Core views:

Han's Laser is the world's leading supplier of printed circuit board (PCB) special equipment with an in-depth presence for two decades. Starting from drilling machines, it has gradually covered multiple core processes. Downstream customers include Shennan Circuits, Kinwong Electronic, Shengyi Electronics, Victory Giant Technology, Avary Holding, Unimicron Technology and other mainstream PCB manufacturers. We are optimistic about the Company's sustainable development, expecting it to benefit from the relocation of PCB production capacity to China in the future, the continuous expansion of domestic board manufacturers and the upgrading and iteration of downstream PCB products. We forecast 2022E/23E/24E EPS of Rmb2.35/3.17/3.91 and initial coverage with a "BUY" rating and a target price of Rmb70 on 30x 2022E PE.

Abstract:

Company profile: 20 years of deep cultivation in PCB special equipment, with full coverage of four key processes.

Established in 2002, Han's Laser started from drilling machines and gradually built presence in multiple core processes including exposure, molding, inspection via endogenous growth and external expansion. Its revenue in 2019-21 was Rmb1.323bn/2.210bn/4.081bn, and recurring profit was Rmb0.21bn/0.30bn/0.68bn, respectively. The Company's specific products include drilling equipment (accounting for 75% revenue in 2021, including mechanical drilling machines, laser drilling machines, etc.), testing equipment (accounting for 7.8%), exposure equipment (accounting for 7.9%), molding equipment (accounting for 3.9%), which are widely used in multi-layer boards, HDI boards, IC packaging substrates, flexible boards and rigid-flex boards and other segments. According to its prospectus, its downstream customers include 89 companies in the 2019 NTI-100 global top 100 PCB ranking and 95 in the CPCA 2019 top 100 China PCB companies list, such as Shennan Circuits, Kinwong Electronic, Shengyi Electronics, Victory Giant Technology, Avary Holding, Unimicron Technology and other mainstream PCB manufacturer.

Industry analysis: PCB factory expansion and structural upgrade drive the demand for the localization of equipment.

According to Prismark, the global PCB market exceeded US$65bn in 2020. By segment, investors can focus on servers and data centers (increase in transmission rate and increase the number of PCB layers), smartphones (from mid-to-low-end HDI to any-layer HDI/SLP upgrading), wireless communication infrastructure (5G base stations increase PCB demand) and automotive electronics (the value of new energy vehicle PCBs is 10 times that of traditional vehicles). The four major segments of PCB take the lead in output growth, with estimated CAGR of 8.5%/6.8%/6.8%/6.8% in 2020-2025, respectively. In addition, applications in data centers and smartphones will also increase the demand for high-end PCB products. Looking ahead to 2022 and beyond, we estimate that under normal circumstances, the annual global PCB equipment purchase will amount to about Rmb30bn-40bn, including demand for the Company’s drilling, exposure, testing, molding and other equipment that amounts to about Rmb12bn-16bn.

Company analysis: From drilling machine to gradual coverage of the four core PCB processes, with advantages in technology, products, customers, and collaboration.

(1) Pioneer of domestic PCB special equipment manufacturing, maintaining a leading position. The Company has ranked first in the China printed circuits industry top 100 (specialized instruments and equipment) released by CPCA for 12 consecutive years. In 2020, its revenue nearly doubled that of the No. 2 in the list. In 2021, its revenue increased by 84.62% YoY to Rmb4.081bn, maintaining a fast growth and evident leading effect. (2) Technology platform + product platform matrix with multi-dimensional collaboration. By focusing on the eight core technologies and four key processes in the PCB industry, the equipment provided by the Company takes up more than 40% of the equipment investment in the PCB industry, of which the domestic market share of its mechanical drilling machines is nearly 50%, and that of general testing equipment exceeds 20%, with significant leading edge. The Company builds a technology platform and a product platform to achieve collaboration of upstream, midstream and downstream technologies, products, scenarios, supply chains, and customers. (3) Patent reserves and R&D personnel are leading the industry. The Company's core technicians have rich expertise. In terms of patents, as of the end of 1H21, it obtained 161 invention patents and 149 software copyrights, taking a leading position among comparable companies in the industry. (4) High-quality customers: With full coverage of domestic mainstream PCB manufacturers. The downstream customers of equipment manufacturers are relatively scattered. The Company’s top five customers contributed 28.81% of the total revenue in 1H21, all of which are established domestic PCB manufacturers. The expected acceleration of production expansion by the customers will continuously benefit the Company as a leading equipment supplier.

Potential risks:

Technology being overtaken or replaced, loss of key technical staff and insufficient reserves; the reliance of some raw materials on overseas and single supplier, fierce market competition, raw material price fluctuations.

Investment recommendation:

The Company is a leading PCB equipment supplier in China, with products applied in the fields of drilling, inspection, exposure, forming, and attaching, covering more than 40% of the equipment needs in the PCB production process. With high quality downstream customers, it will continue to benefit from the relocation of PCB production capacity to China in the future, the continuous expansion of domestic board manufacturers and the upgrading and iteration of downstream PCB products. We forecast 2022E/23E/24E EPS of Rmb2.35/3.17/3.91. Considering the average 34x 2022E PE for related PCB equipment manufacturer, we assign it 30x 2022E PE to derive a target price of Rmb70 and initiate coverage with a "BUY" rating.