New Stocks Prospects | The revenue from the household appliance sector accounts for nearly 70%, can the expansion into new application fields become the new growth curve for Fortior Technology (Shenzhen) Co.,Ltd (688279.SH) entering the Hong Kong market?

At the time when the stock price reached a historic high, Fortior Technology (Shenzhen) Co., Ltd. (688279.SH) is aiming to list on the Hong Kong stock market and become a member of the "A+H" family. On January 15th, Fortior Technology (Shenzhen) Co., Ltd.'s stock price hit a historic high of 191.69 yuan per share, a 133.77% increase from the IPO price of 82 yuan, bringing the company's total market value to 17.6 billion yuan. On the same day, Fortior Technology (Shenzhen) Co., Ltd. submitted an application to the Hong Kong Stock Exchange for the issuance of H shares and listing on the main board, with CICC as the sole sponsor. The number of shares and price range for the issuance have not yet been disclosed. According to the prospectus, Fortior Technology (Shenzhen) Co., Ltd. is a leading chip design company specializing in the design and development of BLDC (brushless direct current) motor drive control chips. In terms of performance, Fortior Technology (Shenzhen) Co., Ltd. has achieved continuous growth in the past two years. In mid-2023, its revenue increased by 27.37% to 411 million yuan, with a net profit of 175 million yuan, a year-on-year increase of 23.13%. As of the first three quarters of 2024, Fortior Technology (Shenzhen) Co., Ltd.'s revenue increased by 53.72% to 433 million yuan, with a net profit of 184 million yuan, a year-on-year increase of 48.05%, showing an accelerating growth trend in performance. Fortior Technology (Shenzhen) Co., Ltd. stated that the funds raised from the Hong Kong IPO will be used to enhance research and development and innovation capabilities, further enrich the company's product portfolio and expand downstream applications, expand overseas markets, strategic investments or acquisitions, as well as for operating funds and general corporate purposes. Looking at the balance sheet, Fortior Technology (Shenzhen) Co., Ltd. is well-funded. As of September 30, 2024, Fortior Technology (Shenzhen) Co., Ltd.'s total assets were 2.556 billion yuan, total liabilities were 50.516 million yuan, net assets were 25.05 billion yuan, and the asset-liability ratio was only 1.98%, with a current ratio of 31.1 times. While the performance continues to grow, the gross profit margin is declining. BLDC motor main control and drive chips can be used in many industries such as smart small household appliances, white goods, power tools, sports travel, industrial, automotive, Siasun Robot & Automation, and others. Due to the advantages of high efficiency, high reliability, low vibration, low noise, and fast response of BLDC motor main control and drive chips, the penetration rate of BLDC motors in downstream markets continues to increase, driving sustained market growth. According to Frost & Sullivan data, from 2019 to 2023, the global market size of BLDC motor main control and drive chips rapidly increased from 12.9 billion yuan to 26.3 billion yuan, with a compound annual growth rate of 19.4%. During the same period, the growth rate in the domestic market was 24.8%, higher than the global growth rate. With the continuous penetration of BLDC motors in downstream markets, it is expected that the global market size will increase from 30.7 billion yuan in 2024 to 58.5 billion yuan in 2028, with a compound annual growth rate of 17.5%, while the domestic market growth rate will be 20.9%, still higher than the global growth rate. However, in terms of market structure, foreign companies dominate the global BLDC motor main control and drive chip market. According to Frost & Sullivan data, based on income in 2023, the top five players in the global market were companies from Germany, the United States, Switzerland, the Netherlands, and Japan, with market shares of 18.5%, 11.8%, 10.8%, 7.1%, and 5.9% respectively, totaling 54.1%. Fortior Technology (Shenzhen) Co., Ltd. has a market share of 4.8% in the global market, ranking sixth, and is also the largest BLDC motor main control and drive chip company in China. Fortior Technology (Shenzhen) Co., Ltd.'s products cover all core components of typical motor drive control systems, including motor main control chips with MCU and ASIC, motor drive chips with HVIC, IPM, and power devices including MOSFET. In 2023, the revenue shares of MCU, ASIC, and HVIC were 66.8%, 11.7%, and 16.9% respectively. In terms of application areas, Fortior Technology (Shenzhen) Co., Ltd.'s products are mainly used in the home appliance industry. In 2023, the revenue shares from smart small household appliances and white goods industries were 55.5% and 14.4% respectively, totaling 69.9%. Their revenue shares from power tools, sports travel, industrial, and automotive industries were 7.4%, 7.8%, 8.5%, and 5% respectively. Benefitting from the trend of domestic substitution, Fortior Technology (Shenzhen) Co., Ltd.'s products continue to penetrate various application areas, leading to steady growth in performance. In the period, revenue increased by 27.37% to 4.11 billion yuan, and net profit increased by 23.13% to 175 million yuan. Entering 2024, the continuation of the trend of domestic substitution and the issuance of the "Promotion of Large-scale Equipment Update and Consumer Goods Replacement" policy have driven the demand for appliance product and equipment updates, accelerating the penetration of Fortior Technology (Shenzhen) Co., Ltd.'s products in the fields of home appliances, sports travel, industrial, and automotive, leading to an accelerated growth in performance. In the first three quarters of 2024, Fortior Technology (ShenzhThe revenue of Co. increased by 53.72% to 4.33 billion, with net profit increasing by 48.05% to 1.84 billion.However, while the performance continues to grow rapidly, Fortior Technology (Shenzhen) Co.'s gross profit margin is trending downwards. According to the prospectus, in 2023, the gross profit margin of Fortior Technology (Shenzhen) Co. was 53.2%, a decrease of 4 percentage points from 57.3% in 2022. Fortior Technology (Shenzhen) Co. stated that this was mainly due to increased competition in the market for MCU and ASIC products, which account for a large proportion of their revenue. In response to this situation, Fortior Technology (Shenzhen) Co. strategically adjusted and reduced the prices of these products to maintain competitiveness, thereby dragging down the gross profit margin. In the first three quarters of 2024, the gross profit margin of Fortior Technology (Shenzhen) Co. was 52.2%, a decrease of 0.7 percentage points from the same period in 2023. This was mainly due to continued intensifying competition in the MCU market, leading the company to lower the selling prices of these products, causing the gross profit margin of MCU to decrease from 57.2% to 55.4%. Clearly, the increasing competition in the market has become a key factor affecting the profitability of Fortior Technology (Shenzhen) Co. If the market competition further intensifies in the future, Fortior Technology (Shenzhen) Co. may need to reduce prices of corresponding products to maintain competitiveness, leading to a possible continued downward trend in gross profit margin, which could impact the company's profit release. Over-reliance on the household appliance industry and slow development in diversified applications Since 2018, the United States has continuously imposed bans on the development of China's semiconductor industry. In this context, Chinese semiconductor companies have started to reduce purchases of related components from the United States or diversify their supplier base to ensure the security and controllability of their supply chain. However, the issue of concentrated suppliers remains prominent for Fortior Technology (Shenzhen) Co. According to the prospectus, the procurement amount from the top five suppliers accounted for 89.3%, 86.9%, and 79.6% of Fortior Technology (Shenzhen) Co.'s total purchases in 2022, 2023, and the first nine months of 2024, respectively. Supplier A and B provide wafers for Fortior Technology (Shenzhen) Co. and are its main suppliers, with purchases from these two suppliers accounting for 32.9% and 23.3% in the first three quarters of 2024, totaling 56.2%. Any changes or termination in cooperation with suppliers A and B could impact the company's operations. The company has expanded its procurement network to include other wafer manufacturers to ensure stability and flexibility in wafer supply, but whether this will effectively address the issue of excessive concentration of supplies remains to be seen. Aside from suppliers, there are also potential risks related to customers for Fortior Technology (Shenzhen) Co. According to the prospectus, the company mainly sells its products through distributors, with revenue from distributor channels accounting for 94.3% in 2023. The top five customers generated 50.6% of the revenue during the period, with the largest customer contributing 17.5%. With high customer concentration, the loss of key distributors in the future could impact the company's operations. Furthermore, Fortior Technology (Shenzhen) Co. may also face potential risks related to inventory. The inventory turnover days for the company were 287.3 days, 311.8 days, and 224.4 days in 2022, 2023, and the first three quarters of 2024, respectively. If the company's business expands in the future, the risk of obsolete inventory may increase with inventory accumulation. If the company's forecasted demand exceeds actual market demand, there could be risks of inventory devaluation or provisions due to surplus inventory. Additionally, fluctuations in downstream market demand should also be closely monitored by investors. The accelerated growth in Fortior Technology (Shenzhen) Co.'s performance in the first three quarters of 2024 is directly related to the implementation of policies promoting large-scale equipment upgrades and trade-in programs. If future policy stimuli fall below expectations, it could have a significant impact on the company's performance. In 2023, revenue from the household appliance sector accounted for nearly 70% of Fortior Technology (Shenzhen) Co.'s total revenue, an increase of 3.3 percentage points from 2022. With revenue mainly concentrated in the household appliance sector, if demand in the household appliance industry is prematurely exhausted due to equipment upgrade policies in 2024, a subsequent weak demand in the household appliance market may hinder the growth of Fortior Technology (Shenzhen) Co.'s performance. Furthermore, whether Fortior Technology (Shenzhen) Co. can achieve rapid expansion in other application areas is also crucial in determining its intrinsic value.Key points. Fortior Technology (Shenzhen) Co., while deeply rooted in the home appliance industry, has started to penetrate into the fields of electric tools, sports travel, industry, and automobiles. However, from the data perspective, Fortior Technology (Shenzhen) Co.'s development in these areas remains relatively slow, with the core growth of the company's performance mainly driven by the home appliance business. It can be foreseen that whether the company can quickly expand in other application areas to open up growth ceilings will be one of the key factors determining the valuation level of Fortior Technology (Shenzhen) Co.Overall, Fortior Technology (Shenzhen) Co. achieved continuous growth in performance driven by the trend of domestic substitution and the growth in demand in the household appliance market. The company has a high-quality asset structure and ample cash flow. However, it still faces several potential risks, such as high supplier and customer concentration, long inventory cycles, downstream applications overly concentrated in the household appliance sector, and sluggish growth in other sectors. With both strengths and weaknesses, it remains uncertain whether Fortior Technology (Shenzhen) Co. will attract investment in the Hong Kong stock market.