Riding on the momentum of NVIDIA's surge of over 60%, PC PARTNER is being hyped up?

With the news of NVIDIA becoming the world's highest market value listed company, a NVIDIA concept stock, PC PARTNER (01263), has also quietly achieved an astonishing increase. During the five working days from June 14th to 20th, the company's stock price reached a high of 5.38 Hong Kong dollars from 3.28 Hong Kong dollars, with an increase of 64%.

On the news front, PC PARTNER recently announced a profit increase, expecting to achieve a shareholder's net profit of not less than about 150 million Hong Kong dollars for the six months ending June 30, 2024, compared to about 20 million Hong Kong dollars in the same period last year, mainly due to strong demand for the new series of graphics cards launched earlier this year.

The performance of the semi-annual report shows strong profitability, which is in stark contrast to the trend of declining revenue and net profit in the company's previous annual report.

According to public information, PC PARTNER is a well-known graphics card manufacturer, mainly engaged in the design, development, and manufacturing of graphics cards. The company's ZOTAC brand is a core AIC partner of NVIDIA globally.

In 2023, NVIDIA's full-year stock price rose by nearly 240%, marking the largest annual increase since 2001, and achieving a good performance with a 126% year-on-year revenue growth and a 581.32% net profit growth. However, as a NVIDIA concept stock, why has PC PARTNER's performance not resonated with NVIDIA and instead shown a significant gap?

Net profit in the annual report dropped by more than 90%, promotional clearance sales affecting performance?

According to the Zhitong Caijing APP, PC PARTNER recorded revenue of 9.167 billion Hong Kong dollars in 2023, a decrease of 14.9% year-on-year; the net profit attributable to shareholders was 60.843 million Hong Kong dollars, a decrease of 91.3% year-on-year. Looking at a longer timeline, since 2021, the company's revenue and net profit have continued to shrink significantly, approaching the breakeven point by 2023.

In the 2023 annual report, the company pointed out that the poor business performance was mainly affected by various geopolitical and economic factors, which impacted consumer spending and corporate investment. The decline in revenue was mainly due to the decrease in sales of graphics cards and EMS business, although the growth of other personal computer-related products and components partially offset the decline.

Specifically, revenue from graphics adapter business decreased by 19.2% to 7.266 billion Hong Kong dollars, sales of own-brand graphics adapters decreased by 18% to 5.661 billion Hong Kong dollars, and sales of ODM/OEM graphics adapters also decreased by 23.3% to 1.605 billion Hong Kong dollars; The revenue of the EMS business decreased by 10.8% to HKD 739 million, the revenue of the brand business decreased by 17.5% to HKD 5.816 billion, and the ODM/OEM business (including parts trading) decreased by 10.1% to HKD 3.352 billion. During the year, all business lines experienced declines, but some of the declines were offset by the increase in parts trading.

In terms of product categories, the decline in sales of image adapters was mainly due to price promotions for own-brand image adapters during the year, as well as discounts on previous generations and slow-moving own-brand products. The decline in sales of other personal computer-related products was mainly due to weak demand for personal computers.

During the reporting period, the company's efforts to reduce inventory had some effect, with the value of year-end inventory decreasing by 38% to HKD 1.136 billion, and inventory turnover days decreasing from 66 days in the same period of 2022 to 64 days.

At the same time, the company's costs and expenses also decreased, with operating expenses slightly narrowing by 5.1%, mainly due to reduced director's profit sharing and employee bonuses. Among them, sales and distribution expenses increased by 13.7% to HKD 138 million.

AI Heat Unabated, PC Hardware Market Expected to Benefit?

According to the Zhitong Finance APP, PC Partner Group was originally an OEM factory for ATI reference graphics cards and Sapphire graphics cards, and has now become one of the world's largest graphics card manufacturing factories, providing OEM services for NVIDIA, AMD, and Intel's reference cards, as well as OEM/ODM services for major global PC brands such as HP, DELL, and Lenovo. In addition, the group's wholly-owned brand, Zotac, is also NVIDIA's global core AIC, a first-line high-end graphics card brand.

In the past few years, benefiting from the mining boom brought by blockchain and digital currencies, PC Partner Group also experienced strong growth. However, with the market shifting towards AI and servers, the company's secondary market valuation has also declined.

In 2023, while the desktop PC and graphics card market remained in a downturn, data center GPUs continued to grow rapidly. According to Hpcwire citing the latest data released by semiconductor research firm TechInsights, the total global shipments of data center GPUs reached 3.85 million units in 2023, an increase of 44.2% compared to 2.67 million units in 2022.

Recently, at the 2024 COMPUTEX Taipei International Computer Show, Zotac also followed the AI trend and launched a series of new hardware products, including the External GPU BOX external graphics card dock that accelerates computing and AI performance, the ZBOX mini PC that can sustain AI workflow loads for long periods, and the ZBOX Healthcare series medical AI computers.

In response, Dongwu Securities pointed out that 2024 will be the first year of the AI PC era. Many industry giants such as Qualcomm, Apple, and AMD will concentrate on releasing their PC platform products centered around the AI concept. Considering the widespread application of AI tools in business and productivity software, the AI PC market is expected to achieve rapid growth in 2025 and 2026 As the development of AI PCs promotes the growth of replacement demand, it also imposes higher requirements on PC hardware, and the PC industry chain is expected to usher in a period of simultaneous increase in quantity and price.

While the performance is expected to be boosted by the AI wave, PC Partner Group also faces international trade risks that cannot be ignored. Since last year, the U.S. government has implemented a series of export restrictions on artificial intelligence chips. Although NVIDIA has revealed that it has developed an "improved version" of chips for Chinese customers that comply with the latest U.S. export rules, the overall sales volume of NVIDIA in the Chinese market has already declined significantly.

In response, PC Partner Group also acknowledged in its financial report that the new export regulations by the U.S. government may prevent NVIDIA from selling high-end gaming GPUs to the company or accepting OEM/ODM orders for the production of high-end gaming GPUs, which will be detrimental to the company's competitiveness and lead to a decline in sales revenue.

Abandoning Hong Kong for Singapore Listing, to Avoid International Risks?

It is worth mentioning that under the threat of international political uncertainty risks, there are market rumors that NVIDIA is considering shifting towards the Southeast Asian market and preparing to establish a "non-China, non-U.S." relatively neutral supply chain system. At the end of 2023, NVIDIA CEO Huang Renxun visited Asia, visiting Japan, Singapore, Malaysia, and Vietnam, releasing various national-level cooperation agreements.

During an interview in Singapore, Huang Renxun stated that NVIDIA will continue to supply to Chinese customers based in Singapore, and revealed that in the three months ending October 2023, sales to Singapore customers (including Chinese companies) accounted for approximately 15% of NVIDIA's total revenue. When discussing future investment plans, Huang Renxun disclosed that NVIDIA is considering significant investments in Singapore.

Recently, PC Partner Group announced that, in response to business strategies and development, it is currently considering seeking to introduce its shares to the main board of the Singapore Stock Exchange in accordance with the regulations and/or conditions of the Singapore Exchange and the Hong Kong Stock Exchange, and exploring the feasibility of delisting its shares from the Hong Kong Stock Exchange.

The speculation for abandoning Hong Kong for a Singapore listing is due to the long-term undervaluation and low liquidity of the company's valuation in the Hong Kong stock market. The company aims to seek more financing opportunities in the Singapore market, and there are also speculations that the company may transfer its production capacity to Singapore to mitigate the impact of international political risks on its performance.

According to the company's financial disclosure, the revenue in the Asia Pacific region in 2023 was approximately HKD 3.274 billion, higher than the revenue in the Chinese market of HKD 2.127 billion, making it the highest proportionate sector in the regional market.

Furthermore, in 2023, the number of suppliers in the Asia Pacific region for the company was 370, higher than the 150 suppliers in China With the trend of AI driving rapid growth in the PC and hardware market, PC Partner Group's performance has shown positive signs of recovery. At the same time, if the company voluntarily delists from the Hong Kong stock market, the major shareholders will repurchase existing shares in the market, which will also drive up the stock price. Additionally, it is worth noting that the company's AI-related business is still in its early stages, and there is uncertainty regarding future performance growth