Last week we wrote a report about Lianchuang Optoelectronics (Lianchuang, Shanghai stock exchange symbol 600363) the best tech stock in China that is the most undervalued and the most likely buyout buy foreign tech companies.
The company just released its 2019 Q2 financials today. We are sharing with our readers here our quick reviews on the primary numbers in the financial report. Lianchuang’s Q2 financial results, as we estimated, were pretty good. In the second quarter, the company completely reversed the short-term slowdown of its top-line and bottom-line in the first quarter. Sales soared, and net profit were close to resume upward trend again. The following are the key numbers for the second quarter:
Revenue: RMB 1.15 billion, 29% growth YOY.
Net Profit: RMB 67.2 million, drop 10% YOY
Earnings Per Share: RMB 0.1516
Annualized Earnings Per Share: 0.6064
As we can see, revenue rose by nearly 30% year-on-year. For technology stocks, revenue is absolutely the most important indicator of future performance. The logic here is the same as that of dot-com stocks. A company’s net profit can be easily affected by short-term fluctuations in input costs. The fact that its revenue continues to grow at fast speed proves that its products have irreplaceable technological superiority and attractive price-performance ratio that customers like, its customer base will keep on growing, and its sales footprint will keep on expanding. Fast-growing revenue is the key to an electronic company’s long-term growth. As long as the company continues to expand its market share and brand awareness, after its market share clears certain critical threshold its bargaining power with customers and suppliers will rise quickly and its profit margin will increase significantly. Against the backdrop of the fierce trade and tech wars between China and the United States and Chinese government’s full-throttle push to increase and upgrade domestic consumptions on every categories including electronics, Lianchuang management team’s decision to slightly sacrifice short-term profits in order to accelerate sales growth and seize market share is very wise. It is the same strategy as the one that Alibaba, Tencent and meituan.com adopted in their early years. The strategy is also the one those redhot companies that recently went public in China’s new high-tech stock trading board Star Market. The startling similarity between Lianchuang and those hotly sought-after stocks with P/Es in the 100s confirms that that Lianchuang’s business is experiencing a second explosive growth and that the company is the most valuable high-tech gem hidden in Shanghai stock exchange’s main board.
In the second quarter, the company's latest technological breakthroughs and product innovations in 5G, superconducting, and military sectors have not yet started to show any power (the news pieces about the company’s breakthroughs in superconducting and military sectors appeared in late June and July, while the first 5G mobile phone in China was launched in August). When Lianchuang’s products in these three new and fast-growing business sectors start to penetrate markets in the third quarter, with the company's sales in LED/OLED and electricity sectors continue to soar, Lianchuang’s top-line and bottom-line growth in the second half of this year and next year will be quite exciting. Basing just on the company’s EPS in the second quarter without considering the aforementioned growth catalysts in new sectors, the company’s annualized EPS is still no less than RMB 0.60, implying a price-earnings ratio of about 20 only, which is materially below the average P/E of electronics or high-tech stocks in China and outrageously lower than the average P/E of stocks on the new Star Market board (in the hundreds). Its fair P/E should be at least 40. Let’s once again compare the valuation multiples of Lianchuang and some of its comparables:
Lianchang Optoelectronics: P/E ratio 25, P/E ratio 2.09, market capital RMB 5.27 billion.
Xinguang Optoelectronics: P/E ratio 502, P/E ratio 1.957, market capital RMB 7.93 billion.
Fuguang shares: P/E ratio 103, P/E ratio 11.54, market capital RMB 12.64 billion.
Western superconductor: P/E ratio 129, P/E ratio 1.169, market capital RMB 24.6 billion.
Thus, our investment thesis in this bright high-tech company remains intact. The stock is undervalued by 70+% and is the most likely buyout target for foreign tech giants that are crave about China’s technology IPs and immense market of electronics.