聚光科技(300203)

The share price of Focused Photonics has corrected 33% since 12 January (vs.SZCOMP: down 7%) , initially triggered by the preliminary results and laterweighted by the potential cancellation of placement and overall weakness of SZSEChiNext market. However , we strongly believe that these concerns are overdoneand with the industry outlook promising and the company’s fundamentalshealthy, this round of correction offers a good additional buying opportunity.Below, we address some key concerns from investors.

Concern #1: 2017 results miss

We fully understand where this concern comes from. The guided earnings growthof 10-40% was below what the market had anticipated (consensus was lookingfor ~35% so mid-point of the guided range failed to match). On top of it,the preliminary results also brought up non-recurring income of Rmb91m (incl.acquisition related income of Rmb43m and government subsidy of Rmb48m) thatwas included in the 2017 earnings, which if we simply striped it out would makethe range for recurring earnings even lower . However , this calculation was clearlynot right as 2016 earnings also included non-recurring income of Rmb95m withsimilar sources. So on a like-for-like basis, the core earnings in 2017 would stillgrow 12-50%.

Concern #2: potential cancellation of placement

With placement being officially approved and share price staying above theplacement price, the possible cancellation of placement led investors to questionif company’s fundamentals changed. We think the answer is a loud “No”.We estimate that the company recorded 40% new order growth in 2017. Thegovernment’s push for a stricter environmental enforcement and FPI’s dominantposition in environmental monitoring point to a promising outlook in years tocome. As for placement, we think the possibility of cancellation certainly existsgiven sharp correction in share price lately, but the main consideration might befinancial de-leveraging. As de-leveraging has become a priority for the centralgovernment this year , banks’ financing terms via pledge of stocks has sharplytightened recently (e.g. the triggering point of banks selling pledged shares hasbeen raised vs. previously). In order to avoid unnecessary financial risks at thepersonal level and considering the volatile share price lately, we believe the twofounders might consider giving up placement.