Harmontronics (瀚川智能), a smart manufacturing solution provider to list on STAR Market, set its initial public offering (IPO) price at CNY 25.79 (USD 3.75) per share, valuing the company at 44.36 times its earnings in 2018.
Smart manufacturing is a broad category of manufacturing that employs technology-integrated manufacturing, high levels of adaptability and rapid design changes, digital information technology, and more flexible technical workforce training. For Harmontronics, its core technologies are applied in automotive electronics, healthcare equipment and new energy batteries industries in the process of R&D, design, production, sales and services.
Founded in 2007, the Jiangsu-based company generated a revenue of CNY 436.01 million (USD 63.39 million) last year with a CAGR of 70.36% since 2016. The automotive electronic sector gained CNY 370 million, representing 80% of the revenue, while healthcare equipment and new energy batteries contribute 7% and 8% respectively. The R&D expenses of the company were CNY 11.43 million, CNY 12.67 million and CNY 19.60 million from 2016 to 2018, accounted for 7.61%, 5.19% and 4.50% of the revenue respectively. Harmontronics’ top five clients made up of 83.04%, 72.82% and 75.07% of the revenue with CNY 137 million, CNY 217 million and CNY 373 million.
The above-mentioned financials posed three risks for the company: First, the limited application in downstream industries would add volatility to its business. Though showing a tendency of decline, the automotive electronics still took the largest share in both clients and revenue. Second, the lower than average (the average ratio in STAR Market is 15%) R&D ratio might restrain competency in future development. Third, the high concentration in its top clients made the company dependent on the operation status of those clients, adding uncertainty in the long run.
Besides those cons, the author holds a positive view of the company.
In recent years, China has continuously promulgated laws, regulations and policies to support the healthy development of high-end equipment manufacturing industry. Smart manufacturing belongs in the sector of general equipment manufacturing in China's A-share market. Currently, there are nearly 25,000 enterprises in this sector with an output value of CNY 4.22 trillion.
In addition, Harmontronic has a significant market position in the field of automotive electronic intelligent manufacturing, the major driver of its revenue. Of the top ten component parts manufacturers worldwide, seven of them are corporate customers of the company, including Continental Group, Bosch, Electrical Appliances, Magna, Essence, etc.. Similar in healthcare and new energy battery industries.
China's economy has bred a series of high-end manufacturing enterprises with outstanding scientific and technological innovation ability and international competitiveness. However, due to the high risk, large investment amount and long liquidity cycle of scientific and technological enterprises, financing difficulty and poor quality have long been the pain point of the industry.
STAR Market might be the solution for the growth and development of high-end smart manufacturing enterprises like Harmontronics.