Autel Ends First Day of Trading on Star Market Up 204%
COVID-19 and China
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Yet another sound IPO has happened on the Shanghai bourse’s Nasdaq-style marketplace: Shenzhen-based Autel Intelligent Technology (688208:SH) launched open trading on February 13. The share price jumped up, reaching CNY 80.40 (USD 11.52) in the first minutes of the morning session. Later on, it slightly retreated, closing the day at CNY 74.10 (USD 10.61) apiece, a level three times higher than CNY 24.36 (USD 3.49) – the firm’s initial offering price.

Update: on the following day, the stock went down, closing at CNY 66.06 (USD 9.45).

Autel’s primary business – automotive electronics, such as diagnostic systems, testing tools and Advanced Driver-Assistance System (ADAS) hardware – brought it approximately CNY 900 million (USD 128.88 million) in 2018; this number grew at a 23.66% compound annual growth rate over the two previous years.

What’s more, according to a prospectus (in Chinese) that was filed with the local capital market authority in November 2019, the company used to run some projects in the field of Unmanned Aerial Vehicles (UAV): in 2016 and 2017, when Autel punched the break-even point, a significant portion of operating income came from this area.

The top management then, most probably, realized that it jumped on the trend too late and ditched the idea of further development of the UAV product line; as a result, no gain from drone-selling in the following fiscal year can be observed on their balance sheet.

While revenues matter in terms of growth potential and market assessment, profits can tell us the most about whether a particular business is healthy. In Autel’s case, margins have been dropping continually. This is exacerbated by the firm’s lowering R&D expenses, one of the culprits behind its diminishing competitiveness.

By the by, the global automotive electronics market is full of ‘carnivores’ with tremendous market caps. The company’s pool of direct competitors is vast too. It includes Bosch, Snap-on (SNA:NYSE) as well as Hong Kong-listed Launch Tech (2488:HKEX) and Baolong (603197:SH), which is currently trading on the Shanghai exchange’s main board.

There is another significant concern related to the harsh market environment Autel is operating in. Over 80% of its revenue typically originates outside of China, with around 45% coming from North America. Relying heavily on American and Canadian buyers, the company is likely to be affected by the recent wave of global trade conflicts. Therefore, in the near future, it might choose a more robust strategy, trying to keep up with increasing demand locally. 

Autel is among the companies selected by EqualOcean in its quarterly report ‘The Star Market Overview 4Q 2019’ (download).

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