Han's Laser is in the midst of a performance winter. How can it save itself from the predicament?

As one of the first eight stocks listed since the launch of the SME Board in 2004, Han's Laser's revenue has maintained positive growth for 14 years in the 15 years since its listing, making it a blue chip stock highly sought after by the capital market. However, its performance has been declining step by step since 2019.

Not long ago, Han's Laser was caught in a whirlpool of public opinion due to questions about the long time and high investment of the European R&D center project and the chairman's angry response to CCTV reporters. At this time, A-shares were selected into FTSE Russell, and Han's Laser was also included. Whether it can save the decline in performance has become the focus in the market.

In the cold winter of declining performance in the past two years,
Han's Laser reported a 60% drop in profits in its semi-annual report in 2019. Various signs show that the company is still going through the winter.

On August 18, the semiannual report released by Han's Laser showed that the net profit in January-June was 379 million yuan, a decrease of 62.74% from the profit of 1 billion yuan in the same period last year; the operating income was 4.734 billion yuan, a year-on-year decrease of 7.3%.

The operating performance forecast for January to September disclosed simultaneously by Han's Laser shows that the net profit attributable to shareholders of the listed company in the first three quarters was between 580 million and 750 million yuan, with a fluctuation range of -65% to 55%.

Affected by the cyclical downturn in the consumer electronics industry, which has led to cautious capital expenditures by some industry customers, the company's market orders have declined compared with the same period. At the same time, due to the impact of product structure and market competition, its comprehensive gross profit margin has declined by 5.97 percentage points compared with the same period last year.

Operating costs in the first half of the year were 3.149 billion yuan, a year-on-year increase of 1.83%; financial expenses were 76.75 million yuan, a surge of 272.55%, due to the combined impact of fluctuations in the US dollar exchange rate and increased interest expenses during the reporting period.

In addition, cost expenditures such as sales expenses, administrative expenses, income tax, and R&D investment have all declined to varying degrees.

•Laser and automation supporting equipment contributed 83.82% of the revenue, with revenue of 3.968 billion yuan in the first half of the year, a year-on-year decrease of 2.72%, which is a business that can basically maintain the current market status.

•The situation of another product, PCB and automation supporting equipment, was relatively difficult, with revenue of 422 million yuan in the first half of the year, a year-on-year decline of 37.55%.

• The revenue of the new high-power laser business fell by 5.43% year-on-year, mainly due to intensified market competition;

• New energy business has smooth cooperation with major customers, but due to fierce market competition, the gross profit margin is low

The story of apology for information disclosure

Regarding the European R&D and operations center that had previously caused controversy, the general contracting contract for the project disclosed by Han's Laser showed that the total contract amount signed in July 2016 was 154.5 million Swiss francs, equivalent to approximately 1.055 billion yuan.

At the same time, Han's Laser apologized and expressed its deep awareness of the shortcomings in its information disclosure work. It will actively implement rectification measures and establish a long-term prevention mechanism for the matters that have been implemented.

Han's Laser said that due to work omissions, the self-built European R&D and operation center had inaccurate and untimely disclosure of project information. The company now supplemented the relevant situation and progress and apologized to investors.

At the same time, Han's Laser released several announcements on August 18:

The company announced its performance for the first half of 2019, with net profit attributable to shareholders of listed companies falling by more than 60% during the reporting period.

The company also announced the construction status of the European R&D and Operations Center project. Regarding the European project that has attracted much attention before, the company said that the total amount of the "European R&D and Operations Center Construction Project General Contracting Contract" is equivalent to about RMB 1.055 billion, and the operations center is expected to be completed by the end of 2020.

In July, the Shenzhen Securities Regulatory Bureau conducted a special inspection on Han's Laser's information disclosure and put forward rectification requirements for the company. The company announced that it has hired an internationally renowned accounting firm to conduct a special audit of the European R&D and Operation Center project. The special audit has not been completed yet, and the audit results will be announced to the public in a timely manner after completion.

Eight years have passed since the European R&D and Operations Center was planned in 2011. Due to many objective factors, the company's strategy of promoting internationalization through mergers and acquisitions in Europe has not met expectations, and many factors have had a significant impact on the original positioning of the European R&D and Operations Center project.

Previously, the Shenzhen Securities Regulatory Bureau conducted a special inspection on information disclosure matters of Han's Laser in July and put forward rectification requirements for the company.

Investing heavily in European R&D center to support growth

At present, Han's Laser has two projects under construction, of which the new European R&D and Operation Center project has an investment of 135 million yuan, and the Han's Global Intelligent Manufacturing Base has an investment of 277 million yuan. As of the end of the reporting period, the budget for the European R&D and Operation Center project increased to 1.057 billion yuan, and the budget for the Global Intelligent Manufacturing Base increased to 1.947 billion yuan.

Han's Laser planned to establish a European R&D center in Switzerland in 2010. Now, eight years have passed and the company has invested a total of 806 million yuan, and the project progress is 75%.

Han's Laser focuses on the research and development of laser technology, and continues to overcome difficulties in the field of lasers and laser technology applications. When it realized that there was a large gap compared with European and American industry giants, it decided to explore more international cooperation and business development.

As the birthplace of laser technology, Europe has gathered a large number of laser industries and business partners. Switzerland, with its strong industrial foundation, has won the favor of Han's Laser.

The completion rate announced to the public in 2015 was 80%. In 2016, it was said that the completion rate was only 50% due to late construction and other reasons. Since then, the completion rate has changed repeatedly, and when the R&D center will be completed has become an unsolved mystery.

The original budget for the project was RMB 50 million. After several budget adjustments, as of the 2019 semi-annual report period, only 75% of the project had been completed, while the actual investment amount of RMB 806 million was 16 times the budget.

The economic cycle is going against the tide

This year, Han's Laser has encountered a small cycle of weak electronic product consumption, and the sales of its downstream enterprises have fluctuated and declined, and the enterprises dare not expand rashly. This trend has been transmitted to the upstream of the industrial chain, and the producers of means of production such as Han's Laser are naturally under pressure.

Considering that it seems unlikely that Han's Laser will incur losses now, but profitability will become more difficult, the company may want to take advantage of the quiet market and low valuations to conduct in-depth development, horizontally acquire some small businesses, or vertically integrate the industrial chain.

Judging from the market value of shareholdings, the market value of QFII's shareholdings in Han's Laser and other companies exceeded 1 billion yuan at the end of the second quarter; judging from the number of new or increased shares, QFII bought relatively more stocks such as Han's Laser in the second quarter.

The impact of the successful entry of A-shares into FTSE

FTSE Russell has announced the inclusion of A-shares, which means that the openness of A-shares has taken another step forward. At the same time, MSCI plans to adjust the inclusion ratio from 5% to 20%, which is also a major positive for A-shares and means more foreign capital inflows.

The impact of the FTSE 500 Index on A-shares does not lie in the amount of capital, but in the butterfly effect it triggers. A-shares have reached the standards of international indices and can be included in most global indices.

Although the funds brought in by other indexes are not as much as MSCI, they have the advantage of quantity. This is the impact of investment on A-shares, triggering a butterfly effect, which is far greater than the impact of the funds brought in.

Recently, MSCI suggested increasing the inclusion factor of MSCI China A-share large-cap stocks from 5% to 20%, which would directly bring nearly 300 billion yuan of incremental funds to the market next year. Then, China A-shares as a whole may see an inflow of more than 400 billion yuan next year, which can indirectly leverage more foreign capital to enter the market, activate the Chinese A-share market, and allow A-shares to get out of the downturn and drive a greater impetus to employment.

The innovation cycle of consumer electronics is approaching and is expected to achieve a breakthrough in performance.
From a business perspective, Han's Laser continues to develop new products and downstream customers on the basis of improving its competitiveness in the consumer electronics industry, and its business lines are in full bloom. Although its profits declined significantly in 2019, its operating income only fell by 7.3 percentage points.