We hosted an NDR with BaTeLab's management on 15 Oct. Co-founders Mr. Li (Chairman) and Mr. Zhang, and Investment Director Mr. Zhao attended our meeting. Key takeaways are summarized below.
Business strategy: 1) Why industrial market? Mgmt. explained that the market has lower R&D costs, given its long-tail characteristics (~80% of the total sales in the market is attributed to a large number of individual products with sales of each accounting for no more than 0.02% of TAM, per Frost & Sullivan). Leveraging its proprietary EDA software tools and reusable IP library, the company is able to achieve cost efficiency than peers. 2) Why patterned wafers? Mgmt. believes that this business model has higher efficiency in marketing while maintaining low cost in operation.
Operation risk: Some investors have expressed concerns over the high revenue reliance on distributor channels (90% of total revenue in 1H24). Mgmt. highlighted that the concentration of customers is just sales channel-wise. Taking into account the diverse end-market demands (indirect customers), the customer base is actually not concentrated.
Revenue growth drivers: Mgmt. pointed out future sales will grow on semiconductor localization. BaTeLab had a portfolio of 500+ SKUs as of 1H24 (vs. ~10k for industry leaders) and plans to expand ~100 SKUs annually. The upside is expected to be significant.
CapEx: Mgmt. said they will invest in R&D infrastructure and upgrade its R&D center, improve product line and make strategic investments.
Demand: Mgmt. thinks the current market demand is in the process of gradual recovery. In the long-term, mgmt. expects the growth of analog IC market to accelerate in the next 5-10 years and they hope to get prepared for that.
Margin: The company's gross profit margin is within the range of 50%-55%. No single product contributes over 3% of revenue, as BaTeLab targets less mainstream product categories and niche markets. Mgmt. believes such approach allows the company to gain significant traction in specialized segments and is less exposed to price war, thereby sustaining a high GPM. In 1H24, the company reported a lower-than-expected GPM at 51.3% (vs. 55.2% in 1H23). Mgmt attributed that to increased inventory provisions (RMB18mn) under HKFRS. Excluding this impact, the company's GPM remained stable.
Reiterate BUY, with unchanged TP at HK$49.8, corresponding to 20.4x 2024E P/E. We maintain our revenue forecast at 40%/38% in 24/25E and GPM at 53-55%. The stock is currently trading at 10.8x/7.5x 2024/25E P/E, which is very attractive in our view. Risks: 1) volatile economic conditions; 2) change in partnership with its core customers or suppliers; and 3) slower-than-expected introduction of new product categories.
