Investment positives
　　We initiate coverage with an OUTPERFORM rating and a target price of HK$15.00, implying 5x 2022e P/S.
　　Why an OUTPERFORM rating?
　　AInnovation has achieved commercialization of artificial intelligence (AI) in a large number of segments. It ranks No.1 in China’s manufacturing-based AI segment measured by market　share. The company combines its expertise in deep learning with insights into industrial pain points to provide companies with full-stack AI products and solutions. It has taken the lead in commercializing AI technologies in a wide range of downstream segments, especially six manufacturing submarkets and two financial submarkets. According to Frost & Sullivan, AInnovation is the largest company in China’s manufacturing-based AI segment measured by market share.
　　The manufacturing-based AI segment has a long-term promising outlook. AInnovation likely to beat competitors in the underlying industrial vision software area. We note China’s seeming　inexorable trend towards digitalization, with AI solutions continuing to penetrate manufacturing and financial industries. According to Frost & Sullivan, China’s enterprise AI solution market may reach Rmb836.6bn in 2025. In the deep learning field, companies are mostly at the initial development stage, whereas AInnovation has achieved commercialization in select industries, accumulated data and updated algorithms. We think AInnovation may gain a first-mover advantage in these areas and beat competitors. We believe it may leverage its strong localized response capabilities and a full range of solutions (similar to consulting business model) to sharpen its competitive edges.
　　Self-developed deep learning platforms; accumulating AI technology assets to reduce repetitive development work of AI projects; sustained improvement in project delivery efficiency.AInnovation has independently developed three deep-learning platforms and accumulated AI technology assets to assemble reusable modular software or hardware, thus reducing duplication of R&D into AI projects and increasing development efficiency. As of June 30, 2021, the firm owned 1,985 AI technology assets, of which　96.2% had been reused in different products and solutions. The company can now meet most of its needs from new projects by reusing existing AI technology assets.
　　How do we differ from the market? The market does not think that　AInnovation will maintain high growth momentum and turn profitable, given the firm’s heavy exposure to hardware sales and low added value from software products. However, we think AInnovation’s end-to-end integrated solutions covering both software and hardware better meet customer needs. In the manufacturing-based AI segment, AInnovation has acquired quality customers and gained a first-mover advantage. We expect the company to maintain a strong revenue and earnings growth momentum by implementing a strategy of efficient market expansion. We think the firm’s expense control capability will strengthen thanks to management optimization and higher order delivery efficiency driven by accumulated technology assets.
　　Potential catalysts: Support from intelligent manufacturing policies; strategic cooperation with leading firms in downstream industries.
　　Financials and valuation
　　We expect AInnovation’s 2021-2023 revenue to be Rmb841mn, Rmb1.43bn and Rmb2.34bn in 2021-2023 respectively, implying a 72% CAGR. We estimate that its adjusted net loss will be Rmb206mn, Rmb135mn and Rmb106mn, respectively. Initiate with an OUTPERFORM rating, given that the company is still in the stage of rapid expansion and its business lines have large growth potential. We set our target price at HK$15.0, implying 46% upside and 5x 2022e P/S, considering that the company is still in the early stage of AI commercialization. The stock is trading at 3.4x 2022e P/S.
　　Risks
　　Intensifying market competition; continued business loss; technological evolution faster than the firm’s innovation capabilities; loss of important customers.