to be implemented pretty much. We are talking about heavy industry and there might be equipment replaced. And in Q4, we're going to see some of the project-based order that flowed into our report, right? So whether this has been done in October already, partially. all right. To be honest, we don't have this clear figure yet because EO is pretty much project-based. But in Q4 and also next year, definitely speaking, we're going to see the implementation of these projects. But whether that already happened in October, I can't answer that.

U

Unknown Analyst

All right. My third question is that about the globalization. You're saying that you're going to be focusing on the positioning in North America. So do you have a priority in place about the different overseas markets?

J

Jun En Song

executive

All right. So in terms of the priorities of the order attraction, non-European and American markets should be very good, and APAC and Middle East should be prioritized to attract their income, I mean, attract their order because the entry level and barrier is not high. We're able to cover these markets from the products from China. From a strategic positioning in the longer term, definitely speaking, European and American markets are actually higher end market in terms of the high-end manufacturing. So European American, especially Europe, is going to be our focus.

In the U.S. or North America, we are pretty much passive because we do have a lot of key accounts of our industries and had the demand. So they're asking us there to establish the facilities there.

Operator

And now we have the participants. Next one, and please identify yourself before.

U

Unknown Analyst

This is [indiscernible] Machinery. I have the first question, which is that in Q3, the downstream industry's structure for the industrial automation, can you actually tell us for instance, new energy and renewable energies or process automation. What about the mix of different industries, downstream?

J

Jun En Song

executive

All right. So the answer is that we do have a lot of different industries downstream, and the management definitions are changing. But for the year of last, we had a SBUs. But now this year, we have 3 SBUs plus a comprehensive one. So only 4 units now have been operated. So there's a big change.

And also, what I'm going to say is -- so for the advanced SBU, the pretty much at SBU and also a comprehensive view, which is pretty much dependent on the distributors to sell. So the most important thing is that advanced SBU with the machine tools and also the assets and batteries and semiconductor, for instance, these are very important. So this accounts for about 30-plus percent.

And second one is the high end. There are a lot of high-end industries, now textiles, aircon press, injection auto machines, air cooling, et cetera. and also the automation electrification of industrial machineries, et cetera, accounting for less than 30%, should be about 27%, 28%. And that one is the Energy, PV, solar, wind and ESS. So this is pretty much about the Pan-energy segment. with about 27% to 20% of the percentage against it, lithium battery and wind solar. In last year, just now we're talking about percentage against the total order of initial automation. So last year, the lithium battery and solar wind accounted for about 20% against the total order of the industrial Automation segment, but now it's less than 10% or around 10% or so from the standpoint of order income situation.

U

Unknown Analyst

my second question is that not long ago. We've been saying that the United Power [indiscernible] plant has already started the construction. We would like to understand that what is the structure now and now you can see that the overall operating revenue is about CNY 300 billion, as you have planned. So pretty actually big. We would like to understand the cycle and pace. So I think that we have 5 years of different phases.

For the first phase, the total kind of value is about CNY 5 billion in terms of investment funds, we're going to have CNY 1 billion of investment for the first phase, but this is subject to the order income from our customers. And we announced that we're going to be having 5 phases for the establishments and construction. We're going to start the first phase this year, with about 1 point something billion as upfront investment.

All right. So we would like to ask the question about the automation.

J

Jun En Song

executive

You know that at the current stage, the net income, I mean, the net profit is pretty good. So we'd like to understand that know-how that we are able to make sure that our net profit is better than our peers and how to make it sustainable. And the price has been pressed, so still rely on some of the internal policies like the sales and also, we are actually still focusing on the R&D expenditures reduced from 20% against revenue to about 10% or so. Because -- and we focus on the excellent products and projects from excellent customers and also the expense ratio from R&D is also reducing. And these are some of the methods that we had.

U

Unknown Analyst

All right. And the last tiny question is that for the industrial automation, you had an outlook for Q4. But now, how do you think about your overall performance next year? How do you predict that?

J

Jun En Song

executive

Actually, it's difficult for me to answer this question. If you're talking about the trend of next year, I think that is going to be better than this year. For instance, equipment upgrade. -- and the replacement -- and also, we do see a lot of policies that are going to be implemented by the government next year. So on a prediction base next year is going to be better than that of this year.

And also from the budget standpoint of STPP definitely speaking, this is not confirmed, but definitely speaking, we're going to have a strategic meeting very soon. So definitely speaking, we're going to be outperforming the rest of the industry. We're going to give you a stretched target.

Operator

So next, let's have the next participant, and please identify yourself.

U

Unknown Analyst

This is [indiscernible] Securities. I have one question only, which is about the industrial control. So you can see that we had about decline of the revenue of about 8.8%. And for this industrial control. As you are saying that, actually, the industrial control industry was quite stable, as you have already stated. So do you think that, that was due to the decline of the order income situation.

And also my second question is that in the second half of the year, what kind of industries have declined or reduced their overall demand?

J

Jun En Song

executive

All right. So as I have already said that in Q3, the order income situation dropped year-on-year, year-by-year. In terms of order income for the segment, several reasons. First step for new energy and solar and wind, for instance, had a big decline of their order placements. -- actually, the gross margin of our products in these 2 segments because we have a lot of large accounts. So actually, the gross margin should be lower than the rest of the other segments.

And second point, we have a fluctuation for some of the other traditional segments. And definitely speaking, their growth rate has been slowing down. So that's why we had a decline of the order income situation. And of course, that was impacting the overall income we had in Q3.

Operator

Next, telephone number ending with 593. Please ask your question and state your name and company first.

U

Unknown Analyst

I am from [indiscernible] Investments. And I have several questions. One, regarding general automation. He said that in that part, there had been some splitting in different SPOs. So what about the energy SPO in the current new categorization of your businesses, what type of customer industries have you included? And in the first 3 quarters of this year, what are the progress of energy storage-related business? And what was the gross margin for that?

J

Jun En Song

executive

Well, thank you for that question. Our internal general departments and business group's adjustment. Previously, we had only a few sectors included in the energy sectors, just PV, lithium-ion batteries, et cetera, but now others like minerals, mining, and other process industries are included into the new category. That's why we renamed it. So quite a few sectors have been added into it, and it's hard to compare the numbers with the past. And as for the most specific sector, you asked about energy storage, well, our performance in the first half wasn't so good, only 30% growth because of the competitive landscape and the low gross margin.

U

Unknown Analyst

Okay. And my second question goes to elevators. I see some pressure there with your revenue from elevator business in the third quarter. So could you help us to break it down between base and the integrated advancers progress in this year? And what about your overseas business next year outlook? Will that help to compensate the current pressure we have?

J

Jun En Song

executive

Well, we don't have that kind of number to exactly answer your question yet because right now, our sales system is integrated. And from our sales Palmer, the base and the non-based elevator cells are integrated together. I cannot tell you that specific number and as for domestic sales and you asked about our overseas growth projected next year, well, our overseas business, some of those are operated with the help of traders from within domestic markets.

So financially speaking, the business, even though we operate it overseas, but actually, it's calculated within our domestic business because we sell to our traders and who sell to overseas markets. So it's a little bit chaotic. So let me just refer to the official report caliber. Well, so if those domestic traders who export to overseas are included then the overall growth in overseas market with elevator business is above 10% faster than domestic market.

Domestic market business is really under some pressure. And as you have asked, how are we going to compensate for the pressure we have with elevator revenues? Well, on one hand, we are going to further proceed with business development in overseas, including key accounts and the medium- and smaller-sized clients. and we do more with post market. Our target, of course, is to compensate for that kind of pressure in revenue. So for the Elevator business group, we would do improvements on services, business development and the poster services.

Operator

[Operator Instructions] Telephone number ended with 9649, please ask your question and state your name and company before your question.

U

Unknown Analyst

I have 2 questions. I am from BofA. My first question is regarding to PLC. I see your third quarter small-sized PLC market share continued to maintain at a very high level. about the future of a small-sized PLC, what would it be? Are you going to continue to aim for a target of 25% to 30% market share domestically? And do you have any plans and progress in terms of upgrading those products to medium and bigger size PLC?

J

Jun En Song

executive

Well, internally and externally, people may have different definition of PLC sizes. -- we have small, medium and medium large sized those 3 sizes. AC-800, those are medium- and large-sized PCs. -- also categorized as very typical implicated motion control PLCs, so a lot of our products are sold in large scale, except for the large-scale PLCs, we are now still developing for the process industries. So we might have a different definition of PLC sizes when compared with externals.

And as for the small-sized PLC, right now, our overall market share is 4%. And in the first half of the year, we launched some new products, including the EV series, medium-sized PLC newly launched AM 700. So PLC business, we still face quite a lot of pressure this year. And the reasons include that PV and lithium-ion batteries are our main customer sectors for medium- and medium- and large-sized PLCs and the demand from those 2 sectors significantly decreased, and that impacted our business on medium- and medium- and large-sized PLCs, but there are still silver lining that our small PLCs in machining tools and 3 Cs, et cetera, and other sectors clients, our business had grown there, and that helped us to compensate or mitigate the decreasing in sales to PV and lithium-ion batteries. And that was for this year.

And as for the future strategically, we know that for industrial POCs, it's very important and our targeted POC market share, we hope it to be as high as our servo business. First of all, reaching that of inverter 20% and then like servos to be 30% to 40%. Of course, that target would be much difficult for us to achieve with PLCs when compared with serval and inverters because our largest competitor, Siemens is so strong, so excellent, their market share is very high in the Chinese market. Yet still, we have that ambitious goal to be set.

We firmly believe that is PLC, we understand as the brain of industrial systems, and there must be some demand for localization. And as long as ions become more familiar with our products and service and recognized as more our PC market share will increase as well.

U

Unknown Analyst

I have another question regarding new energy vehicles. So from first quarter to third quarter, your top 3 new energy vehicle customers. So who all that? Can you tell us? And as for industrial control, the gross profit is different from that of the new energy vehicle business, if we can continue to have that much growth and who are the most growth contributing clients to you would be?

J

Jun En Song

executive

So you were asking about the new energy vehicle business or just general automation?

U

Unknown Analyst

New energy, new energy vehicles.

J

Jun En Song

executive

Okay. Okay. Our key accounts include the Lee auto, GAC and Cherry, including Xiaomi, our top 5 new energy vehicle OEM clients accounted for over 50% of our revenue share in new energy vehicle business. For the new energy vehicle business, right now, our penetration rate -- at the highest month in this year, I remember it was 50%. So in the Chinese market, I mean, new energy vehicle penetration rate in the entire Chinese market in China, it's above 50%. And people would only buy more new energy vehicles. But don't expect it to be like doubling like what we've had years before.

But overall, the new energy vehicle market in China will continue to grow, so for our business, maintaining a 40% to 50% growth per year is possible.

Operator

Next one 8277 your telephone number. Please state your name and the company before asking your question please.

U

Unknown Analyst

I am from CIC. I have a few questions. My name is [ Jan Pong. ] Well, overseas market, you mentioned that the U.S. clients would like you to provide services over there. So who are those clients, your direct clients or the ones that you have contacted with through some agencies? And thirdly, next question, new energy vehicle, as you said, it's very likely for you to reach a 40% to 50% growth next year. So what -- if we were to break it down, because every year, I mean, there has been a theme behind the growth of new energy vehicle businesses. Like the year before last is the new OEMs and last year, it was the traditional OEMs overseas business. So what would be that kind of a theme for next year? And you also mentioned about 10% to 20% new designated projects, so which percentage of those are in domestic and which are overseas.

J

Jun En Song

executive

Well, first, the question of yours, North America, we had a lot of clients. We have 3 super accounts in North America for Elevator. In the HVAC sector, we had a few top 3 or top 4 clients, especially with air conditioning, because they are building data centers for AI, they have strong demand for air conditioner and that they are really requiring us to build warehouse centers, logistics centers and then to build our base there. they have such strong demand. Of course, there are other sectors who would want us to be there as well, but those are the 2 biggest.

And next, the question of yours new energy vehicle next year, we expected to reach that 40% to 50% growth with our new energy vehicle business. And if you ask me to explain the logic behind that growth, while let's see our designated projects. We worked with Lee Auto, Xiaopeng and Xiaomi, we have those new OEMs in China, but the traditional the Type A, as we dev-defined the Type A bans OEMs, we actually have got many incremental designated projects from them. We had from GAC and from great War, but now Cherry, Chang and FAW, SAIC, we have designated projects from them as well. So with the traditional type A OEMs give us more designated projects, it really help us to build our incremental volume in the future.

And of course, overseas, overseas contributed to our business more than CNY 400 million last year and this year, probably CNY $1 billion and next year more -- so overseas business will also contribute to our incremental growth as well. So overall, basically, it's the accumulation of our incremental designated projects that will boost our growth there.

U

Unknown Analyst

Let me add another follow-up question. The 10 to 20 designated projects from January to September this year, what's the split between domestic and overseas.

J

Jun En Song

executive

I don't have the exact number, but most of those newly designated projects are from domestic markets. The overseas OEMs, they really have a much slower rhythm -- so most of the designated projects we had within this year are from domestic I don't have the exact number, but most of those are from domestic. That's for sure.

Operator

Next telephone number ending with 6981. Please state your name and company before you ask your question.

U

Unknown Analyst

I have a few follow-up questions regarding new energy vehicles. I want to know, based upon our innovates current revenue structure? What's the split between plug-in and BEV vehicles because the plug and growth in domestic market is very high. And I know you have a high market share there. So I would like to know about the split between bug in and pure battery BEV vehicles. And to see their future momentum of growth. And furthermore, according to the structure of your products, which include motion control and power and the electric drives. So what's the current structure? Because see the volume, the average price increase there has been pretty significant. So what is the split between these different types of products you have with your new energy vehicle businesses?

And the next year, as you said, you aim for a target of 40% to 50% growth. And because of your out of expectation, outperformed the expectation in last year and this year. So do you have any possibilities of further increasing that expectation next year? And you mentioned about the gross margin. And you said R&D was around 10%. So with that kind of revenue growth, is it possible to lower down the expense ratio out of revenue, so does that mean the net profit of new energy vehicle business would be out better than expectation significantly?

J

Jun En Song

executive

Well, thank you, Ms. [indiscernible], you asked about new energy vehicle businesses. Well, first, split between plugging and BEV, we don't have that number. We mainly serve clients who produces 3 kinds of vehicles, BEV, extended range EVs and plug-in hybrid. The extended range and the plan hybrid are both hybrid. So in that sense, 80% of our business in new energy vehicle went to hybrid Yes, extended range and hybrid less added together. So 80% -- and for EREV mainly Lee Auto -- we are very competitive with this client.

A few years back, we started the planning for plug-in hybrid businesses Among those, we call Type A OEMs, traditional OEMs in China have a lot of designated projects focusing on plug-in hybrid, but I don't have the exact number to give you the split between those hybrids with BEV.

And as for your second question, it's even more complicated, we have the electric drive and the electric power system. That is the major categorization of those 2. And with electric drives, there are several different types. X1, power assembly, like 3 in 1 or the 6 in 1, we also have the direct sale of just the power control or the the electric driver or the driver modules or just the state rotator. So the rotors. We don't have actually the numbers to answer that question. It's really complicated product structure. But overall, just 2 categories: Electric drive and Electric power. So between these 2, 70%, 80% are in the category of electric drives while -- well, of course, then electric motors are included in the electric drive in that case, more than 80% of our business are within the electric drives, while less than 20% are in our supplies or in the power system. It's very complicated. So I could only give you this answer.

And as for gross margin, we never told the outside, whether it's 80, 90, 18%, 19% or 20%. But overall, new energy vehicle businesses gross margin is really quite low. And looking into the future, we don't see the likelihood of it being significantly increased in that case. All we can rely on is to drive up the scale and control the ratio of expenses.

U

Unknown Analyst

Okay. Understood. And what is your long-term revenue outlook for new energy vehicle business? Do you have higher expectations you're supposed to because you have been outperforming expectations in the past 2 years.

J

Jun En Song

executive

Well, yes, there had been some space like one of the investors asked the questions regarding capacity planning? Yes, indeed, we do have capacity planning, which reflected the kind of space, but it takes time to build gradually.

U

Unknown Analyst

Okay. And really, I do see your business with new energy vehicle is quite strong, and it's getting stronger. Okay. I also have another question with Industrial Automation. You said that next year will be better than this year. So you have bought some strategical adjustments you've made. So I feel that right now, the markets have been observing different reasons or different factors when they see your future growth I mean, what is your attitude towards those comments?

Right now, the structure is really like you have quite scattered the business across different types of clients. So what would be the main driver of your growth in industrial automation? What's the main theme? And what type of growth would that be, like double digits or like 50%?

J

Jun En Song

executive

Well, with Industrial Automation, of course, we would have a double-digit growth target. That is the definite goal we have to achieve, including overseas business, right? No. No. Overseas is not included. Because right now, we really have this very complicated business overall, the portfolio. So what I was referring to was just double-digit growth with domestic industrial automation business. That is the traction target we have to set that as a target and achieve it.

U

Unknown Analyst

Okay. And with your overseas business, previously, I've been hearing that the revenue part wasn't very surprising, but next year, is it going to have a lot more recoveries or progresses because we've been hearing about those business progresses, but not reflected in the revenue that much.

J

Jun En Song

executive

Well, for our overseas business, well, on one hand, with Chinese equipment going outside the calculation would actually be within our domestic market. business. And the next part would be the Belt and Road initiative projects, there will be a lot of turnkey projects, large ones. And yet their procurements are finished within the Mainland China market. So it's still defined as our domestic markets.

And as for the other overseas market, we actually had done pretty well hundreds of millions of revenue this year. And the growth has been pretty fast over 100% because for those parts, we had a few teams, specifically catering to the needs of our customers, especially OEM customers. We have got special projects, specific management, in the beginning of this year, we have established dedicated teams to sort out our management structure for those. So this year, overall, our overseas business have been pretty well, I mean, including those which are calculated domestically.

U

Unknown Analyst

Okay. Any progress with human [indiscernible] any progresses. But with human noise this year?

J

Jun En Song

executive

as we said last time, -- we do those transmission type, electric drives. We focus on the hardware and components development. So still now in the progress of being developed.

U

Unknown Analyst

Okay. Well, I remember some time in the back you said that he's going to have a very dexterous hand, a robot arm to be launched first.

J

Jun En Song

executive

Well, we never said that. still the transmission type, the electric drive and other parts and the components would be launched the first and is still being developed.

Operator

Okay. Next one, telephone number ending with 5886. Please state your name and company first

U

Unknown Analyst

Hello, Mr. Song I'm [indiscernible] from JPMorgan Industrial. So I have -- the first question I have is regarding automation business. Apart from the largest scale upgrading business, there's also quite a lot of macro stimulative policy given by the government by the end of September. And the way we see it I mean the way you see it, you contact your downstream clients from different sectors, are they confident for the upcoming months and the next year? And if not, what's hindering their optimism? Is it because of PV or the lithium-ion battery?

J

Jun En Song

executive

Well, indeed, in the end of September this year, the central government had launched, acquired many stimulative policies, and that helped to recover our confidence and our clients' confidence. Of course, it take -- it would take some time for that confidence to be converted into real orders because we are in the middle part of the entire middle -- of the entire industrial chain. So it takes time to pass it on from the project level to the procurement level and then to us. So it takes some time to boost the recovery of confidence.

And right now, as you said, some clients optimism are still hindered, I don't think it's just because of the PV or lithium-ion battery business. With lithium-ion batteries, there had been some slight recovery in Zhuhai, but not so much with PV industry. because we serve a lot of downstream clients. In October, as I said, even though there has been impact from the decrease of our PV and the lithium clients, but yet still, the entire portfolio was growing because we have the growth from other sector clients, and by the end of this year, what would be the overall performance, it's hard to say at the moment right now. And it's quite volatile by now.

Some sectors might have a good September, but lower October, while for another sector, it might be the difference, I mean, higher in September and the lower in of October, it's hard to see a consistent trend.

U

Unknown Analyst

Okay. Understood. My second question for the automation business right now, are there any progress or updates with the competitive landscape? I heard from some others saying that the price competition in the Chinese market is still very fierce. So would that affect your annual discounts to be given in next year's business?

Well, yes, indeed, the price competition is quite fierce, especially in the first half of the year when our discounts, the framework based agreements discount would be given mostly like in those cases. And the next year, how would the price be?

J

Jun En Song

executive

It's hard to say from now. But in the longer term -- I mean, in a normal sense is the price pressure would be better than this year, not as competitive in price as in this year? Because in this year, because of that fierce competition in price, some overseas competitors and some smaller competitors within Chinese market have been kicked out. And so next year, it will be better, I guess.

U

Unknown Analyst

Okay. Understood. My final small question there, I see your third quarter performance extended that of in quarter 2. Operating cash flow is really nice. So what is the reason behind that? Well, operating cash flow, pretty decent well, because we've continued with that since the first half of this year, Well, overall, to analyze from the perspective of a company's cash flow, we really are not seeing a lack of cash flow.

Our downstream customers would give us those acceptance bill and some of those would be used by us to pay and some can be paid by them. And also, as for collecting the collectibles, we are pretty good at this. Our DCs and when managing our dealers -- we have dedicated teams to work on those. So overall, we paid quite strong attention to the collection of payments from our clients, especially when our cash flow is good, we pay special attention to that. We don't get catalysts for that. And this year's cash flow will be better than last year or before.

Operator

7258. Please state your name and the company before asking your question.

U

Unknown Analyst

I am [indiscernible]. As you previously mentioned, in the future, you will be focusing more on providing solutions to clients. And that means probably in my understanding, you will be more focusing on industry-specific key accounts, so you would like to go with the route of customization. And does that mean in 2025, you're going to have some adjustment with your R&D expenses?

Second question, because you have a very high self-produced ratio of your products. So what would be the cost of control situation for that in the future?

J

Jun En Song

executive

Well, for your first question, indeed, like you said, not only the top clients, but even for the medium and small size the customers of ours, we would provide them with solutions because we have a very wide portfolio of products and of course, those solutions, I mean some of those are really customized solutions. That help us to really keep ourselves at a great position to defend other competitors' attack. So as long as it's possible to offer solutions, we would do so, be it POCs or visual products or power systems or electric drives, motion controls, et cetera. And our as previously, I said, it's also becoming strategy of solution-oriented business of ours, but not just for certain industries. We are pushing for solutions to be offered to even the sedimented lower-tier markets.

And as for your second question, R&D expenses. Our overall expense control would be around 8% to 10%. And as we said this year, some unnecessary projects would be canceled with relatively lower profits and business strategic value we would simply unmet those projects so that we can spare the efforts and energy on those really important projects of ours.

And as for the third question of yours, I don't quite understand your question. You mean the supply chain management.

U

Unknown Analyst

Yes, I mean, the core products -- the core materials, chips and other materials?

J

Jun En Song

executive

There is supposed to be some price down possibilities or at least to lower down the cost of those by self-producing. While cost is just one factor. The core technology mastering would be another. So in this regard, of course, we do some self-produce to save cost. But with -- I mean, including even for chips, when we serve the automotive industry, what we call the assembling type we procure from chip providers and do our assembly by ourselves so that to reduce cost without using the standardized version of what they launched into the market.

And it really helps us with our customization because of either performance boost or the scaling down of form factors with smaller sizes. And we also do self-producing of some larger mechanical structures, but I don't have an exact number for how much percentage to have self-production. Well, I do know some self-production cases, for example, the assembly of chips just now I mentioned, but I don't really have the overall picture numbers.

U

Unknown Analyst

Okay. So -- as for automotive or the electric control drive and power the 3 different categories of your products are quite different from each other. So in the future, your 3 in 1 or 6 in 1 bundles that you launched to your clients, would that be really competitive to help you gain an advantageous position? So those -- my question actually is those [indiscernible] products of yours, what is the current percentage of your sales? And -- you also said you have specific product sales like scatter and [indiscernible]. Those are core components. So what are the suppliers of those for you?

J

Jun En Song

executive

Well, for new energy vehicle, the whole industry have quite different demand for our solutions. That's why we have all kinds of bundle products to sell. Our driver module -- our driving modules sometimes are sold to our clients independent because they develop everything else on their own. So they just procure the driver module with from ours and to formulate their entire product. So it's quite complicated to say. But the [ X1 ] solution to include everything inside, it's really difficult because right now, really, we do see significantly more differentiated demands from our clients. And we don't have that many platform based common solutions, which apply to more than one customer.

Some customers would just buy the part which controls the electronic control and some would buy XM1, some would buy just the stater and rotors, et cetera. And I don't have that exact number of the XN1 sales specifically, even third-party don't have those numbers. Because if we just sell a stater or just a router or a stater and a router, how can that be calculated as an electric motor or half a motor et cetera. It's really difficult to calculate. It's too complicated to break it down like that.

Operator

Next one1039. Please state your name and company first. Please?

U

Unknown Analyst

Hello, Mr. Song. I am [ Iris ] from Asia Industrial Automation department from Deutsche Bank. I have 2 questions. The first one is around your profit rate, including gross margin and the net profit rate, so regarding to gross margin, how should we understand your plan for next 3 years? Because what we have heard is that next year, we'll be with faster growth in new energy vehicles, while for automation business, there are price competition and you have your own structural adjustments, including the 6 joints robots and high-performance electric motors which are to affect your automation business gross margin as well. Right now, it's about 30% -- so is this like the lowest it could get? Or do you mean the gross margin for your business could further go down in the future? What is your management's attitude towards this?

And then also, I would like to ask about net profit rate as well. Let's say if suppose, the gross margin would find it very difficult to go up higher. Would you do more cost of control, at least to increase the net profit margin -- net-net profit rate.

J

Jun En Song

executive

Well, the gross margin for us -- we don't manage a comprehensive gross margin within our company because our 3 business locks we have got pretty clear management structures. So they would manage their gross margins independently on their own. And then when added together, it's our company's comprehensive gross margin. We don't set a gross margin target comprehensively and break it down for the different departments. It's not like that. So they do the gross margin management on their own, the different departments.

Okay. And for this year, overall, our customers are asking for lowering prices and we do face pressure with gross margin. New energy vehicle business, there had been a fluctuation of gross margin, and we would strive to maintain at the same level right now because it's already very low. New energy vehicles had its independent gross margin there. And for Industrial Automation, we have quite scattered the clients, so the gross margin is really capped at a pretty decent level. Even if going down after 3 years, it will be only a very small margin for it to go down. Like in the past years, you can see even there have been for several gross margin decreased by less than 1 percentage point. And with servo, it actually got increased. So comprehensively with the industry automation, the decrease of gross margin might happen, but it controlled a very limited range, less than 1 percentage point or elevators with this year's decrease in its gross margin, it will maintain stable at this year's level continuously.

So overall, in the next 3 years, our gross margin, I believe, with each of these different business departments would maintain stability at most with a very limited decrease there. But comprehensively speaking, it's hard to say, especially with the uncertain conditions with new energy vehicle businesses, we don't have that internal comprehensive gross margin management.

And for your second question, net profit rate increase mainly comes from the scaling up and efficiency increase. Or to put it another way, the decrease of the expenses to increase our profit -- net profit sales.

U

Unknown Analyst

And my next question would be a follow-up question regarding net profit rates because 2 years ago, you had been doing some long-term stimulus encouragement. And I remember in 2020, there had been a $5.05 billion net profit. And this year, a CNY 5.3 billion net profit target. And of course, this year, we understand it might be difficult to reach that, but you're about to set a target for next year previously, you have a 10% absolute value growth with your net profit, and of course, in the last 2 years, indeed, the market situation wasn't so optimistic. So would you continue to set that high target for yourself in the next 2 years? Requiring that encouragement plan to set a target of 10% growth in net profit, absolute value?

J

Jun En Song

executive

Well, the target of that long-term incentive would be always planned by our Board meeting in April at the year, but overall, our message is similar to what you have described, that long-term incentive would be to encourage the extra, the extra growth, that's what we call the long-term incentive. That's the extra incentive. That's the point of setting up our long-term incentive foundation. It's always to set up a challenging target, and that's the original point of that.

U

Unknown Analyst

Okay. Let's just wait and to see if you are to reach that target next year. And I have another question with your progress in North America business. You said you're building logistics centers and the planning for operations. So could you tell us the location of your logistics centers and what are going to be your local production bases in U.S. or in Mexico.

J

Jun En Song

executive

Our logistics warehouse center is in United States. And as for production base, we're still in the process of making choices. In U.S. or in Mexico, we've been hearing different voices and had the 2 meetings, haven't decided yet. So the warehouse is to be built in U.S. and for the production base still in the progress of being discussed.

Operator

Next one 0556. Please state your name and the company name first.

U

Unknown Analyst

Yes. I'm [indiscernible]. I have 2 quick questions. One is for Industrial Automation. We do see that this year, your downstream OEM equipment manufacturers, even though the domestic economic performance wasn't so good. But structurally, those downstream OEMs are exporting pretty nicely to overseas markets. So I would like to ask you if we -- look, at this kind of demand of your downstream clients who wish to export to overseas and when compared with your local customers, what would be the difference between those 2 different types of businesses.

J

Jun En Song

executive

Well, it depends -- it really depends on which destination they are trying to export to. If it is Europe, then in terms of product requirement, it will be different. But if they sell to Southeast Asia, then the products requirement would be similar to what we produce for our local customers as well. So that's the first difference.

And secondly, it depends on who are the final user -- if it is a Chinese company who build their factory overseas and would like to buy equipment and their decision-making process is similar to what we have with local customers. But if it's an overseas customer, then it's a different approach. So we have different dedicated teams for different types of businesses. The kind of you described, the OEM customers exporting to overseas, that's one of our opportunity we've identified this year, and they have been doing pretty well with a growth speed of more than 100% in that regard this year for us.

U

Unknown Analyst

Okay. Okay. Understood. And my second quick question, industrial software business, every time I would ask about this, industrial software and digitalization. In terms of the numbers of industries that you serve, had there been any increases because before it's just stamping textiles and a few -- so are there any new customer industries?

And secondly, with the industrial softwares, I heard that you have got those complete solutions, which included the software as well as including designing, simulation and your hardware. So how would you rate that kind of solution of yours? And what kind of pain points of customers you really can help your clients to deal with. So from which perspectives can we evaluate those complete solutions of yours to include the software parts.

J

Jun En Song

executive

Well, that is a pretty complicated question to answer because our industrial softwares is type of its own and the digitalization and the FRA is the FRA. So 3 teams are building and industrial software independently. And as for [ ionCube, ] which is quite used in many sectors, including ports, digitalization and mining, energy sector, our metal industry clients, they use our ionCube software as well.

As for industrial softwares, I'm not sure if you visited the SIBO this year, the industrial expo, we had a booth there to showcase the integration of hardware solution and the simulation in industrial softwares, simulating the operation of our port. And as for automation company, we acquired a simulation software company a small one. And we wish to be based upon that to put our automation, digitalization solutions together with the simulation technology to offer a complete solution. And of course, right now, our capacity is pretty weak. In that export, we just showed a simulation platform of automated crane operation.

So with the program, we can simulate the on-site operation and you can simulate the operation in the dock remotely. So overall, that is the automation plus simulation plus digitalization software solution. And right now, we have to admit it's pretty weak. And the solutions we are promoting to the education industry, mainly for the purpose of training and exercising. Still, we haven't seen any real landings or implementations in the industrial practical field, but we are working on that.

And as for the more complicated pan industrial software solutions, we have the NRA system software were. Well, we showcased them all in this year's industrial Expo, but we have quite small booth, and we didn't have enough space to show the actual details of the mall. So that was it.

U

Unknown Analyst

Well, a follow-up question there, Mr. Song. But what about some stand-alone softwares that you can sell and then consider those complete or integrated comprehensive digitalization solutions.

Of course, the PLC shall be excluded. PLC excluded. So the revenue from those softwares and solutions just tell us some numbers regarding either the revenue or the number of orders. And can you tell us that like by the end of the 14, 5-year plan period by the end of 2025, what would those numbers be?

J

Jun En Song

executive

Well, like Ty said, we have 3 software wars excluding plc, the IFA software is similar to the Board to software of Siemens and the second one would be the simulation tool for industrial applications. And the third one is the digitalization platform. And the third one is the only one we've been selling to is at the moment right now. And this year, the order reached 100 million to 200 million.

Operator

Next one telephone number ending with 7983. Please state your name and company first.

U

Unknown Analyst

Hello, Mr. Song. I am analyst Zhong Sheng from Morgan Stanley.

S

Sheng Zhong

analyst

I would like to ask a question about the PLC. Your small PLC strategically used to be entering your business landscape together with other products like servo or drives. So among those clients that you have penetrated with other products, what is the current penetration rate of your small PLCs and if you are to give an outlook of your PLC market share target, what would that be?

And for large PLC product development and the launch progress, what is the current stage of that?

J

Jun En Song

executive

Well, you asked about our internal product penetration or the combined sale ratio. Well, actually, we don't talk about this number in recent years. Before we did. Every time we would like to see how PLCs are sold together with the servo, but that was like 5 or 6 years ago, we have an important KPI regarding that, but we don't use that anymore in recent years. And I think that, that bundle ratio between servo and PLC is still pretty high, but we don't have this exact number anymore, but we used to have that, I can tell you.

And -- so right now, Servo and PLCs are combined even more closely than before. As long as there are serval sold to our clients, PLCs would most likely be sold as well to them. PLCs are a little bit less than servo, but I really don't have the exact numbers. And as for PLC market share targets, I've said before, current is 13% to 14%. And to set a target, well, we wish to drive it up to 20% for our PLC market share, but without a designated time point, and we regard that as a strategic target because PLC is like the neck of industrial automation, a very important terrain for us to occupy.

And we do expect a prototypic example of large-size PLC to be launched by the end of this year, and we would define willing customer to test it together with us because it's large and complicated the prototype would take some more time to be tested. So by the end of this year, prototype might come.

Operator

Due to time limitations, let's have the last but not least, the investor, 9539. Please state your name and company first.

U

Unknown Analyst

I am [indiscernible] from Shanghai. I'm an analyst. I have 2 questions. You mentioned about key accounts. You also mentioned about some lower tier, small automation clients. Both are important to you. So in the past year, in terms of automation orders for the smaller size, lower tier clients, what was the situation overall?

And my second question would be like before you had -- in order to expand the portfolio of automation products, you also have done something for besides machineries or precise electronics, et cetera, but seemingly for quite much in the future. So what is the progress of your automation business development with those new territories?

J

Jun En Song

executive

Well, thank you for the questions. As for the small-sized clients or small batches of small numbers, there is quite a lot. I'm not sure if you know, there are industrial clusters, for example, in [ Clopay, ] there is an inbound cluster of industrial park. In Wingo of [indiscernible] province, there's quite a lot of shoe making and the letter making clusters of companies, those are what we call the cluster economy in China. Those are very small companies, but many of them clustered together. So we would use our channels to get in contact with them, and we did that since the end of last year until now, it's almost a year and it had been pretty effective.

We don't have exact number for just those kind of businesses. But as I said, apart from our major 3 SBUs, we have the comprehensive market business, which are mostly reliant on the small-size agencies and those small clients, and they have got a 40% increase in revenue this year, the highest. So this way of working with the small customers, to leverage our service points to leverage our products and our brands and our product solutions. It has been pretty effective. But I really don't have the exact numbers for those business. But our overall comprehensive regional growth has been pretty successful there.

And as for the new products, we do have a lot. But as I said, we are going to prioritize our [indiscernible] products. And you mentioned about the precise machineries. With precise machineries, we have a few products there, for example, for the machining tools, machine or industry, we used to just provide them with servo. But now we also provide them with other products including the lead screws and the 3 Cs, which are needed by them. So we are going to be able to provide more parts of our product portfolio to this single industry. with machine tool industry servo is so important, and Servo is definitely our mainstream, but once we've introduced the new products, then our market capacity and the space we can tap into would be much bigger. So we leverage this kind of strategy to get into existing customer sectors with new products of ours in the 3C industry electronics, with our visual plus Serve or visual with servos, et cetera, PLC, really helped us to get into there with more businesses.

Operator

Thank you. Thank you, Mr. Son. So that had been almost 2 hours. Thank you all, dear investors for paying attention to Inovance, and thank you for your support. Some investors might have other questions, which we don't have questions to answer right now. You can leave a comment for our IR, and they will give you answers afterwards. Thank you all, dear investors. Thank you, everyone, for joining this session. This is the end of our meeting today. Thank you, and I wish everything goes well with all of you. Bye.

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Shenzhen Inovance Technology Co Ltd
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