FRIENDESS ELECTRONIC(688188):FOCUS ON SUSTAINABILITY OF CUTTING BUSINESS; LASER INDUSTRIAL CONTROL PLATFORM A POTENTIAL CATALYST

类别:公司 机构:中国国际金融股份有限公司 研究员:Xianfan CHEN/Jian DING/Zhihao WANG 日期:2022-01-21

Action

    We highlight the sustainability of the development of the laser cutting industry, and believe that Friendess Electronic (Friendess) shows potential in establishing an industrial control platform leveraging its core laser control technology. Considering uncertainties over downstream demand, we cut our TP 2.4% to Rmb468.48. Maintain OUTPERFORM.

    Reasoning

    This report focuses on two key issues facing Friendess: substantiality of the cutting business and potential of developing into an industrial control platform.

    1) Will the rapid expansion of the laser cutting market be sustainable? The market generally linearly extrapolates the high growth of Friendess’ cutting system in the next 3-5 years based on the rapid growth of its laser cutting business in the past. We believe that the size of China’s laser cutting machine market has surpassed the sum of the traditional cutting markets, and the penetration rate alone can no longer explain the continuous high growth of the industry. The industry growth is related to the decline in critical point of capacity utilization driven by improvement in equipment cost-effectiveness and the development of new applications, in our view. It is difficult for us to predict exactly when the rapid growth momentum will see a downward inflection point. However, we could closely track the following factors: 1) whether the price cuts of laser cutting machines continue; 2) whether market demand fluctuates sharply; 3) if there is any progress in new laser cutting materials and applications in new scenarios; and 4) if demand experiences sharp fluctuations at the macro level.

    2) Does Friendess have the potential be become an industrial control platform? Based on its five basic technical capabilities, i.e., computer-aided design (CAD), computer aided manufacturing (CAM), numerical control (NC), sensor, and hardware, Friendess has achieved whole-process coverage from drawing reading and layout (CAD) to process design (CAM) and processing control (NC, sensor and hardware) in the segment of laser cutting, and developed internationally leading all-in-one integrated solutions. The company is extending its core competence into areas such as ultra-fast laser, intelligent welding, and ultra-high-precision drive-control integration to create a new source of growth. We are optimistic that the company has the potential to develop a platform leveraging its laser control technology.

    Earnings forecast and valuation

    Considering uncertainties over downstream demand in 2022, we maintain our 2021 EPS estimate at Rmb6.05, but lower 2022 EPS estimate 3% to Rmb7.81. The stock is trading at 51.2x 2022e P/E, which is a reasonable level, in our view. We believe that the company is developing a new source of growth and expanding rapidly by leveraging its five core capabilities, and that it sees ample upside to growth with the continuous expansion of businesses such as intelligent cutting head, ultra-fast laser, etc. Given uncertainties over downstream demand, we cut our TP 2.4% to Rmb468.48, corresponding to 60.0x 2022e P/E and implying 17.1% upside. Maintain OUTPERFORM.

    Risks

    Disappointing demand in end markets, marketing of high-power control systems, and progress in construction of projects funded by financing schemes; falling profitability amid business expansion; and short supply of raw materials.