Investment positives
　　We initiate coverage on Morimatsu International Holdings (Morimatsu) with an OUTPERFORM rating and a target price of HK$9.70 (17x 2022e P/E). Morimatsu is a leading player in the domestic high-end pressure equipment market. The firm also sells products in overseas markets. It offers pressure equipment to customers in pharmaceuticals, electric vehicle (EV) battery-related raw materials, chemicals, electronics chemicals, personal care chemicals, and oil and gas industries. Morimatsu continues to improve its technologies and expand its presence in downstream industries.
　　Why an OUTPERFORM rating?
　　Improving competitive advantages by leveraging advanced technologies and comprehensive solutions. Morimatsu utilizes the advanced technologies of Japanese controlling shareholder Morimatsu Industry, and enjoys the low cost and high efficiency of the domestic manufacturing industry. Its stainless steel bioreactors, mRNA modular factory solutions, and high-pressure acid leaching reactors are more advanced than many comparable products in the world. Orders for these products have increased rapidly in recent years, pointing to the notable competitive advantages of Morimatsu.
　　Offering products to customers in multiple downstream industries to mitigate impact of cyclicality; modular solutions improving efficiency of constructing and delivering projects. We expect the firm's revenue to increase steadily over the long term, as its offerings in various downstream industries can mitigate the impact of cyclicality. Modular factories have multiple advantages - high quality, brief construction period, low costs, and convenience. In 2011, Morimatsu acquired Swedish company Pharmadule to improve its capabilities of constructing and delivering projects.
　　Pharmaceuticals: A long-term growth driver for earnings. The biological drug segment grows more rapidly than do other subsectors of the domestic pharmaceuticals industry. Frost & Sullivan estimates that biological drugs will account for nearly 30% of the pharmaceuticals industry by 2025. Morimatsu's stainless steel and one-off bioreactors are utilized in the biological drug subsector. We think the company will benefit from increased production capacity of biological drugs and clients' efforts to upgrade manufacturing equipment, as the firm continues to increase its production capacity for stainless steel and one-off bioreactors.
　　EV battery-related raw materials: Offering manufacturing equipment for multiple EV battery-related raw materials; gaining market share in subsectors. Demand for nickel manufacturing equipment has increased rapidly, as: the incremental installed capacity of nickel-rich ternary batteries as a percentage of total incremental installed capacity of EV batteries has reached nearly 50%; and nickel metal is in short supply. Morimatsu also provides manufacturing equipment for electrolytes, cathode materials, anode materials,and binders. We expect the firm to grow rapidly given the boomingEV battery industrial value chain.
　　How do we differ from the market? The market believes that domestic production and increased demand from downstream industries are the main growth drivers for Morimatsu. We think the firm's growth potential will exceed the market expectation, as: Morimatsu offers pressure equipment technology-based comprehensive solutions; it will likely offer additional manufacturing equipment for new materials; and the firm focuses on high-gross margin materials.
　　Potential catalysts: Accelerated capacity expansion for manufacturing equipment of biological drugs and EV battery-related raw materials; expanding presence in the new material market proceeding more rapidly than expected.
　　Financials and valuation
　　We estimate that the firm's EPS will reach Rmb0.49 in 2022 and Rmb0.64 in 2023, a CAGR of 32%. The stock is trading at 13.0x 2022e and 9.9x 2023e P/E. We initiate coverage of Morimatsu with an OUTPERFORM rating and a TP of HK$9.70. Our TP implies 17x 2022e and 13x 2023e P/E, offering 31.1% upside.
　　Risks
　　Cyclicality in downstream industries; liquidity risks; exchange rate risks.