The announcement made by Hehui Optoelectronics, stock code 688538.SH, regarding its plans to initiate an IPO on the Hong Kong Stock Exchange (HKEX) has created quite a stir within the investment communityCiting the need to accelerate its international strategy and to boost its overseas operations and financing capabilities, the company seeks to issue H-shares abroad, thereby investing in its high-end AMOLED display panel productionThis decision comes at a crucial time for the company, which has faced a series of financial difficulties since its listing on the Star Market in May 2021.

AMOLED, short for Active-Matrix Organic Light Emitting Diode, is heralded as a cutting-edge technology in the panel industryThe increasing market share of AMOLED panels has been a crucial driver for growth in the display panel market as manufacturers persistently strive for higher resolution and greater efficiency

Advertisements

However, despite these technological advancements, Hehui opted for an IPO in Hong Kong after suffering annual losses that total approximately 5.8 billion RMB from 2021 to 2023. Recorded financial losses have raised pertinent questions about whether listing in Hong Kong will help the company break free from its troubling cycle of deficits.

Hehui Optoelectronics finds itself entrenched in a capital-intensive industry known for its long return cycles and cyclical natureThe panel industry is currently experiencing a downturn that began in late 2021 and has persisted into 2023, with signs of recovery only expected later in 2024. The company's predicament is exacerbated by a challenging economic backdrop, including geopolitical tensions that have dampened global economic prospects and weakened consumer demand in the electronics sector.

Upon listing in 2021, amidst an overall decline in the panel industry, Hehui reported a net profit loss of 949.5 million RMB that year—a troubling start

Advertisements

The subsequent years saw the company continue to spiral further into losses: 1.6 billion RMB in 2022 and a staggering 3.244 billion in 2023. These figures underscore a broader trend in the industry, where undercutting prices have become prevalent amid stiff competition and an ongoing struggle to maintain market share.

Despite reporting an anticipated revenue increase of 63.17% in 2024—projected at 4.96 billion RMB—Hehui's forecasts show a continued net loss of 2.51 billion RMB, albeit a slight improvement from previous deficitsAnalysts maintain that while revenue growth is a positive indicator, significantly heightened losses continue to loom overhead, presenting Hehui with a pressing challenge to rectify its balance sheetVarious factors played a role in the marginal recovery observed in 2023, including a notable increase in shipments across tablets, laptops, and automotive displays, achieving an impressive growth of over 200%. The firm’s strategic initiatives to enhance production efficiency and improve yield rates have positively impacted its gross margin, leading to a general improvement in operational performance.

However, when evaluated holistically over a four-year span, Hehui’s cumulative losses now exceed a remarkable 8.3 billion RMB

Advertisements

This figure is alarming as it effectively wipes out the entirety of the funding raised upon its initial public offering in 2021. Consequently, the impending IPO bears significant weight, posing a dual set of challenges—one pertaining to operational sustainability and the other tied to market capitalization and investor confidence.

Moreover, a close examination of Hehui’s specific operational focus reveals that while AMOLED panels are gaining momentum in market acceptance, the company is heavily invested in rigid AMOLED technologyIt is noteworthy that while flexible AMOLED displays dominate the market with an anticipated 42% share by the end of 2024, rigid AMOLED displays continue to lag, with only a 12% market penetration, creating a precarious position for Hehui as demand for more advanced display technology increases.

Hehui has been one of the early entrants into AMOLED mass production within China, currently operating 4.5 generation and 6 generation production lines capable of yielding both rigid and flexible displays

Despite holding the position of the largest producer of rigid AMOLED panels in China and second worldwide, the company faces challenges due to the smaller scale and relatively lower profitability associated with this segmentIndustry insiders highlight that rigid AMOLED displays generally cater to less profitable budget-end devices, thereby exerting a downward pressure on profits.

Additionally, leading up to 2022, Hehui primarily focused on small to medium-sized AMOLED panelsThe maturation of technologies within this segment, alongside increased penetration rates, has sharpened competition to a fever pitchGiven that OLED prices plummeted recently, the competition for mid-sized panels has only intensified, placing a further strain on the company’s financial performance.

As a countermeasure, Hehui has indicated a shift towards penetrating larger-sized products due to projected growth in the industry

alefox

Developments in the laptop arena have birthed new AMOLED products aimed at leading Chinese brand clients, while similar recognition has been garnered within the tablet and automotive display marketsStrategic collaborations with established brands are anticipated to play a key role in bolstering its standing within the broader market landscape.

The prevailing sentiment within the industry suggests a shift towards larger OLED panels as a trend for the future; however, these technologies demand a higher level of precision in yield rates, cost management, and production processes—elements that have only ramped up in complexity over timeFurthermore, flexible OLED displays remain poised to become the mainstream technology within display productionWhether Hehui can carve out a competitive niche for itself amid this fluctuation and uphold its differentiated strategy remains to be seen.

In summary, Hehui Optoelectronics’ plans for an IPO in Hong Kong signify an important juncture for the company's future