Following yesterday's surge, A-shares once again experienced a comprehensive rally today, with the Shanghai Composite Index surging straight out of the gate and recapturing the 2900 point level, and over 5200 stocks closing in the green.

However, there is another scene unfolding. Shenzhen Huaqiang, which had seen 16 consecutive daily limits in the previous 17 days, is now in freefall. On September 25, Shenzhen Huaqiang's share price plunged more than 8% intraday, competing with Datang Telecom for the top spot on the losers' list.

The eruption of speculative stocks is inseparable from hot topics. At the end of July this year, some media reported that Huawei HiSilicon would hold its first Global Connectivity Conference on September 9, where it would unveil multiple HiSilicon chips covering various application scenarios such as audio-video, HarmonyOS, and Starlink.

As a chip company under Huawei, HiSilicon fell into a trough a few years ago due to US sanctions. The announcement of the Global Connectivity Conference naturally generated significant interest.

Previously released operating results showed that Huawei HiSilicon's business began a full recovery in 2023.

In the fourth quarter of 2023, HiSilicon shipped as many as 6.8 million chips, representing a year-on-year increase of 5,121%. Revenue for the quarter soared 24,471%. In the first quarter of this year, Huawei HiSilicon sold over 8 million chips, returning to the top five globally.

Relying on its fully self-developed advanced chips such as Kirin, Kunpeng, and Ascend, HiSilicon has not only returned to the center of the global chip industry but has also driven a comprehensive rebound in Huawei's performance.

In 2023, Huawei's revenue reached 704.2 billion yuan, an increase of 9.63% year-on-year, marking the largest annual growth since 2019. Net profit reached 87 billion yuan, a year-on-year increase of 144.5%. In the first half of this year, Huawei's revenue growth continued to accelerate, with the company achieving revenue of 417.5 billion yuan, a year-on-year increase of 34.3%, and net profit of approximately 55.11 billion yuan, a year-on-year increase of 18.2%.

There are also market rumors that HiSilicon may follow the example of Huawei's BU and become independent from Huawei, transforming into a global supplier like Qualcomm or NVIDIA. This implies that the research and development and mass production capabilities of HiSilicon's chips may see unexpected progress.

With Huawei HiSilicon in the spotlight, the market naturally sought out concept stocks to speculate on, and Shenzhen Huaqiang, which is also based in Shenzhen, became the "chosen one."

Shenzhen Huaqiang is one of the largest agents for Huawei HiSilicon, representing products such as smart TV chips, display driver chips, and AI chips. It is a genuine HiSilicon concept stock.

At the same time, the company responded quickly to the hot topic. As HiSilicon continues to introduce new products, the company will increase its research and development efforts and promotion of HiSilicon product application solutions to facilitate market expansion.

This statement further attracted market attention.

Shenzhen Huaqiang's unique shareholding structure also makes it conducive to becoming a speculative stock.

According to data, Shenzhen Huaqiang's total share capital exceeds 1 billion shares, but 740 million of these are held by the controlling shareholder and its concerted action parties, leaving only around 300 million shares in actual circulation, with a market value of less than 3 billion yuan before the rally.

In terms of short-term momentum, Shenzhen Huaqiang is indeed unparalleled among HiSilicon concept stocks, but the long-term picture is quite different.

Shenzhen Huaqiang's primary business revolves around electronic components. Currently, the company has three major business segments: authorized distribution of electronic components, the electronic component industry internet, and physical trading markets for electronic components and electronic terminal products.

The distribution of electronic components is the company's most significant source of revenue, and the agency of Huawei HiSilicon chips falls under this segment. In 2023, Shenzhen Huaqiang's revenue from electronic component distribution reached 18.018 billion yuan, accounting for 87.49% of total revenue, making it a leading player in the domestic electronic component distribution sector.

As a speculative HiSilicon concept stock, Shenzhen Huaqiang has not disclosed relevant business data with Huawei HiSilicon, but to some extent, past performance changes can indicate the impact of HiSilicon on the company.

Shenzhen Huaqiang became an agent and distributor of HiSilicon in 2017 through the acquisition of Qinuo Technology. Over the following six years, while the company's overall revenue doubled, its net profit, which is more crucial, changed very little.

Becoming a HiSilicon distributor does not seem to have helped Shenzhen Huaqiang earn more money.

Starting from the first quarter of 2023, Shenzhen Huaqiang's net profit has declined for six consecutive quarters, with the most recent four quarters even experiencing an increase in revenue without a corresponding increase in profit. In the second quarter of this year, Shenzhen Huaqiang achieved revenue of 5.921 billion yuan, a year-on-year increase of 22.97%; net profit attributable to shareholders was 119 million yuan, a year-on-year decrease of 15.79%.

Perhaps due to HiSilicon's strong position, the company's bargaining power has decreased, and the gross margin of Shenzhen Huaqiang's electronic component distribution business has plummeted from 11.59% to 6.61%. This sustained decline in gross margin has dragged down the company's profitability.

Expanding into new HiSilicon businesses in the future will require significant funding, but the capital behind Shenzhen Huaqiang can provide limited support.

The company's controlling shareholder, Huaqiang Group, had interest-bearing debts of up to 36.6 billion yuan in 2023, including short-term debts of 23.7 billion yuan, while monetary funds for the same period were only 6.2 billion yuan. The short-term debt funding gap alone was as high as 17.4 billion yuan. To raise funds, the listed company even faces the risk of being bled dry by its major shareholders.

Therefore, even with its soaring share price, Shenzhen Huaqiang has not forgotten to remind investors that there is uncertainty regarding the progress of HiSilicon's new product promotions, and the impact on the company's performance remains to be observed. Recently, the company's share price has risen significantly in the short term, deviating significantly from market trends, posing a risk of market sentiment overheating.

Huawei's influence in the capital market is self-evident, with over 800 A-share concept stocks associated with the company. Shenzhen Huaqiang is not the first listed company to see its share price soar by piggybacking on Huawei.

In June 2021, around the time Huawei launched its HarmonyOS, a stock called Runhe Software became a speculative darling, with its share price surging nearly sevenfold in just over two months.

In response to the subsequent letter of concern from the Shenzhen Stock Exchange, Runhe Software replied that it was one of the initiating units of OpenHarmony and a co-builder of the Huawei HarmonyOS ecosystem, seemingly attempting to justify the skyrocketing share price.

However, reality was not as optimistic as expected. HarmonyOS contributed negligible revenue to Runhe in 2021, and in 2022, Runhe's net profit even declined by 40%. The script of a turnaround through HarmonyOS did not materialize, and the share price plummeted by nearly 60% from its highs.

On August 29, 2023, the day Huawei launched its Mate60 series phones, another speculative stock, Jierong Technology, began to soar. In less than a month, Jierong Technology saw 16 consecutive daily limits based on its status as a Mate60 supplier, with gains exceeding 500% over the period.

The market's focus on Jierong at the time was due not only to its low market capitalization but also to the fact that Huawei had once been Jierong's largest customer, accounting for nearly 50% of its revenue.

In reality, Huawei became Jierong's largest customer nine years ago. Since 2017, Huawei's contribution to revenue has fallen below 10%. In 2021, 2022, and the first half of 2023, Huawei accounted for 0.46%, 3.48%, and 3.70% of the company's operating revenue, respectively.

Senseless market speculation often comes and goes like a breeze. After just one month of gains, Jierong's share price began to decline continuously and is now down more than 60% from its highs.

Shenzhen Huaqiang, which suddenly soared by piggybacking on the HiSilicon hype, also lacks a solid long-term rationale.

Historical experience in the global industrial economy suggests that the long-term beneficiaries of the growth and expansion of a hardware giant are undoubtedly upstream component suppliers rather than downstream product agents. This holds true from the early Apple supply chain to recent developments in the Tesla and NVIDIA supply chains.

For super brands, agents are unlikely to dominate the market and may even eventually be replaced by the brand's own self-operated channels.

From this perspective, as Huawei HiSilicon grows and expands, the true beneficiaries in the A-share market are upstream suppliers rather than downstream agents. Shenzhen Huaqiang's future performance is unlikely to exhibit the rapid growth momentum seen in leading Apple supply chain companies like Luxshare Precision or NVIDIA supply chain leaders like InnoLight.

In addition to the risk of share price adjustments due to easily falsifiable performance, the risk of selling by the controlling shareholder cannot be ignored.

Public information shows that of the 740 million shares held by Shenzhen Huaqiang's controlling shareholder, 330 million are pledged as collateral for exchangeable bonds. Currently, the exchangeable bonds have entered the conversion period, and Shenzhen Huaqiang's skyrocketing share price is significantly higher than the conversion price. Once these shares enter the secondary market through conversion for reduction, they will undoubtedly have a significant impact on the share price.

On September 9, the rumored Huawei HiSilicon Global Connectivity Conference failed to generate any buzz online, and Shenzhen Huaqiang opened high but closed low, seeing two consecutive daily limits down.

This kind of sentiment-driven speculation comes and goes quickly. Once the event-driven positive factors are fulfilled, Shenzhen Huaqiang's share price in the future will return to being driven by its performance.

Disclaimer

The content related to listed companies in this article is based on the author's personal analysis and judgment of information disclosed publicly by the listed companies in accordance with legal requirements (including but not limited to interim announcements, periodic reports, and official interaction platforms). The information or opinions in this article do not constitute any investment or other business advice. Market Value Observation shall not be held responsible for any actions taken as a result of adopting this article.

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