Interpreting the New Stocks of US Stocks | Performance dragged down by the sluggish real estate market, HCAI.US's net profit plunged by 63.4%

In 2023, according to data from the Traffic Management Bureau of the Ministry of Public Security, China's newly registered vehicles reached 24.56 million, an increase of 5.73% compared to the previous year. This number has exceeded 20 million vehicles for 10 consecutive years since 2014. Due to the continuous growth in the number of newly registered vehicles, by 2023 China's motor vehicle ownership reached 435 million, with 336 million being automobiles. The increasing number of vehicles owned has led to higher efficiency requirements for parking lots and garages in the market, thus creating opportunities for the development of smart parking solutions. One representative company in this field is Huawei Technologies, which has initiated the journey to go public in the United States. It was revealed that Huawei Technologies, a provider of smart parking solutions and equipment components in China, submitted its initial public offering (IPO) application to the SEC on August 14 and updated its prospectus on September 13. Huawei Technologies has applied to list on the NASDAQ under the code "HCAI," intending to issue 5 million shares of common stock at a price range of $4 to $6 per share, with a maximum fund raised of $30 million. In terms of performance, Huawei Technologies faced the dilemma of "increased revenue but decreased profit" in 2023. During the reporting period, its revenue was $34.279 million, a 63.58% increase compared to the previous period, but the net profit was $2.0161 million, a significant decrease of 63.4%. Why is there such a large gap between Huawei Technologies' revenue and net profit? The details can be found in the company's prospectus. Long-term industry development opportunities vs. short-term operational challenges Smart parking refers to the use of technology and data-driven solutions to optimize and improve the efficiency of parking spaces in urban areas, aiming to make parking more convenient, cost-effective, and environmentally friendly. Compared to traditional parking systems, smart parking systems offer several major functions: maximizing space utilization, programmable control systems, safety mechanisms, voice and information assistance, IoT fault feedback, and expandable service functions. The significant gap in parking space construction in China provides huge market potential for the development of the smart parking industry. According to the "Urban Parking Facility Planning Guidelines" issued by the Ministry of Housing and Urban-Rural Development, for cities with a population of less than 500,000, the ratio of parking spaces to vehicle ownership should be between 1.1:1 and 1.5:1; while for cities with a population exceeding 500,000, the ratio should be between 1.1:1 and 1.3:1. According to this planning, there are millions of parking space gaps in China, requiring the transformation of existing parking lots to meet market demand. At the same time, most parking lots and garages in China still rely on manual collection of fees. The average annual cost of a toll booth exceeds 100,000 RMB, and this cost is continuously rising. High costs, low efficiency in fee collection and traffic flow, have made unmanned intelligent parking lots and garages a trend in the industry. In recent years, driven by continuous market demand, the smart parking industry has experienced rapid development. Data shows that in 2022, the market size of China's smart parking industry was approximately 20 billion RMB, and according to predictions from the "Research and Analysis Report on Supply and Demand and Key Enterprise Investment in the Chinese Smart Parking Industry Market from 2024 to 2029," the market size of China's smart parking industry is expected to reach 27.8 billion RMB in 2024 and reach 42.6 billion RMB in 2028, implying an average compound annual growth rate of approximately 11.22% from 2024 to 2028. However, in the short term, Huawei Technologies faces significant challenges, one of which is the downturn in the real estate industry, leading to a decrease in new home sales, weakening the demand for multi-level parking garages and causing the smart parking industry to enter a sluggish phase. Furthermore, the competition in the smart parking industry continues to intensify. As of August 18, 2023, there were a total of 2,177 companies operating in the smart parking industry in China, with a compound annual growth rate of approximately 21% since 2015. The entry of a large number of small-scale enterprises into the market has intensified industry competition, leading to price wars. Companies have varying production qualifications, product types, and quality standards, resulting in further industry differentiation. The level of expertise in smart parking systems and related equipment has become a key competitive advantage for companies, with listed companies such as Shenzhen Jieshun Science and Technology Industry (002609.SZ) and Jiangsu Wuyang Automation Control Technology (300420.SZ) being major players in the industry. Behind the significant increase in revenue, Huawei Technologies' equipment structure component business adopts a "quantity over quality" approach. Huawei Technologies is a comprehensive provider of smart parking solutions and equipment structural components. Its customized parking solutions adopt an integrated business model, covering the entire value chain from design, manufacturing, installation to maintenance to optimize the efficiency of limited parking spaces. Specifically, to meet the different parking needs of customers, Huawei Technologies manufactures and provides various types of multi-level parking garage products, such as lifting and shifting, convenient lifting, vertical circulation, vertical lifting, plane movement, lane stacking, multi-level circulation, horizontal circulation, and car lifting. In addition, Huawei Technologies also offers repair, design, and maintenance services to ensure that parking solutions continue to work effectively. Currently, Huawei Technologies' parking solutions' customers include government departments, hospitals, property management companies, real estate companies, institutions, residential communities, and other enterprises with parking lots or garages. With its production qualifications and market influence, Huawei Technologies' smart parking system is addressing the parking challenges in rapidly developing urban areas in China. In addition to smart parking solutions, Huawei Technologies also provides equipment structural components, including conveyors, feeding system components, garage structural components, customized steel materials for multi-level parking equipment, load-bearing materials, and railway accessories. The customers for equipment structural components are industrial manufacturing companies, such as mining transport machines, industrial conveyors, railway tracks, and other product manufacturers. Huawei Technologies' smart parking solutions and equipment structural components business units have significant synergies. The related products of equipment structural components can be used in the customization and manufacturing of smart parking solutions, increasing product value and market competitiveness as market demand increases.In the parking solution, such integrated operation can enhance the company's competitiveness, thus reducing the risks brought by price competition.In 2023, HuaChen Technology's revenue increased by 63.58% to 34.279 million US dollars, mainly due to a significant increase in revenue from equipment structural components. During the reporting period, revenue from equipment structural components was 25.5269 million US dollars, compared to only 3.347 million in 2022, an increase of 662.67% year-on-year, with the proportion of total company revenue increasing from 15.97% to 74.47%. The explosive growth in revenue from equipment structural components was mainly due to an increase in investment in this business area by HuaChen Technology, as demand for multi-story parking garages was affected by sluggish new home sales. This led to explosive growth in this business. Revenue from multi-story parking garage business during the reporting period decreased to 8.012 million US dollars, compared to 16.9573 million in the same period in 2022, a direct halving. Although the significant increase in revenue from equipment structural components drove a substantial increase in HuaChen Technology's total revenue, the company's gross profit margin decreased from 41% in 2022 to 18% during the reporting period, leading to a direct 28% decrease in gross profit. The significant decline in gross profit margin was mainly due to two reasons: the contraction of the high-margin multi-story parking garage business and losses from two projects dragging down profit margins; and to expand the sales volume of equipment structural components, HuaChen Technology actively reduced prices during the reporting period, further dragging down the company's profitability. With a 28% drop in gross profit, as HuaChen Technology expanded its sales volume in equipment structural components, operating expenses also increased significantly, leading to a 63.4% decline in the company's net profit during the reporting period. Therefore, HuaChen Technology's current business operations face significant pressure. After the weakening demand for multi-story parking garages, although the company shifted its focus to equipment structural components, the competition in the equipment structural components industry is more intense than the intelligent parking industry. This forces HuaChen Technology to adopt a strategy of trading price for volume to expand market share, leading to a situation of "increased revenue but decreased profit". Furthermore, the increase in customer concentration for HuaChen Technology in 2023 may also pose potential operating risks. According to the prospectus, in 2022, the revenue from the top four customers accounted for 43.08%, but by 2023, the revenue from the top four customers increased significantly to 65.5%, with the revenue from the largest customer accounting for as much as 31.21%. It is evident that during the reporting period, HuaChen Technology secured a major customer in the equipment structural components business at a low price. The significant increase in customer concentration and high dependence on a single customer may make HuaChen Technology's performance more volatile. If the demand from top customers weakens or product prices do not rise, it could impact HuaChen Technology's business operations. Overall, considering the intense competition in the equipment structural components industry, if HuaChen Technology continues to expand this business, the situation of increased revenue but decreased profit is likely to persist. Until the high-margin intelligent parking business resumes expansion, the probability of sustained growth in net profit for HuaChen Technology remains relatively low. Short-term business pressures are still evident, which could suppress the company's valuation for public listing.