Fragmented Shareholding Positions Allystar For Turbulence

The satellite positioning chip designer previously planned to float shares on China's domestic A-share market, but has shifted its sights to Hong Kong with its new listing application

Key Takeaways:

Hong Kong IPO applicant Allystar Technology continues to report losses, but could soon become profitable as it achieves economies of scale and other greater efficiencies
The company has signed strategic partnerships with many big tech names such as Meituan, BYD and ZTE

The rise of location-based apps and smart cities, combined with a new dawn of the internet of everything (IoE), has created strong demand for positioning services that are putting Allystar Technology (Shenzhen) Co. Ltd. on the investor map. Now, the leading positioning chip designer is trying to cash in on its rising star with a recent application to list in Hong Kong.

The company has done some directional shifting of its own, moving its sights to the more internationally focused Hong Kong after originally planning to chase a listing on China's domestic A-share market.

Allystar uses navigation chip technology and an R&D team it acquired in 2017 from Huada Technology (0085.HK), a subsidiary of state-run electronics giant China Electronics Corp. (CEC), a year after its founding by seven shareholders, according to its listing document filed earlier this month. It began mass producing its dual-frequency high-precision navigation and positioning system-on-chips (SoC) in 2019 for use in the BeiDou system, China's homegrown alternative to the globally popular U.S.-based GPS. Since then, it has also begun making chips for use in other major global positioning systems, including GPS.

Allystar's current shareholding is quite diverse, with no single company holding more than 10% of its stock. Its largest shareholder is CEC subsidiary China Electronics Optics Valley Union (0798.HK), which holds a 9.2%. Other shareholders include China Citic Bank and China Merchants Bank, with 7.2% and 7.1% stakes, respectively. New energy vehicle and battery giant BYD (1211.HK; 002594.SZ) is also an early investor with 4.1%, while fellow carmaker SAIC Motor holds 1.8% through a joint venture. Robert Bosch Venture Capital, an investment arm of German automotive parts giant Bosch, also holds 2.95%.

Sixth-largest global positioning chip supplier

Global navigation satellite systems provide positioning, navigation, and timing services via satellites and chips, and are used to help apps determine global positioning. Four such systems are currently operating worldwide, including China's BeiDou, the U.S. GPS, Russia's Glonass and the EU's Galileo.

Allystar's SoC products are ultra-low in power consumption and use AI-integrated positioning algorithms. The company uses an asset-light model of designing its chips and manufacturing them using third-party foundries. It is the sixth-largest such chipmaker globally with 4.8% of the market, and the second largest in China, based on its units shipped.

The global positioning services market is growing rapidly, worth about 2 trillion yuan ($278 billion) in 2023 alone, driven by development of mobile internet and internet of things (IoT) technologies. Rapid AI advancements fueling a new wave of increasingly sophisticated consumer electronics, along with rapid growth in automotive intelligence and the low-altitude economy, are expected to keep the market growing by 9.1% annually to reach 3.25 trillion yuan by 2028, according to third-party market data in Allystar's listing document.

Sales, R&D spending drag

Allystar's revenue comes from two main segments: global navigation chips, modules, and related solutions; and high-precision chips and modules. Last year, those two accounted for 28.3% and 71.7% of its revenue. Global navigation chips contributed 238 million yuan and high precision chips provided 602 million yuan, bringing the total to 840 million yuan, up 30.2% year-on-year.

It's worth noting that while the high-precision chip and module business is the company's biggest breadwinner, that segment's gross margin was extremely low at just 2.8% last year. By comparison, the smaller global navigation segment had lower revenue but a much higher gross margin of 27.3%. As a result, global navigation chips contributed 65 million yuan of Allystar's gross profit last year, much higher than the 17 million yuan provided by the high-precision chips and modules business. The company's total gross profit of 82 million yuan last year was also up by 20.7% from 2023.

Despite the strong revenue and gross profit growth, the company still reported a loss of 141 million yuan last year due to significant sales and R&D costs. That said, the loss still narrowed by roughly half from 2023.

Allystar believes it can continue to stem the flow of red ink and become profitable, stating it plans to reach such a goal in the near future by improving its gross margin, enhancing its operational efficiency and optimizing its working capital management. The company points out it expects its gross margin to significantly improve as companies roll out increasingly sophisticated global positioning products and solutions, and that such growing demand will also help it to reach greater economies of scale.

Fragmented shareholding

Allystar's client portfolio looks quite strong, featuring strategic tie-ups with the likes of takeout dining giant Meituan, bike-sharing operators Hello Inc. and DiDi Bike, smart vehicle technology companies BYD, ZTE and SAIC Motor, and telecoms carriers China Mobile and China Unicom in the smart cities space.

Hong Kong-listed chip designers are doing well in general lately, which could help to boost sentiment towards Allystar's offering. Among those, Horizon Robotics (9660.HK) and Black Sesame (2533.HK) current trade at healthy price-to-sales (P/S) ratios of 12 times and 9 times, respectively. Allystar's 840 million yuan in revenue last year and a similar P/S ratios of 7 times to 8 times would value the company at about 6.3 billion yuan, near unicorn status defined as a market value of more than $1 billion.

But one key concern could be Allystar's highly fragmented shareholding structure. Its largest stakeholder owns less than 10% of its shares, while as many as 42 hold less than 3%, and 21 hold less than 1%. Many of those smaller holders are quite likely to sell their stakes after the company's lock-up period expires, which could create some volatility for the stock as the company tries to position in the global investor constellation.

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