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Apple supplier loses half its value but no selloff from foreign funds
[CHINA] Han's Laser Technology Industry Group Co has lost US$5 billion, or half its value, since the summer, swept up in a global rout of companies that make up Apple Inc's supply chain. Yet foreign investors remain enamored of the Chinese laser tools maker.
As of this week, foreign investors held about 17 per cent of Han's Laser through the northbound arm of the Shenzhen-Hong Kong stock connect: the highest proportion among more than 700 stocks that foreigners can invest in via the two-year-old market link. That's despite a brutal drubbing that's pushed the company to its cheapest per-share valuation in over five years. A manufacturer of laser cutting and welding gear for consumer electronics labels from Samsung to Sony, it's trading at its lowest in roughly a year.
Admirers of Han's Laser believe it's close to a bottom in the wake of Apple boss Tim Cook's surprise outlook cut in January, the culmination of months of concerns about iPhone demand that've walloped partners such as Hon Hai Precision Industry Co. Mounting evidence that China's economy is cooling more rapidly than expected is also punishing industrial firms. The stock was trading at about 14 times 2019 earnings as of Tuesday after touching 13 on Jan 3 -- its lowest since mid-2013.
Yet revenue growth is expected to rebound to more than 20 per cent this year, helped by advances in laser technology that allows it to seek new clients beyond a floundering smartphone arena.
"In the long run, if China wants to develop its high-end manufacturing industry, the laser sector will be a major part of Beijing's plan with at least 10 per cent in annual revenue growth," said Zhu Jixiang, a Capital Securities Corp analyst whose recommendations yielded the second-highest returns among his peers over the past year. "There's a buying opportunity" anytime its valuation dips below 15 times 2019 earnings.
Founded in 1996, Han's Laser has grown into a global supplier of laser cutting, welding and drilling gear to a plethora of global electronics names from Panasonic to Olympus. Its advocates say an increasingly diversified business -- in printed circuit boards, for instance -- and lead in the domestic laser equipment sector helps it hedge risks from weakening iPhone sales, even during an economic slowdown.
Although Chinese tech companies have wilted along with the rest of the market as US trade tensions persisted, high-end manufacturing remains attractive to some. Citigroup set a price target of 50.9 yuan (S$10.18) on the stock on Jan 10, implying room to climb about 70 per cent because of its deepening penetration. That's sharply higher than the average projection of about 43 yuan from 13 analysts, which still suggests a comfortable ceiling.
Part of its draw is simple profit potential: earnings-per-share is expected on average to grow 13 per cent in 2018, then quicken to 28 per cent in 2020. To be sure, Apple still accounts for around 40 per cent of Han's Laser's revenue, estimates Hiroki Lu, a fund manager at SinoPac Securities Investment Trust who's cut his holdings since July to avoid the selloff. But that proportion's dropping gradually.
That's why foreign shareholdings in the company increased 13 percentage points over the past year, the second highest jump among all mainland-listed companies participating in the stock connect program, data compiled by Bloomberg show.
"It's in the worst time now. The price should be stable because other businesses of the company have a chance to grow," said Mr Lu, who's gauging when to jump back in. "The company is exploring its own laser transmitter, which will help lower costs in the future."