Hello, everyone. Welcome to attend the Inovance 2024 Q3 results announcement. Everyone is on mute. Please allow me to make the announcement. Now, we are inviting the investors. The meeting conference is for reference only, cannot be disseminated publicly. Without the authorization, the media is not allowed to do any dissemination, 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 dissemination of the message. Please be careful for the investment decisions. Before the start, we would like to remind everyone that we are gonna have Q&A when we have the presentation finished. Please allow me to introduce the leader, the Vice President, Mr. Song Junen, and Board Secretary. And now we're gonna give the floor to Mr.
Song to give you, the announcement and presentation.
Thank you very much, everyone. Welcome, everyone, to attend the 2024 Q3 results announcement from Inovance. What's happening is that, normally I'm gonna give you introduction about the performance of, the top three quarters, and then Q&A after that. Before introducing the business, we had a prologue, and I think that there are several keywords that are very important. The first is risks and opportunities. Second is tactics and strategies. And third of all, transformation and actions. In terms of the risks and opportunities, everybody knows about that. At the current stage, for Inovance Technology, we have three 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, that due to the impact of the industrial downgrade and downward trend, we had a decline of the business growth. So for the whole internal environment or, I mean, external environment, there are risks in front of us. As everybody knows, through the macroeconomic data, that you can see that the overall kind of a demand from the other sectors to the industrial automation is declining. There are several reasons. First is that for the industrial automation as a big segment, we had two renewable energies, lithium battery, and also solar industry. We had a sharp drop of the demand from these two 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, you know, 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.
Also, Belt and 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, you know, boost of the demand of the order in China. So we have to grasp that opportunity. Second point I would like to say is that there is actually a program about the equipment and 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 gonna be very important to us. And especially for domestic brands, this is gonna be boosting their demands over our business.
Third point, as 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, you know, 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 initial automation business, we had about, 4% of the growth, overall speaking. And, also, for those, downstream, you know, industries that had, over 20% of the growth, we had about 20 of them in our downstream. Meaning that they had about 20% growth in terms of their order, you know, demand.
So from this standpoint, I do believe that there are lots of structured opportunities across the different downstream industries. We do see a lot of opportunities because of Belt and Road 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, you know, 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, you know, 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, you know, 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 have 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 servo, PLC, or, you know, driver. We do have a lot of different products in this big category, while external environment is not that friendly towards us in terms of the strategic direction and also the strategic products, we started to implement it 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, simply speaking, we had, you know, some of the strategies over those, you know, products by actually, you know, 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, you know, future directions, and we do believe that there are a lot of potentials ahead of us. What's been lacking is that how that we are able to implement seriously those strategies and making those segments bigger.
Now, we do have three pillar, you know, businesses under the industrial 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 we call it the seed products or the strategic products.
So for instance, industrial robots, we know that at the current stage the total value is less than CNY 1 billion, but for the total size of the industrial robot, while we're having better intelligence for the industrial robots or robots as a whole, there is gonna 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 drives or electric motor with higher performance, how that we are able to make the best use of this to have the electric motor or motor plus business. You know, for some of the higher performance drive motor, we wanna make this bigger.
And this is gonna be a big and potential market with our laser focus. And also we have a lot of potential as seed 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 gonna become, but for the rest of the others, it's over tens of billions. So how are we able to have a laser focus, you know, 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 gonna 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 a lot of 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 more attentions. Third pair of the words is transformation and actions. What we are really good at is adapt ourselves with the changing 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 two 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 establishments of the new products.
For instance, especially for some of the new products, we have established designated team to do sales. And also, we had an operation of the industrial plus, so that you know, we are able to have a lot of you know 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 you know 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 modes. We have also some of the other, you know, changes of a lot of different strategies. Achieving the fast growth in industrial 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 demands from the market. This is a big change for us.
We've been already starting to do this, and then I believe that, you know, gradually we're gonna start the organizational restructure, restructuring that is, you know, driven and centered around the most needed, solution. And also, just now, we were talking about some of the potential and the seeding product, you know, businesses, how that we're making sure that they're enjoying a very high growth, and, also to having a breakthrough of the existing organizational structure by establishing a designated team or departments. So that's to say that we had a lot of, restructuring going on in order to be adapted to the external environment, which is changing, and also adapted to the changing strategic businesses.
And also, another thing that we're focusing on is action, which is that we're gonna be focusing on the implementation of our different, you know, 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, you know, 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 nine months. CNY 25.4 billion of the operating revenue, increasing by 26%.
So from a business, you know, 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, you know, business segment. So overall business, on the overall point, the operating revenue was pretty good. Second one is net income attributable to shareholders, CNY 3.35 billion, increasing by only 1%. So for the net income attributable to the shareholders, the growth rate is lower than the operating revenue because of three reasons. The first is that, you know, in terms of the comprehensive gross margin for all the products that we had, this was reducing actually in the past three 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 attributable 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, two IPOs, we had a fair value changed, and that had impact to this particular figure in the middle. I think that last year, we had about the impact of the profit of almost CNY 100 million-CNY 200 million because of that.
That was because of the changing of the return on investment and also the reduction of the fair value. The third one was because of the income tax. You can see that the income tax increased a lot, which had around the impact of around CNY 160 million-CNY 170 million units—I mean, million profit. First of all, we have about 10% of the annual income tax, and this is influential and impactful. This is the reason why we had a way lower growth of the net income attributable to shareholders than that of the operating revenue.
Third of all, you know, we had the also impact for net profit attributable to shareholders after deducting non-current 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 the 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 31.02%. For the gross margin, we had two reasons of having this slight decline.
One of the reasons was because that, the, you know, automation business, I mean, automobile business actually had a lower, gross margin, so the overall comprehensive gross margin was lower. Second reason, as we all know, that, the industrial demand was, pretty much, you know, decreasing, and we had a lot of, price war going on in the downstream. So most of the prices of our products actually decreased. But on the overall basis, for the three major core, products of, the general automation, the, PLC and, servo, frequency, and inverter, so pretty good for the first nine months. The gross margin of the three products actually reduced by no more than 1%, and an increase in the gross margin for PLC, actually, for the past, three quarters.
So we had a very good business performance. But of course, while we do have a lot of other products for general automation, not necessarily these three ones, so still, we have also the reason of the structuring 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 three ones, actually, we have a very good control of the expenses. The selling, administrative, and R&D expenses are actually controlled, actually, at a general term, we had about expense ratio of 18.2%, increasing by 13%. And R&D's investment, CNY 2.2 billion, and expense ratio, 8.7%. So while finishing the financial figures, let's actually giving you an overview of the businesses of different segments.
The first one is the industrial automation, including robots, and inverter, robot, and servo. We call it, you know, four 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 46% of our overall revenue. And CNY 10.4 billion, increasing by only 6% for new energy vehicle, then the, this is contributing to above 41% to our overall revenue, so that we had a big increase of this particular businesses. And on one hand, this was quite contributive, right, to our overall 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 industrial line plus. And, also, we have, also the strategy of, marching into top markets and developing discrete markets. For the top customers, the most effective way to actually, you know, talk to them and sell the products to them is to sell the targeted and tailor-made 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 that if we're talking about the you know 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 industrial automation have been you know adjusted. The first is the comprehensive SBU. And also we have the fast growth for the industrial automation SBU and advanced manufacturing SBU. The energy SBU had actually a big drop. This is the only exception.
Second one, I'm gonna 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 initial positioning and enhance our branding. You know, several years ago, if we actually went to some of the OEMs of passenger vehicles, people actually don't care about, you know, the other brands, but we have been confirming our positionings in this big industry. And also, in terms of the diversification strategy, we have the different scope of application, like BEV, plug-in, range extended, and also the others, right? We have a lot of diversities.
The fourth is designated projects, and now we do have more designated projects with over 20 designated products, from January to September in 2024. Also, now we are developing the fifth- generation platform, including the electric drive, you know, drivetrain, and also electric motor as well. For intelligent elevator, this has been impacted by the less- than- ideal development of the property and real estate industry. We do actually see a decrease of the demand of the whole elevator. In the after-sale service market, it is actually difficult for us to offset the loss that we had in the past. We had about 6% of the revenue decrease for this segment, but of course, performing better than the industry average. Still, you know, there is a solid growth in the sales revenue of elevator electric accessories.
Also, second point is that there is a fast growth in the after-sales 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 in after-sale service market, but this is, you know, difficult to offset the impact that we had from the real estate industry because of less sales of the new elevators. And also third of all, we're talking about globalization, gaining orders from the global giants. Last but not least, let's talk about the globalization and globalization. So we had about, you know, CNY 1.5 billion of revenue, increasing by 20%. There are several opportunities. First is that newly incoming markets, Europe and America.
We've established office and warehouse centers in the United States with a product base under the preparation. Indeed, for some of the super giant customers, they do actually now have a lot of requirements in North America, be it as the customers from the elevator standpoint or from the industrial automation. You know, 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.
With those individual lines, for instance, air compressor, injection molding machine, air conditioning, lithium battery makers and engineering machinery top companies, we've been establishing the strategic collaborations with, you know, most of them, and started the batch shipment. For non-European and American markets, you know, APAC, Middle East are our focus, and also we are expanding into South America markets with new, four distributors added. In terms of the inverter, PLC and servo, while we are actually now selling these products, we are also expanding ourselves to robotic products. There is breakthrough in South Korea, Vietnam, and India. All right. You know, this is pretty much about the overview of the four businesses. For the outlook of 2024, only one slide. Quite straightforward.
This is our target that we set up in the beginning of the year without any changes now. From an operating, in 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 in the beginning of the year still. All right, so very briefly, in giving an overview of our performance from January to September. Now, I'm going to open the question to the floor. Thank you.
Hello, everyone. If you wanted to ask question on the phone, you're able to press star and one to ask your question. If you're joining via the app or an internet web browser, you can actually type in your question in the chat box, or you can raise hand on the side. Thank you.
Again, if you want to ask question, if you're dialing in, please press star and one to ask your question. If you're joining via internet, you can type in your question in the chat box using app, or you can raise hand to ask question directly verbally. Thank you. Now let's give the floor to the very first investor. Please identify yourself.
Thank you. Hello, Mr. Song. I am from Goldman Sachs, and my name is [Du Chen], the analyst of industrial segment. So I have three questions. The first is that I would like to know that, you know, we had actually the gross margin, especially for the industrial 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 three major business segments, any improvements versus the first half of the year in Q3? And also, can you share with us some of the, you know, risks and opportunities that you have encountered? The third question is that with regards to the potential seeding products, I mean, businesses like industrial robot, the big 6-axis products are able to have a very good growth in the Q3. So we would like to know that, do you think that there is a tipping point already realized with regards to this big 6-axis robot?
All right. So thank you very much for this question.
First one is about, you know, the 1% year-on-year decrease for the gross margin of industrial automation in Q3. So, I would like to know 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 three products, we have industrial robots and also the precision drivetrain, and also the driver motors, et cetera. So actually, from the key three products, the gross margin is pretty good, actually. Actually, we have seen and experienced a little bit decrease, but primarily because of the product structures.
So for instance, for the six, you know, axis or joints, in this robot, the gross margin was lower, and also for the, you know, driver electric motors, definitely speaking, the gross margin is lower than that of the PLC or servo products. So because of this particular kind of product mix, we had, 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 our 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.
You know, automotive business is actually quite performing with about 40%-50% of the growth. Second is the industrial automation, with about 30%-40% of the growth, and the elevator is a bit weaker, only enjoying 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 three business segments in overseas. And third of all, the big 6-axis industrial robot. We don't call it actually ceiling product or potential product, but this is a strategic, supportive, and pillar industry. In Q3, as you were 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, you know, large size, 6-axis, robot, they're starting to picking up the momentum. We 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 or axis. For the large size, it's around one thousand almost, you know, robots sold. So, I think that, you know, this is pretty much good in terms of the overall growth. But we don't really know that, you know, the, in this particular, you know, industry, in Q3, we're gonna have a big momentum picking up.
All right. Thank you very much, Mr. Song. Now give the floor to the next investor, and please identify yourself before.
Hello, Mr. Song. I'm [Yawen Jiang] from Changjiang 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? Thank you.
All right, so October, this is not ending. Still three to four... Sorry, yeah, three days to go. We don't have, because we don't have the, you know, 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 decline year-on-year on the order income.
October-wise, we believe that there is gonna be a positive growth for the order income. Excluding the impact of lithium, battery, and solar, we will have a higher growth, but still we have to wait for the finalized 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, you know, industries, we don't have the figures right now, but overall speaking, for the process automation might be better, and electrification of the industrial 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.
All right. Thank you very much.
My second question is that, for the lithium battery and, solar industry, I mean, we had, you know, driven down the overall base number. So how do you think about the, growth of, PLC and servo and also the other businesses? I think that servo and PLC as businesses have been impacted the most, because of less growth of, the solar industry. How do you think about this?
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 two industries. But of course, for lithium battery, we had a slight recovery, you know, more overseas projects.
For consumer electronics, battery projects are becoming more, but we're not 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 you know, 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.
Okay, so my next question is about the industrial robot. 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 have seen, that we do have some of the-...
incoming, like industrial robot and also the high performance electric motor as the potential supportive products. So do you believe that the gross margin for these new coming, you know, industries or products are gonna be as good as the existing ones? How do you think about the profitability?
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, automotives, and also some of the sales due to the region-based mode. And the 3C industry is actually the industry that we have the most robots sold to. So most of the projects of this kind happening this first half of the year, that's why we have the slow growth rate in Q3.
That is actually because of the features and, you know, the economic nature of the robot industry. We do see a lot of the impact from the different allocations throughout the whole year of the project implementation. On the overall basis, the robot business is actually growing at a much better pace, higher than that of the industrial automation. We are saying that this is actually gonna become a pillar industry in the future in terms of the industrial robot. Definitely speaking, we're gonna have more strategic resources invested, and making sure that industrial robot is gonna be a very supportive industry to our overall business. All right, so just now you're saying about the gross margin of the high performance electric motor and this robot.
Talking about the comprehensive, you know, gross margin, this is lower than the, you know, inverter, PLC, and servo products. And larger the product is... larger the robot is, the cost is gonna 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 industrial robot is having a very good profit, and pretty profitable.
Thank you. All right, let's have a very quick question at last about the new energy vehicle business. In Q4 of last year, we had a very high base of incoming revenue.
How do you think about the revenue in Q4?
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 definitely speaking, this is gonna be the same situation this year. Overall speaking, the revenue from the new energy vehicle business, CNY 14 billion-CNY 15 billion, pretty assured. So there will be a very good growth in Q4 for this type of business, for sure. From a profitability standpoint, because of a larger scale, of course, the gross margin is 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, you know, pressure on the gross margin.
But still, we can improve our efficiency. So on the overall basis, the profitability is getting better.
Thank you. All right. Thanks a lot. This is pretty much about my question. Thank you.
Now, let's give the floor to the next participant, and please identify yourself first.
Thank you very much. Hi, this is [Du Jiaying] from UBS. So my question is about, first of all, in Q3, the gross margin, you know, quarter- by- quarter was quite stable. So, you know, quarter-by-quarter, do you think that, you know, the gross margin of the automation business has been improved?
Right. So Q by Q, quarter-by-quarter, growth margin-wise, for industrial automation, I don't think that this is changing that much, 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. But was it because of a better performance of elevator business?
All right. I don't think so. Yeah, pretty similar. I don't know the reason, probably because of a change in product structure. I am not researching on the reasons yet.
All right, understood. My second question is for the automation, how do you think about the policy stimulating the equipment change and replacement and update?
All right. So, yes, there are actually, you know, two 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 that we are able to, you know, see the equipment replacement and update from a EO market. And next year, I think that, you know, it is going to be implemented pretty much. We are talking about heavy industry, and there might be equipments replaced. And in Q4, we're gonna see some of the project-based order that flow into our pool.
All 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 gonna see the implementation of these projects. But whether that already happened in October, I can't answer that.
All right. Thanks a lot. My third question is that about the globalization. You're saying that you're gonna be focusing on the positioning in North America, so do you have a priority in place about the different overseas markets?
Right. So in terms of the priorities of the order attraction, non-European and American markets should be very good. And you know, 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, by the products from China.
But from a strategic positioning in the longer term, that is speaking, you know, European and American markets are actually higher-end market in terms of the high-end manufacturing. So, European and American, especially Europe, is gonna be our focus. And, the U.S. or North America, we are pretty much passive, because we do have a lot of, you know, key accounts of our industries and have the demand, so they're asking us to there, to establish the facilities there.
All right. Thank you very much, Mr. Song.
And now we have the participants. Next one, and, please identify yourself before.
Thank you. Hello, Mr. Song. This is, [Huang Shaoping] from Guotai Machinery.
I have the first question, which is that, you know, in Q3, the downstream, you know, industries 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?
All right. So the answer is that, you know, we do have a lot of different industries downstream, and the management definitions are changing. Before the year of last, we had six SBUs, but now this year we have three SBUs, plus the comprehensive one. So only four units now are being operated, so there's a big change, and also, what I'm gonna say is...
So for the advanced SBU, the pretty much energy SBU and also comprehensive SBU, 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 the semiconductor, for instance, these are very important. So this accounts for about 30+%. And second one is the high end. There are a lot of high-end industries now, textiles, air compressor, injection molding machines, air cooling, et cetera. And also the automation, electrification of industrial machineries, et cetera, accounting for less than 30%. Should be up, should be about 27%-28%. And next one is the energy. You know, PV, solar and wind and ESS.
This is pretty much about the pan energy segment with about 27%- 20% of the percentage against it. Lithium battery and wind and solar. In last year, just now, we're talking about percentage against the total order of industrial automation. Last year, the lithium battery and solar and wind accounted for about 20% against the total order of the industrial automation segment, but now it's less than 10%, or around 10% also from a standpoint of order income situation.
All right. Thanks a lot, Mr. Song. My second question is that not long ago, we've been seeing that the United Power Suzhou plant has already started the construction. We would like to understand that what is the structure now?
Now you can see that the overall, you know, operating revenue is about CNY 300 billion, as you have planned, so pretty actually, you know, big. We would like to understand the you know cycle and pace. I think that you know we have five 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 gonna have CNY 1 billion of investment for the first phase. But this is subject to the order income from our customers, and that we announced that we're gonna be having five phases for the establishments and construction. We're gonna start the first phase this year with about one point something billion as a upfront investment.
All right.
So we would like to ask the question about the automation. You know that, at the current stage, the you know, net income, I mean, the net profit is pretty good. So we'd like to understand that, you know, how that we are able to make sure that our net profit is better than our peers, and how to make it sustainable?
As well as that, the gross margin is pretty low. And, the price has been pressed. So still rely on some of the internal policies like, the sales, and also, we are actually not still focusing on the R&D expenditures. You know, reduced from 20% against the revenue to about 10% or so. Because, this is actually a platform products.
We focus on the excellent, you know, products and projects from excellent customers. Also, the expense ratio from R&D is also reducing. These are some of the methods that we had.
All right. Thank you. The last tiny question is that for the industrial automation, you had a outlook for Q4. But now, how do you think about your overall performance next year? How do you predict that?
Actually, it's difficult for me to answer this question. If you're talking about the trend of next year, I think that is gonna be better than this year. For instance, equipment upgrade and the replacement. 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 gonna be better than that of this year. And also from the, you know, budget standpoint of SP/BP, definitely speaking, this is not confirmed, but definitely speaking, we're gonna have a strategic meeting very soon. So, definitely speaking, we're gonna be outperforming the rest of the industry. We are gonna give you a stretched target.
All right. Thank you very much, pretty much for my question, and wish the company is getting better and better.
Thank you. All right, so next, let's have the next participant. And please identify yourself.
Thank you. This is Alice from Macquarie 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%, 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, I know in the second half of the year, what kind of industries have declined or reduced their overall demand?
All right. So as I have already said, that in the Q3, you know, order income situation dropped year-on-year, year by year. In terms of our order income for this segment, several reasons. First, is that 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 two 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. And so that's why we had a decline of the order income situation. And, of course, that was impacting the overall income that we had in Q3.
Thank you. Next, telephone number ending with five nine three two, please ask your question and state your name and company first.
Hello, Mr. Song. I am from CITIC Investment, and I have several questions. One, regarding general automation. You said that in that part there had been some splitting in different SBUs. So what about the energy SBU? In the current new categorization of your businesses, what type of customer industries have you included? And in the first three quarters of this year, what are the progress of energy storage related business, and what was the gross margin for that?
Thank you for that question. Our internal general department and the business groups 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 more 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.
Okay, thank you. 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 based and the integrated advances progress in this year? And what about your overseas business next year outlook? Will that help to compensate the current pressure we have?
We don't have that kind of number to exactly answer your question yet, because right now, our cell system is integrated, and from our cells caliber, the based and the non-based elevator cells are integrated together. I cannot tell you that specific number. As for domestic sales, you ask about our overseas growth projected next year. Our overseas business, some of those are operated with the help of traders from within domestic market. 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 market. It's a little bit chaotic. Let me just refer to the official report caliber.
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? On one hand, we are going to further proceed with business developments in overseas, including key accounts and the medium and smaller size clients, and we do more with post-market. Our target, of course, is to compensate for that kind of a pressure in revenue. So for the elevator business group, we would do improvements on services, business developments, and the post services.
Thank you. Thank you. Thank you, Mr. Song.
If you have any questions, you can press asterisk on your telephone.
For online viewers, please state your comments and questions in the commenting area or press raise hand. Telephone number ended with nine six four nine, please ask your question and state your name and company before your question.
I have two questions. I am from BofA. My first question is regarding to PLC. I see your third quarter small-size PLC market share continued to maintain at a very high level. So about the future of a small-size PLC, what would it be? Are you going to continue to aim for a target of 25%-30% market share domestically? And do you have any plans in progress in terms of upgrading those products to medium and the bigger size PLC?
Internally and externally, people may have different definition of PLC sizes. We have small, medium, and a medium large size, those three sizes.
AC800, those are medium and large size PLCs, also categorized as very typical, complicated motion control PLCs. So a lot of our products are sold in large scales, 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 size PLCs, right now, our overall market share is 4%, and in the first half of the year, we launched some new products, including the Easy Series, medium-sized PLC, newly launched, AM700.
PLC business, we still face quite a lot of pressure this year, and the reasons include that PV and the lithium ion batteries are our main customer sectors for medium- and large-sized PLCs, and the demand from those two sectors significantly decreased, and that impacted our business on medium- and large-sized PLCs. There are still a silver lining that our small PLCs in machining tools and 3Cs, et cetera, and other sectors, clients our business has grown there, and that helped us to compensate or mitigate the decreasing in sales to PV and the lithium ion batteries. That was for this year. As for the future, strategically, we know that for industrial PLCs, it's very important, and our targeted PLC 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%-40%. Of course, that target would be much difficult for us to achieve with PLCs when compared with servo 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 as PLC, we understand as the brain of industrial systems, and there must be some demand for localization. And as long as clients become more familiar with our products and service, and they recognize us more, our PLC market share will increase as well. Thank you.
Thank you, Mr. Song. I have another question regarding new energy vehicles.
So from first quarter to third quarter, your top three new energy vehicle customers, so who are they? 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? So you were asking about the new energy vehicle business or just general automation? New energy, new energy vehicles.
Okay. Okay. Our key accounts include the Li Auto, GAC and Chery, including Xiaomi. Our top five 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 vehicles 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 in years before. But overall, the new energy vehicle market in China will continue to grow. So for our business, maintaining a 40%-50% growth per year is possible. Thank you.
Thank you, Mr. Song.
Next one, eight two seven seven, your telephone number. Please state your name and, company before asking your question, please.
Hello, I am from CIC. I have a few questions. My name is [Zhang Peng]. 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%-50% growth next year. So, if we were to break it down, 'cause every year, I mean, there had been a theme behind the growth of new energy vehicle businesses. Like the year before last, it's 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%-20%, the new designated project. So which percentage of those are in domestic and which are overseas?
Well, first, the question of yours, North America, we had a lot of clients.
We have three super accounts in North America for elevator. In the HVAC sector, we had a few top three or top four clients, especially with air conditioning, because they're building data centers for AI. They have strong demand for air conditioner, and that they are really requiring us to build warehouse centers, logistic centers, and then to build our bases 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 two biggest. And next question of yours, new energy vehicle. Next year, we expected to reach that 40%-50% growth with our new energy vehicle business. And if you ask me to explain the logic behind that growth, well, let's see our designated projects. We worked with Li Auto, Xiaopeng, and Xiaomi. We have those new OEMs in China.
But the traditional, the type A, as we defined, the type A clients, OEMs, we actually have got many incremental designated projects from them. We had from GAC and from Great Wall, but now Chery, Changan, FAW, SAIC, we have designated projects from them as well. So with the traditional type A OEMs giving 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. Thank you.
Thank you, Mr. Song. Let me add another follow-up question.
The ten to twenty designated projects from January to September this year, what's the split between domestic and overseas?
I don't have the exact number, but most of those newly designated projects are from domestic market. The overseas OEMs, they really have a much slower rhythm, so most of the designated projects we had within this year are from domestic OEMs. I don't have the exact number, but most of those are from domestic, that's for sure.
Okay. Thank you. Thank you, Mr. Song.
Next, telephone number ending with six nine eight one, please state your name and company before you ask your question.
Hello. Hello, Mr. Song. I have a few follow-up questions regarding new energy vehicles. I want to know, based upon our Inovance's current revenue structure, what's the split between plug-in and the BEV vehicles?
Because the plug-in 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 plug-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 seeing at the volume, the average price increase there had 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%-50% growth.
Because of your out of expectation, you 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 a gross margin, and you said R&D was around 10%. So with that kind of a revenue growth, is it possible to lower down the expense ratio out of revenue? So does that mean the net profit of a new energy bus-vehicle business would be out better than expectation significantly?
Thank you, Mr.[ Zendo Hong]. You asked about new energy vehicle businesses. First, split between plug-in and a BEV, we don't have that number. We mainly serve clients who produces three kinds of vehicles, BEV, extended range EVs, and a plug-in hybrid. The extended range and the plug-in hybrid are both hybrid.
So in that sense, 80% of our business in new energy vehicle went to hybrid. Yes, extended range and hybrid, let's add it together. So 80%. And for EREV, mainly Li 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. We 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 the second question, it's even more complicated. We have the electric drive and the electric power system. That is the major categorization, those two. And with electric drives, there are several different types: X-in-1, power assembly like three in one or the six in one.
We also have the direct sale of just the power control or the electric drive or the drive modules or just the stator, rotor, so the rotors. We don't have actually the numbers to answer that question. It's really complicated product structure. But overall, just two categories: electric drive and electric power. So between these two, 70%-80% are in the category of electric drives, while. Well, of course, then electric motors are included in the electric drive. Then in that case, more than 80% of our business are within the electric drives, while less than 20% are in power 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 business's 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.
Okay, understood. Thank you. 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 two years.
Yes, there had been some space, like one of the investor asked the questions regarding capacity planning. Yes, indeed, we do have a capacity planning, which reflected a kind of space, but it takes time to build gradually.
Okay, thank you. 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 the next year will be better than this year, so you have got some strategic 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 drive of your growth in industrial automation? What is the main theme? And what type of growth would that be? Like a double-digit or like 50%? 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, not included.
'Cause 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'd have to set that as our target and achieve it.
Okay, thank you. 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? 'Cause we've been hearing about those business progresses, but they're not reflected in the revenue that much.
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 have done pretty well, hundreds of millions of revenue this year. And the growth had 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 done pretty well. I mean, including those which are calculated domestically.
Okay. Thank you, Mr. Song. Any progress with humanoids? Any progresses?
Well, with humanoids, this year. As we said the last time, we do those transmission type electric drives. And we focus on the hardware and components development, so still now in the progress of being developed.
Okay. Okay, understood. I remember sometime in the back, you said that there's going to have a very dexterous hand, a robot arm to be launched first. We never said that. Well, still the transmission type, the electric drive, and other parts and the components would be launched first, and it's still being developed.
Okay. Next, the one telephone number ending with five eight eight six. Please state your name and company first.
Hello, Mr. Song. I am [Shu Chan] from JP Morgan Industrial. So I have. The first question I have is regarding automation business.
Apart from the larger 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 month and the next year? And if not, what's hindering their optimism? Is it because of PV or the lithium-ion batteries?
Well, indeed, in the end of September this year, the central government had launched quite many stimulative policies, and that helped to recover our confidence and our clients' confidence. Of course, it would take some time for that confidence to be converted into real orders, 'cause we are in the middle part 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 had 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.
It's quite volatile by now. Some sectors might have a good September, but a lower October, while for another sector, it might be different. I mean, higher in September and lower in October. It's hard to see a consistent trend.
Okay, understood. Thank you, Mr. Song. 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 discount to be given in next year's business?
Yes, indeed, the price competition quite fierce, especially in the first half of the year, when our discount, the framework-based agreements discount, would be given mostly, like, in those cases. The next year, how would the price be?
It's hard to say from now, but in the longer term... I mean, in normal senses, the price pressure would be better than this year. Not as competitive in price as in this year, 'cause in this year, because of that fierce competition in price, some overseas competitors and some smaller competitors within Chinese market have been kicked out. So next year, it will be better, I guess. And...
Okay, thank you. Understood. My final small question there, I see your third quarter performance extended that of in quarter two. 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 receivables, we are pretty good at this, our DLCs and when managing our dealers. We have dedicated teams to work on those. So overall, we paid quite strong attention to the collection of payment from our clients, especially when our cash flow is good, we pay special attention to that. We don't get careless with that. And this year's cash flow will be better than last year or before.
Thank you. Understood. That's all from me.
Thank you. Seven two five eight, please state your name and the company before asking your question.
Thank you, Mr. Song. I am [Shen Hao] from [Foreign language] .
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. You would like to go with the route of customization. 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?
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. 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 PLCs or visual products or power systems or electric drives, motion controls, et cetera. And, as previously I said, it's also becoming a strategy of a solution-oriented business of ours, but not just for certain industries. We are pushing for solutions to be offered to even the segmented lower-tier markets. And as for your second question, R&D expenses, our overall expense control would be around 8%-10%. And as we said, this year some unnecessary projects would be canceled with relatively lower profits and business strategical value.
We would simply omit 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?
Yeah. I mean, the core products, the core materials, chips and other materials. There are supposed to be some price down possibilities, or at least to lower down the cost of those by self-producing.
Well, 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 costs without using the standardized version of what they launch into the market. And it really help 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.
Okay. Thank you, Mr. Song.
As for automotives, for the electric control drive and power, the three 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 launch to your clients, would that be really competitive to help you gain an advantageous position? So those, my question actually is, those X-in-1 products of yours, what is the current percentage of your sales? And you also said you have specific product sales, like a stator and a rotor. Those are core components, so what are the suppliers of those for you?
Well, for new energy vehicle, the whole industry have quite different demand for our solutions. That's why we have all kinds of bundled products to sell.
Our driver module, our driving module, sometimes are sold to our clients independently, because they developed everything, 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 X-in-1 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 customer would just buy the part which controls, the electronic control, and some would, buy X-in-1, some would buy just the stator and rotors, et cetera. And I don't have that exact number of the X-in-1 sales specifically.
Even third party don't have those numbers, because if we just sell a stator or just a rotor or a stator and a rotor, how can that be calculated as a electric motor or half a motor, et cetera? It's really difficult to calculate. It's too complicated to break it down like that.
Okay, understood. Thank you. Thank you, Mr. Song.
Next one, one zero three nine. Please state your name and company first, please.
Hello, Mr. Song. I am Iris from Asia Industrial Automation Department from Deutsche Bank. I have two questions. The first one is around your profit rate, including gross margin and the net profit rate. So in regarding to gross margin, how should we understand your plan for next three years?
Because what we have heard is that next year will 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-in-1, robots and high-performance electric motors, which are to affect your automation business gross margin as well. Right now, it's above 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 control, at least to increase the net profit margin, the net profit rate?
The gross margin for us, we don't manage a comprehensive gross margin within our company. Because our three business blocks, 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 have been a fluctuation of gross margin, and we would strive to maintain at the same level right now, 'cause it's already very low. New energy vehicles had its independent gross margin there.
And for industrial automation, we have quite a scattered clients, so the gross margin is really capped at a pretty decent level. Even if going down, after three 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 servo, gross margin decreased by less than one percentage point, and with servo, it actually got increased. So comprehensively, with industrial automation, the decrease of gross margin might happen, but it controlled a very limited range, less than one percentage point. For 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 three 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 in net profit sense. Thank you.
Thank you, Mr. Song. And my next question would be a follow-up question regarding net profit rate.
'Cause two years ago, you had been doing some learned, long-term stimulus encouragement, and I remember in 2020, there had been a CNY 5.05 billion net profit, and this year, a CNY 5.3 billion yuan 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 two years, indeed, the market situation wasn't so optimistic. So would you continue to set that high target for yourself in the next two years? Requiring that encouragement plan to set a target of 10%, a 10% growth in net profit, absolute value?
The target of that long-term incentive would be always planned by our board meeting in April every year. Overall, our message is similar to what you have described, that long-term incentive would be to encourage 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.
Okay. Okay, thank you. Let's just wait and see if you are to reach that target in next year. I have another question with your progress in North America business. You said you're building logistics centers and 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?
Our logistic warehouse center is in United States, and as for production base, we're still in a process of making choices. In US or in Mexico, we've been hearing different voices and had two meetings, haven't decided yet. The warehouse is to be built in US, and for the production base, still in a progress of being discussed.
Okay. Thank you, Mr. Song. I'm Iris, I don't have other questions.
Next one, zero five five six, please. Please state your name and the company name first.
Hello, hello, Mr. Song, can you hear me? Yes. I am [Jen Wei] from Huafu [Foreign language]. I have two 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 two different types of businesses?
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 would be different. But if they sell to Southeast Asia, then the products' requirement would be similar to what we produce for 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 builds their factory overseas, and they would like to buy equipment, then 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 customers, 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.
Okay. Okay, understood. Thank you. 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? 'Cause before, it just the 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 softwares as well as including designing, simulation, and your hardwares. 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 part?
Well, that is a pretty complicated question to answer, 'cause our industrial softwares is a type of its own, and the digitalization and the IFA is the IFA. So three teams are building the PAN industrial softwares independently. And as for InnoCube, which is quite used in many sectors, including ports, digitalization, and mining, energy sector. Our metal industry clients, they use our InnoCube 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 a port, and as for automation company, you know, 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 expo, we just showed a simulation platform of automated crane operation, so with the programmer, 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.
Right now, we'd have to admit, it's pretty weak. The solutions we are promoting to the education industry, mainly for the purpose of training and exercises. Still, we haven't seen any real landings or implementations in the industrial practical field, but we are working on that. As for the more complicated PAN industrial software solutions, we have the NRA system software. We've showcased them all in this year's Industrial Expo, but we have a quite small booth, and we didn't have enough space to show the actual details of them all. That was it.
Thank you. A follow-up question there, Mr. Song. What about some standalone software that you can sell, and then consider those complete or integrated comprehensive digitalization solutions? Of course, the PLCs shall be excluded. PLC excluded.
So the revenue from those softwares and the 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 fourteenth five-year plan period, by the end of 2025, what would those numbers be?
Well, like I said, we have, three softwares, excluding PLC. The IFA software is similar to the ProTool 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 clients at the moment right now, and this year, the order reached, CNY 100 million-CNY 200 million.
Okay. Okay, understood. So that's all from me. Thank you. Thank you very much, Mr. Song.
Next one, telephone, number ending with, seven nine eight three. Please state your name and company first.
Hello, Mr. Song. I am, analyst, Zhong Sheng, from Morgan Stanley. 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. 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?
You asked about our internal product penetration or the combined sale ratio. 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 five or six years ago. We have an important KPI regarding that, but we don't use that anymore in recent years. And I think that that's a bundle ratio between a servo and a 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 servos 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%-14%.
To set a target, well, we wish to drive it up to 20% for our PLC market share, but without a designated time point. We regard that as a strategic target because PLCs is like the neck of industrial automation, a very important terrain for us to occupy. We do expect a prototype example of large-sized PLC to be launched by the end of this year, and we would find willing customer to test it together with us, because it's large and complicated, the prototype would take some more time to be tested. By the end of this year, prototype might come.
Okay. Thank you, Mr. Song.
Due to time limitations, let's have the last but not least, investor. Nine five three nine, please state your name and company first.
Hello, Mr. Song. I am [Tian Wei from Chen Hai].
I'm an analyst. I have two 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 the in order to expand the portfolio of automation products, you also have done something for precise 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?
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 Hebei, there is an industrial cluster in the industrial park.
In Wenzhou of Zhejiang Province, there is quite a lot of shoe making and the leather making clusters of companies. Those are what we call the cluster economy in China. Those are very small companies, but many of them cluster 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 three 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 had 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're going to prioritize our seed products. And you mentioned about the precise machineries. With precise machineries, we have a few products there. For example, for the machining tools. Machine tool industry, we used to just provide them with servos, but now we also provide them with other products, including the lead screws and the 3Cs, which are needed by them.
So we are going to be able to provide more parts of our product portfolio to this single industry. You know, 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 servo or visual with servos, et cetera, PLC, it really helped us to get into there with more businesses. Thank you.
Thank you, Mr. Song.
So that had been almost two hours.