China’s Rust Belt Glittered: Xinguang Prices IPO at CNY 38.09 per Share
COVID-19 and China
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Xinguang Photoelectric Technology’s shares will start trading on July 22 at the Shanghai venue. The firm set an initial public offering share price at CNY 38.09 (USD 5.54), planning to obtain CNY 952.25 million (USD 138.5 million) from investors on the STAR board.

In the article devoted to the new sci-tech board’s essence, EqualOcean explains how “governmental” the STAR Market is. We noted that a top-down initiative can barely end up as a market-driven mechanism.

Here is the second aspect: a government is able to buy, sell, invest and so on. In a nutshell, it is just another market player. In this regard, special attention should be paid to the traditional “strategic” sectors where the state maintains monopsony. Xinguang is a leading enterprise that can find itself within one of those industries – military electronics.

Two of the five main company’s product lines composed 83% of its revenue in 2018: CNY 120.64 million (USD 17.57 million) came from optical target and scene simulation systems sales, CNY 52 million (USD 7.6 million) – the result of selling various optical guidance systems. Laser countermeasure systems, photoelectric testing equipment and civil-military integration products account for the rest.

The optoelectronics manufacturer’s revenue has been sweepingly increasing in the past three years: from CNY 158.6 million (USD 23.05 million) in 2016 to CNY 208.4 million (USD 30.28 million) in 2018. At the same time, net profit was pleasantly high, reaching a three-year minimum of CNY 40.2 million (USD 5.84 million) in 2017. High profit margins (36.47%, 22.09% and 42.12% in 2016, 2017 and 2018 respectively) apparently became a pivotal factor reinforcing the investors’ optimism.

As for the military-related industries, three things could be said. Firstly, growth here is fueled by the state in many ways. The next one is demand – it is stable and concentrated (which is partly derived from the first statement). Finally, segmentation and lack of real competition are visible with the unaided eye.

Spending around 10% of total operating income on research and development, Xinguang is among the STAR Market laggards by this criterion. Although the state contracts are oftentimes signed for several years in advance, lack of R&D expenses might become the main hindrance on the Xinguang’s way.

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