I have actually discussed PCBs before, specifically about Huadian Co., Ltd.
However, recently several friends have left comments asking me to analyze Shenghong Technology, which led to this article (whoever clicked, please take note, haha).
PS (Since I have previously analyzed Huadian Co., Ltd., this analysis will focus on comparing the two companies and their differences).
The content is divided into three aspects:
- Industry analysis: Is the industry growing or shrinking?
- Company analysis: How competitive is the company, and what is its bargaining power in the upstream and downstream?
- Financial report analysis: How capable is the company in making profits, controlling risks, and growing?
1. Industry Analysis (8 points)
I have already discussed industry analysis when analyzing Huadian Co., Ltd., so I won’t elaborate here. If you’re interested, you can turn left and check my previous article.
In summary: PCBs are not specifically for AI; they are needed in many fields, and the industry is currently in a growth phase.
So here, I will mainly discuss the differences between the two companies.
Shenghong Technology focuses on multilayer boards and advanced HDI, meaning Shenghong is very focused on AI, while Huadian’s layout is broader, primarily focusing on multilayer boards while actively expanding HDI production. Due to its strong focus on AI, Shenghong Technology’s revenue and profit performance this year have been very impressive, which we will analyze later.
2. Company Analysis (8.5 points)
First, in terms of output value, China’s PCB scale accounts for over 50% of the global market, making China the manufacturing center for PCBs worldwide. In the high-end PCB sector, it accounts for about 28% to 35% of the global market. If China has an absolute advantage in PCBs, then it has a relative advantage in the high-end sector.
Among domestic companies, the main players are Huadian Co., Ltd., Shengyi Technology, Shenzhen South Circuit, Dongshan Precision, and Shenghong Technology.
Shenghong is the largest by market capitalization (mainly due to this year’s increase), with a global market share of about 15% to 18%.
The other companies are of similar scale, all around 100 billion, but there are some differences in their business areas. For example, Shengyi Technology produces copper-clad laminates, which are raw materials for PCBs; Dongshan Precision is a diversified electronic manufacturer, with PCB assembly as one of its core businesses; Shenzhen South Circuit deals with PCBs and packaging substrates.
Thus, the companies that are more purely engaged in PCB business and have a closer relationship with AI are Shenghong Technology and Huadian Co., Ltd. Shenghong Technology is highly focused on AI, with its products primarily in the high-end sector, while Huadian Co., Ltd. is in the mid-to-high-end sector, gradually moving towards the high-end.
I previously rated Huadian Co., Ltd. an 8, while I give Shenghong Technology an 8.5.
On one hand, Shenghong’s high-end layout is better; on the other hand, Shenghong’s market share and revenue scale are slightly better than Huadian’s.
3. Financial Report Analysis (8.5 points)
Shenghong’s performance this year has grown rapidly, with revenue increasing by 83.4% and profits tripling. In two years, the stock price has increased sevenfold; there is really not much to say, it’s impressive.
Looking at the gross profit margin, it was around 20% in previous years, but this year it jumped to 35.85%, and the net profit margin reached 22.98%. Comparing with Huadian Co., Ltd., its gross profit margin is 35.4%, and net profit margin is 20.08%. The gross profit margins are similar, but Shenghong’s net profit margin is nearly 3 percentage points higher.
Specifically, Shenghong invested 607.5 million in R&D, 191.8 million in sales expenses, and 343.7 million in management expenses. In comparison, Huadian invested 792.3 million in R&D, 373.6 million in sales expenses, and 300.9 million in management expenses. It is clear that Huadian has higher R&D investment and lower management expenses, as Huadian’s business is broader, leading to higher marketing costs.
Shenghong’s accounts receivable and bills amount to 6.5227 billion, a year-on-year increase of 74.70%, while accounts payable and bills amount to 8.5844 billion, a year-on-year increase of 91.31%. Contract liabilities are 8.57 million, a year-on-year decrease of 5.9%, indicating that the company is rapidly expanding.
Comparing with Huadian, accounts receivable and bills amount to 4.87 billion, a year-on-year increase of 63.71%, while accounts payable and bills amount to 5.6624 billion, a year-on-year increase of 65.42%. Contract liabilities are 63.79 million, a year-on-year increase of 105.58%.
Does this mean that Shenghong’s growth potential is better than Huadian’s?
I think the evidence is not sufficient at the moment; we need to observe further. It can only be said that Shenghong’s expansion is more apparent than Huadian’s. Since it is expansion, there will be financial pressure.
For instance, Huadian’s asset-liability ratio is lower than that of Shenghong, and its liquidity ratio, quick ratio, accounts receivable turnover rate, and turnover days are all better than Shenghong’s.
4. Investment Outlook (8.2 points)
This year, Shenghong’s revenue grew by 83%, and profits tripled, while Huadian’s revenue grew by 49.96% and profits grew by 47%. It seems that Shenghong has completely outperformed Huadian.
However, I must say that the revenue and profits of Shenghong and Huadian are actually quite similar. Shenghong’s revenue is 14.1 billion, and profit is 3.244 billion; Huadian’s revenue is 13.5 billion, and profit is 2.717 billion.
So why is Shenghong growing so fast?
Looking at the 2024 data, Shenghong’s revenue is projected to be 10.7 billion, and profit 1.154 billion; Huadian’s revenue is projected to be 13.3 billion, and profit 2.5872 billion.
The main reason is that Shenghong’s previous data was relatively poor, making this year’s data look particularly good, with profits tripling, which is significantly better than Huadian’s.
Does this mean that Shenghong is a better investment?
Huadian currently has a price-to-earnings ratio of 39.04, with a total market value of 134.9 billion, while Shenghong has a price-to-earnings ratio of 66.3, with a total market value of 241.2 billion, which is roughly double that of Huadian.
Huadian’s stock has risen over 80% this year, and 1.6 times in two years, while Shenghong’s stock has risen 5.6 times, and 7 times in two years.
If the price-to-earnings ratio and market value were the same, I would still prefer Shenghong, but currently, with similar revenue, one has a price-to-earnings ratio of 66, and the other 39, with market values of 241.2 billion and 124.9 billion respectively. Whether Shenghong is worth such a premium is for everyone to judge.
Additionally, we mentioned that Shenghong is pursuing a high-end PCB route, focusing on AI, but I checked the historical R&D investments, and Huadian has always been higher than Shenghong. Of course, we say that investment does not necessarily correlate with output, but the question remains whether Shenghong’s technological barriers are as solid as claimed.
What do I want to express after all this?
From this year’s performance, Shenghong shows higher growth potential; however, looking at recent years’ R&D, return on equity, and other indicators, Huadian appears to be more stable.
Both are rapidly growing companies, and whether they are worth buying and at what price depends on your judgment of their future growth capabilities.