Looking back at the recent IPOs listed on the Main Board in Hong Kong in 2024, the most notable performer is undoubtedly Guanglian Technology (02531).

On July 15, 2024, Guanglian Technology successfully listed in Hong Kong at an issue price of 4.7 HKD, after which its stock price consistently rose with the 30-day moving average as support, showcasing a distinct upward trend. By December 24, the price of Guanglian Technology had reached a peak of 36 HKD, representing a cumulative increase of approximately 665.96% from the issue price in just over five and a half months, topping the list of recent IPOs.

However, in the following three trading days, Guanglian Technology's stock price saw a significant pullback. On December 27, it plunged 22%, and by the market close, the decline had eased to -7.69%, with a volume of 14.75 million HKD, an increase of 122.47% from the previous day's 6.63 million. By December 30, Guanglian Technology's stock price opened high, trying to cover the previous day's losses but failed, resulting in a drop of 12.58% that day, with an amplitude of 21.52%, and volume further increased to 18.56 million HKD. On December 31, after half a day of trading in the Hong Kong stock market, Guanglian Technology's stock price fell below the 30-day moving average and then recovered.

Figure: Stock price trend of Guanglian Technology since listing (source: wind)

From the market perspective, after a cumulative increase in stock price, there has been intense competition between bullish and bearish funds since December 27, with some funds choosing to cash in on profits, which led to a significant price pullback.

The root cause of the significant fluctuations in the stock price may lie in the upcoming unlocking of shares held by cornerstone investors and controlling shareholders. According to Zhitoa Finance APP, the cornerstone investors of Guanglian Technology, who hold 5.11% of its shares, will have their shares unlocked on January 15, 2025; at the same time, the controlling shareholders who hold 30.6% of the shares will also face their first unlocking period on January 15, 2025 (they can sell unlocked shares but must ensure they remain as controlling shareholders). The market is concerned that, with such significant floating profits, there might be a possibility of a complete sell-off after the locked shares are unlocked.

Clearly, the unlocking of shares is the first new challenge Guanglian Technology will face since its listing. The market is also curious whether Guanglian Technology's stock price can regain its upward momentum after retracing to the 30-day moving average, or if this marks the beginning of a major correction?

SaaS business continues to grow rapidly.

Although Guanglian Technology's current stock price has significantly increased compared to the issue price, its performance at the IPO was not satisfactory. By June 2024, the Hong Kong new stock market had begun to show significant signs of recovery, with only 3 out of 9 new stocks listed during the month experiencing a drop. As July approached, despite the market sentiment not weakening, there were as many as 7 new stocks undergoing the subscription phase simultaneously with Guanglian Technology. With a significant increase in new stock supply, Guanglian Technology did not receive much market attention, which was reflected in its sale results.

According to the share distribution results, Guanglian Technology offered 63.6 million shares globally, with 6.36 million shares available for public sale in Hong Kong, accounting for 10% of the total shares offered, and 57.24 million shares for international placement, accounting for 90% of the total shares. It is noteworthy that the public sale was only oversubscribed by 2.49 times and did not trigger the mechanism for reallocation, while the international placement was subscribed 1.06 times. Clearly, whether in the international placement or the public sale, the allocation results at that time were relatively lukewarm.

On the first day of listing, there was a strong selling intention. During the dark market phase, Guanglian Technology's quote once reached HKD 5.7, up 21.28% from the issue price. Excluding handling fees, a profit of HKD 500 was made per lot. However, on the day of listing, Guanglian Technology faced intense selling pressure, and by the close, the gain had significantly narrowed to 2.13%.

It is noteworthy that Guanglian Technology's global offering accounted for about 17.35% of the total, which is not a 'low-tier issuance', nor is there a situation of a '套路回拨' (trick reallocation), thus the sharp rise and fall of Guanglian Technology's stock price on the first day of its IPO, which cumulatively skyrocketed by 665.96%, is driven by the impressive performance of its SaaS business.

Guanglian Technology provides vehicle-mounted hardware and SaaS marketing and management services to customers in China's auto aftermarket. The vehicle-mounted hardware includes three categories: vehicle entertainment systems, vehicle safety systems, and intelligent core boards. The SaaS marketing and management services include SaaS subscription services and SaaS value-added services.

Among them, SaaS subscription services refer to the diJia SaaS marketing products provided to 4S stores and channel customers, as well as the HuGe eShields SaaS products offered to auto finance leasing companies. SaaS value-added services refer to the sale of trinkets and services to car users and the provision of integrated online and offline marketing services to 4S store customers.

In 2023, the revenue from Glocal Tech's sales of in-vehicle Hardware products and SaaS marketing and management services accounted for 40.3% and 59.7%, respectively. However, SaaS value-added services are the key driving force behind the continuous growth of Glocal Tech's performance, with revenue from this business being 9.314 million, 0.111 billion, and 0.2 billion yuan from 2021 to 2023, realizing explosive growth, accounting for 2.9%, 26.8%, and 35.7% of the company's total revenue during this period.

In the first half of 2024, Glocal Tech's total revenue grew by 23.9% to 0.308 billion yuan, primarily benefiting from the SaaS business. According to the earnings reports, due to the company's new cooperation with 4S stores and user centers of Electric Vehicles brands, the revenue from SaaS marketing and management services increased by about 58.3% to 0.219 billion, raising its proportion of total revenue to 71.1%. Meanwhile, due to the scaled expansion of the SaaS business, Glocal Tech's gross margin increased from 42% to 56%, driving a gross profit growth of 64.6% to 0.172 billion yuan during the period.

In the third quarter of 2024, Glocal Tech's SaaS business development accelerated again. According to the company's disclosed data, benefiting from cooperation with Chongqing Sokon Industry Group Stock, Chery, and several other Auto Manufacturers or their affiliates, the company's total revenue increased by 29.7%, with the revenue growth rate of the SaaS business at 66.6%, further up from 58.3% in the first half of the year, raising its proportion of total revenue to 78.92%. Additionally, the overall gross margin for the period was 67%, an increase of 20.8 percentage points year-on-year, and also an increase of 11 percentage points compared to 56% in the first half of the year.

The unlocking of restricted shares may become a "trigger" for stock price adjustments.

The reason why Glocal Tech's SaaS business can continue to grow rapidly is that it has seized the market opportunities brought by the booming development of the AI-connected vehicle industry in China. According to the data, in the first 11 months of 2024, China's auto sales reached 27.94 million units, a year-on-year increase of 3.7%, of which the sales volume of Electric Vehicles reached 11.262 million units, a year-on-year increase of 35.6%. Although the penetration rate of Electric Vehicles has exceeded 40%, it still shows a trend of sustained high growth.

As a company engaged in intelligent connected services for the auto aftermarket, Guanglian Technology aims to achieve a slice of the industry development pie by expanding into the Electric Vehicles manufacturers market. Its collaborations with Chongqing Sokon Industry Group Stock, Chery, and other Auto Manufacturers or their affiliated companies are key reasons for Guanglian Technology's continuous growth. In the third quarter of 2024, the share of unaudited income from Electric Vehicles manufacturers and their delivery service store clients in Guanglian Technology's SaaS value-added services business has exceeded 65%.

According to data from ZhiShi Consulting, based on 2023 revenues, Guanglian Technology ranks first among SaaS marketing and management service providers in China's auto aftermarket industry. As the scale of existing clients continues to expand and new clients are added, Guanglian Technology's SaaS business is expected to continue growing. Meanwhile, Guanglian Technology stated that it will continuously broaden the coverage of digital scenarios around the two areas of "smart vehicle usage" and "smart travel" for intelligent connected vehicles, focusing on the realization of CNI Data Factor Index monetization and AI commercialization in the automotive intelligent connected industry, thereby driving revenue and gross margin growth.

Thus, it can be seen that Guanglian Technology's business growth has a high degree of certainty, which adds considerable value to its fundamentals. However, investors should also clearly recognize the various potential challenges currently faced by Guanglian Technology.

Firstly, there is intense market competition. Whether in vehicle Hardware products or SaaS marketing and management services, both are extremely competitive fields. Although Guanglian Technology is among the leading companies in these sectors, its market share in the SaaS marketing and management market of the auto aftermarket was only 6.1% in 2023, and the combined market share of the top five players was only 21.3%. The industry is highly fragmented, and if competition continues to intensify, it may impact Guanglian Technology's business expansion and profitability.

Secondly, the growth rate of Net income significantly lags behind the growth rate of gross margin. Although the continuous increase in the proportion of SaaS business has led to a noticeable rise in Guanglian Technology's gross margin, driving rapid growth in gross profit, this growth rate has not been transmitted to the Net income. In the first half of 2024, Guanglian Technology's gross profit grew by 64.6% to 0.172 billion yuan, but adjusted Net income only increased by 7.7% to 24.8 million yuan. This is mainly due to a substantial increase of approximately 96.7% in distribution and sales expenses during the reporting period, which eroded net income. If distribution and sales expenses are not optimized, Guanglian Technology's low growth rate in Net income may be difficult to change significantly.

Additionally, after an accumulated surge of 665.96% in share price within less than half a year, Guanglian Technology's valuation has reached a relatively high level. Guanglian Technology's adjusted Net income for 2023 was 61.73 million RMB. If the average growth rate of Net income for 2024 and 2025 is 30%, then Guanglian Technology's current market cap of 10.8 billion HKD corresponds to a PE ratio of over 100 times for 2025, and the current static PB ratio is as high as 25.65 times.

Even if evaluating the value of the SaaS business using the PS valuation method, Guanglian Technology's current market cap gives the SaaS business a PS valuation multiple of possibly over 15 times by 2025. Such a PS valuation level is actually based on relatively optimistic expectations, and if the company's development falls short of market expectations, there will be a risk of a devaluation.

Furthermore, the unlocking of restricted shares may become the "trigger" that forces Guanglian Technology's stock price to adjust. Guanglian Technology's cornerstone investor is Huizhou Guohui United Equity Investment Fund Partnership (Limited Partnership), which subscribed to 18.723 million shares of Guanglian Technology. As of the close on December 31, the value of these shares was approximately 0.55 billion HKD, while the cost was less than 88 million. Under these circumstances, the cornerstone investor may have a higher demand for realizing gains, and 0.55 billion funds in a market like the Hong Kong stock exchange, which lacks liquidity, could potentially lead to early liquidation.

At the same time, the 30.6% of shares held by the company’s controlling shareholder will be partially unlocked with restrictions on January 15, 2024 (to ensure the controlling shareholder status). If the controlling shareholder also sells some shares, it will increase the selling pressure. It is noteworthy that one major shareholder of Guanglian Technology has no shareholding restrictions.

The Zhitong Finance APP discovered that Yantai Longhe (China), which is not a controlling shareholder, is missing from the existing shareholders' list of restricted shares, although it holds a 10.01% stake after Guanglian Technology's IPO. Its name is not found on the restricted list, which may imply that since the listing of Guanglian Technology, the shares held by Yantai Longhe (China) are not subject to restrictions.

According to the prospectus, Yantai Longhe (China) is an investment company controlled by Gao Henan, a former director of Guanglian Technology's consolidated affiliate Guanglian Saixun. Currently, the market value of shares held by Yantai Longhe (China) exceeds 1 billion HKD, and public information does not show any shareholding reduction, indicating that this shareholder likely has not reduced their holdings yet. However, once cornerstone investors or controlling shareholders reduce their holdings resulting in a price correction, other shareholders may also take action.

Overall, Guanglian Technology's fundamentals are solid, and its Saas business continues to develop rapidly, but its biggest issue is the significant short-term rise in stock prices, with the Company Valuation being elevated to relatively optimistic levels. Under such substantial paper profits, if the stock price corrects, cornerstone investors may begin to realize their profits.