Buy shares at a low price and return 10 times a year.

Editor’s note: This article is from the micro-channel public number “Dongsishitiao capital” (ID: DsstCapital), Author: Tao Huidong.

Due to the extremely low share price, investing in Canqin Technology is expected to enable Huawei to create a myth of ten times the return in a year.

Huawei’s sci-tech innovation board empire continues to expand: On March 8, 2021, Canqin Technology disclosed its response to the letter of implementation of the opinions of the Listing Committee meeting, clearing the obstacles to IPO.

Can Qin Technology’s revenue in the first half of 2020 reached 730 million yuan, and its net profit after deduction exceeded 300 million yuan. It is a 5G leader with a market value of more than 30 billion after listing. But three years ago, Canqin Technology’s net profit was only more than 20 million yuan, and the listing was still beyond reach.

Behind the reincarnation is Huawei’s one-handed support. At present, more than 90% of Canqin’s revenue is contributed by Huawei. It can be said that Canqin Technology is another achievement of Huawei’s grand strategy to support the domestic supply chain after purchases were restricted. Incidentally, before the listing of Canqin Technology, Hubble Investment, a subsidiary of Huawei, had “suddenly bought shares” of 110 million yuan. In just one year, this 110 million investment is expected to increase by more than 10 times, and the “hard technology first VC” is well-deserved.

Buy shares at a low price, 10 times return a year

In May 2020, Hubble Investment, a wholly-owned subsidiary of Huawei, invested 110 million yuan in Canqin Technology in the form of transfer of old stocks. After the investment, it holds 4.58% of the shares. Canqin Technology is valued at 24 100 million yuan. In 2019, Can Qin Technology’s net profit has reached 700 million yuan, which means that Can Qin Technology’s valuation corresponds to a P/E ratio of only 3.3 times. This price level is inconceivable in the current primary market. What is even more shocking is that in December 2019, Canqin Technology conducted a round of employee equity incentives. At that time, Canqin priced the company at a valuation of 6 billion yuan, which was more than twice the price of Huawei’s stock price six months later.

Prior to listing, the issue of surprise shareholding and benefit transfer has always been the subject of rigorous investigation by the Science and Technology Innovation Board. Huawei’s unusual share price from the inquiry stage to the listing committee meeting is repeatedly singled out for questions, which shows the attention of the supervisory authority.

In response to the inquiry from the Shanghai Stock Exchange, Canqin Technology gave a reasonable explanation for Huawei’s share price. The earliest contact between Hubble Investment and Canqin Technology was in 2018. By May 2019, the two parties reached an agreement and agreed to value the price at 8 times the price-to-earnings ratio. At that time, the two parties estimated that Canqin’s net profit for the whole year of 2019 was about 540 million yuan, which should be estimated at 4.3 billion yuan at an 8 times price-earnings ratio, which is still much higher than the actual valuation of 2.4 billion yuan. But Canqin Technology stated that the two parties also agreed at the time that the valuation basis should be the average net profit of the two years in 2018 and 2019, while the net profit of Canqin Technology in 2018 was only 57.63 million yuan. Therefore, based on the two-year average net profit of 300 million yuan, 8 timesIn the first half of this year, this proportion has reached 92.68%. Can Qin tied up the Huawei chariot thoroughly.

However, for Canqin Technology, Huawei’s order is both an opportunity and a yoke. After Canqin Technology’s company scale has expanded more than ten times and is moving towards an IPO, how to seek further development after the listing requires facing the “Huawei dependence”. During the review stage, the Shanghai Stock Exchange also focused on inquiring about Canqin Technology’s reliance on major customers and whether there will be a decline in performance after listing.

Indeed, there are some signs that Canqin Technology’s performance growth is under greater pressure. In response to inquiries, Canqin Technology admitted that due to factors such as “fluctuations in downstream market demand” and “increasing market competition”, it is expected that the operating income for the whole year of 2020 will drop by approximately 25% to 29% year-on-year. The profit decline was even greater, ranging from 44% to 45%. As soon as it goes public, its performance declines. I don’t know how investors will view it.

Because of single customer dependence, Canqin Technology is unlikely to have bargaining power in the face of Huawei, and it is a high probability event to encounter price reduction. The prospectus shows that from 2018 to the first half of 2020, the gross profit margin of Canqin Technology’s leading product ceramic dielectric filters has dropped significantly, from 70.2% to 56.6%.

Huawei has always pursued the supply chain strategy of “don’t put eggs in a basket”. After 2018, the strong support of Canqin Technology’s “investment + orders” is more like an extraordinary move in a special period: Huawei needs to cultivate quickly A reliable supplier to solve the pressing needs at the time. In fact, while investing in Canqin Technology, Huawei did not relax its support for other suppliers. In just two or three years, China’s 5G ceramic dielectric filter manufacturers have sprung up.

According to reports, Aifu Electronics obtained an order for Huawei’s 5G ceramic dielectric filter products in October 2018; Wuhan Fangu disclosed that Huawei is one of the main customers. In 2019, some models of 5G ceramic dielectric filters passed the customer’s Certified and sold in batches; Dafu Technology disclosed that several of the company’s 5G filter platform-based products have been sold in batches to customers such as HuaweiSupply.

Under the increasingly fierce competition, it is worth paying attention to how much Canqin Technology’s gross profit margin will drop, or whether it can continue to obtain more orders from Huawei.