Summary of this article:
Hongda Electronics mainly sells tantalum capacitors, and its downstream customers are mainly aerospace and military industry groups;
The company’s comprehensive gross profit margin in 2020 is 69 %, net profit margin reaches 37%, ROE reaches 25%, and profitability is excellent;
High performance growth. Last year, revenue and net profit increased by 65% ??year-on-year. In the first half of this year, revenue increased by 77% year-on-year, and net profit increased by 110% year-on-year, maintaining a high performance growth rate.
01
Business model
Hongda Electronics mainly produces tantalum capacitors, which are divided into non-solid electrolyte tantalum capacitors and solid electrolyte tantalum capacitors, which are mainly used in military products ; Other products mainly include ceramic capacitors, inductors, power modules, etc., mainly for the civilian market, and are also categories that the company is actively exploring.
The company's performance has maintained rapid growth, with revenue of 210 million and net profit of 79 million in 2013. Last year, revenue reached 1.4 billion, an increase of 6.6 times, and net profit reached 480 million, an increase of 6 times. Revenue drivers come from two aspects. One is the continued high growth in revenue from tantalum capacitors, and the other is the category expansion of non-tantalum components.
According to the company's 2020 annual report, the comprehensive gross profit margin reached 69%, a year-on-year increase of 2.42 percentage points; the net profit margin reached 37%, a year-on-year increase of 1.16 percentage points. From the perspective of product structure, it is mainly military products with higher gross profit margins that have grown faster, driving up profit margins.
It can be seen that the company's growth is not an exchange of price for volume, but a healthy model of both volume and price. The company's ROE has increased to 25.23%, and its profitability has reached a big level.
While performance grew rapidly, operating cash flow increased significantly by 210.81% year-on-year. Although it is less than net profit, it is a significant improvement compared to previous years. This shows from the side that after the revision of the "Military Industry Equipment Regulations", the capital flow of the military industry chain has been greatly improved.
The company's accounts receivable grew rapidly, mainly due to the rapid growth of military product orders. The receivables turnover days exceed 300 days, and the inventory turnover days are close to 400 days. This shows that on the one hand, the company is relatively slow to collect payment, and on the other hand, it must always prepare a large amount of inventory to meet customer needs.
This is because the downstream customers are large military industrial groups, and the company does not have a strong say in the industrial chain. Although receivables and inventories occupy a large amount of cash, from the company's cash flow perspective, they have no impact on overall operations.
In addition, the company only has short-term borrowings of 5.5 million, and its liabilities are mainly reflected in upstream accounts payable and employee salaries. Capacity expansion and dividends are all money earned by the company itself, which once again proves that the company is not short of money and its cash flow is very healthy.
02
Capacitor Industry Chain
Capacitors store and release electrical energy in the form of static electricity. They are separated by a medium between two poles of conductive materials and store electrical energy therebetween. . The main functions are charge storage, AC filtering or bypassing, cutting off or blocking DC, providing tuning and oscillation, etc. Capacitor is one of the three major passive electronic components and an indispensable basic component in electronic circuits, accounting for approximately 40% of all electronic components.
Upstream
Mainly metal aluminum, tantalum, copper and ceramic powder are used to prepare capacitor materials. Among them, bulk commodities such as aluminum and copper are more common, while metal tantalum and high-temperature ceramic powder are relatively scarce. Therefore, capacitors made of these two types of materials have special uses and contain high value.
Midstream
According to different materials and functions, the finished products can be divided into ceramic capacitors, aluminum electrolytic capacitors, tantalum electrolytic capacitors and film capacitors.
Judging from the global market share of various types of capacitors in 2019, ceramic capacitors accounted for 52% of the aforementioned four major types of capacitors. Ceramic capacitors can be divided into single-layer ceramic capacitors (SLCC) and multi-layer ceramic capacitors (MLCC).
Among ceramic capacitors, MLCC not only has low equivalent resistance, high voltage/high temperature resistance, long life, small size, and wide capacitance range, but is widely used in downstream applications. Its market size accounts for about 93% of the entire ceramic capacitors. %. In the MLCC category, Japan's Murata and Taiwan's Yageo Electronics master advanced technology and huge production capacity, and they play a decisive role in the industry.
Downstream
The downstream industry is mainly divided into military market and civilian market.
The military market is mainly used in high-precision fields such as aerospace, radar, and missiles, which require continuous operation in extremely harsh environments (high temperatures, sub-zero temperatures). Therefore, the reliability of capacitors is very dependent. The main demand in this field is high-performance, high-quality tantalum capacitors and high-temperature ceramic capacitors.
The civilian market is very broad. Almost all electronic devices, such as smartphones, tablets, computers, wearable devices and household appliances, require capacitors. Among them, multilayer ceramic capacitors (MLCC) are becoming more and more popular. To occupy more and more market share.
In the A-share market, there are 5 listed companies mainly engaged in capacitors: Hongda Electronics, a manufacturer of specialty tantalum and ceramic capacitors, Hongyuan Electronics, a manufacturer of high-temperature ceramic capacitors, Fara Electronics, a manufacturer of film capacitors, and Ceramic capacitor manufacturer Torch Electronics and Fenghua Hi-Tech, which has the largest MLCC production capacity.
03
Growth-driven
Hongda Electronics attaches great importance to research and development, has relatively advanced technology, and has deeply benefited from the rapid growth of the military and civilian dual-use market.
Military Electronics
As my country's overall technological level improves, advanced equipment is installed in batches, the informatization rate of military equipment rapidly penetrates, and the demand for upstream electronic components grows rapidly.
According to the Qianzhan Industry Research Institute, my country’s military electronics market will reach 501.2 billion yuan by 2025, with a compound growth rate of 9.3%.
Capacitors
The application market of capacitors is much broader in the civilian industry than in the military industry. In addition, the continued penetration of consumer electronics, the rapid popularization of 5G, the Internet of Things connecting everything, and the explosion of new energy vehicles will have a positive impact on the growth of electronic components.
According to statistics from the China Electronic Components Industry Association, the global capacitor market size reached US$22 billion in 2019. The market size of my country's capacitor industry was 110.2 billion yuan, accounting for more than 70% of the global share, making it the world's largest capacitor market. .
The growth rate of my country's capacitor market is much higher than the global average. It can be said that the increase in capacitors is domestic. As long as we have the technology and production capacity, we are not afraid of losing sales.
04
Summary
Hongda Electronics is a leader in technology and has been deeply involved in military electronics for more than 20 years. Its profit margin is significantly higher than that of its peers. In recent years, its performance has grown rapidly and it is profitable. The ability is very good.
The core competitiveness that drives high performance growth lies in R&D capabilities. The company has significant advantages in tantalum capacitors, and has been very successful in expanding into the civilian market in recent years. Among them, ceramic capacitors and microcircuit modules have rapidly increased in volume, forming new performance drivers.
There are two main points to watch in the future of Hongda Electronics. One is the order-driven trend under the high boom in the military industry; the other is whether the high growth in the civilian market can be sustained.
Judging from the performance disclosed in the interim report, net profit increased by 110% year-on-year, maintaining the high growth since last year and forming support for its previous large increase.
The company has shown excellent growth since 2019, with a three-year compound growth rate of 43.69%. This growth rate is very fast, and PEG, a commonly used valuation indicator for growth stocks, can be used as a reference.
As of September 3rd, the company's market value was 34.4 billion, and the corresponding PE-TTM was 50 times. According to the consensus forecast of brokers, the full-year net profit was 570 million, a year-on-year increase of 57%, and the corresponding valuation was 45 times.
The current PEG is 1.14, which is close to a reasonable valuation based on the data. However, considering that brokerage reports usually overstate expectations, with huge early gains and large profit margins, once there is any trouble, there may be a major correction.
To be conservative, if PEG can fall below 0.8, it will have a large safety margin.