Appotronics Corp NON RATED Niche Player in the Display Industry

Eyes on the Ground Technology Components│China│September 16, 2019

China Appotronics Corp NON RATED Niche player in the display industry

Current price: Rmb39.91 ■ Recently, we visited Appotronics Corporation Ltd. [688007.CH], a Chinese high-tech Consensus Tgt Price: N/A enterprise providing the world's leading semiconductor light source solution as its core Up/downside: N/A technology. ■ The Company is a niche player in display industry, and was one of the first batch of Reuters: public companies in the SSE’s STAR Market. Bloomberg: 688007 CH ■ Risks: increasing competition, breakthrough in substitute technologies and lawsuits. Market cap: US$2,532m Rmb18,022m High-tech enterprise in the laser display industry Average daily turnover: US$104.6m Appotronics (光峰科技) is a Chinese high-tech enterprise providing the world's leading Rmb717.7m semiconductor light source solution as its core technology. The company went public on Current shares o/s: 451.6m July 22, 2019, and was one of the first batch of public companies in the STAR Market of the Shanghai Stock Exchange (SSE). The company is a global leader in the laser display Free float: 12.7% industry. In the field of laser displays, it has applied for more than 1,450 patents.

Advantages of ALPD laser display technology In 2007, Appotronics pioneered the first generation of ALPD laser display technology, setting the development direction for the next generation of laser displays. It was the first company to realize the industrialization of laser display technology on a global scale, and has established China's leading position in the field of laser displays. In Aug 2018, the Company released its ALPD® 4.0 laser display technology.

The company's ALPD® technology focuses on solving the industrialization problems of laser displays. Through the adoption of high-efficiency, cost-effective GaN (gallium

Source: Bloomberg nitride)-based blue lasers, the Company overcame the limitations of poor temperature stability of red laser materials, and the low efficiency and short life of green lasers, and Price performance 1M 3M 12M uses high-efficiency fluorescent materials to achieve red and green spectrum. By Absolute (%) -11.5 combining the high brightness of lasers with the high performance of fluorescence, the Relative (%) -19.2 problem of visual speckle caused by the coherence of laser light sources was overcome, and the ideal projection light source with high brightness, high efficiency and low cost was Major shareholders % held Li Yi 36.0 realized, allowing the large-scale application and production of laser display technology.

Applications of ALPD laser display technology

Appotronics is applying the advantages of its ALPD laser display technology in three

This Eyes On the Ground report represents a main industries: film, TV and education. a) The Company currently has a 60% market preliminary assessment of the subject share of China’s laser cinema light source market and plans to focus on expanding into company, and does not represent initiation into tier-3 and tier-four cities. b) The Company is optimistic about toC applications of laser CGI's coverage universe. It does not carry display technology, and is entering this market through cooperation with internet investment ratings, and CGI does not commit to companies, such as Xiaomi, and by building its own brand. c) The Company forecasts regular updates on an ongoing basis. stable growth in the education industry. The Company is also expanding toG and toB Insert segments through its Laser DLP video wall and other products.

Valuation Appotronics’ net profit is expected to grow 40% and 39% in 2019F and 2020F, respectively, based on market consensus. It translates into 72.6x 2019F P/E and 52.2x 2020F P/E.

Analysts Financial Summary Dec-16A Dec-17A Dec-18A Mark Po Turnover (Rmb m) 355 806 1,386 T (852) 3698 6318 Operating profit (Rmb m) (32) 102 259 E [email protected] Net profit (Rmb m) 14 105 177 Alex Li T (852) 3698 6256 % Change n.a. 656 68 E [email protected] Adjust net margin (%) 4 13 13 Wong Chi Man ROAA (%) 0.8 15.4 18.0 T (852) 3698 6317 E [email protected] ROAE (%) 23.7 149.3 24.7 SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

Technology Components│China Appotronics Corp│September 16, 2019

Revenue and cost structure The company mainly provides two kinds of products through sales and leasing: laser light engines and complete laser projectors.

The laser light engine (激光光学引擎) business has two products: a laser light source (激光光源) and a laser television optical engine (激光电视光机). The laser light source is used mainly for laser digital cinema projectors. The laser television optical engine, which has two more subsystems (image modulation and projection lens) than the laser light source, is used mainly for laser televisions.

The complete laser projector (激光投影整机) business has four products: (1) a laser digital cinema projector (激光电影放映机), (2) a laser TV (激光电视), (3) a laser education projector (激光商教投影机), and (4) laser large venue projector (激光工程投影机).

Figure 2: Revenue structure of Appotronics 2018 2017 2016 Revenue (RMB m) % % % Sales 1,058.68 76.40% 642.56 79.76% 321.47 90.57% Laser Light Engine 297.2 21.45% 200.39 24.88% 56.81 16.00% Laser Light Source 231.73 16.72% 183.1 22.73% 56.81 16.00% Laser Television Optical Engine 65.47 4.72% 17.3 2.15% - - Laser Projector Whole Set 705.94 50.94% 396.33 49.20% 239.17 67.38% Laser Digital Cinema Projector 6.69 0.48% - - - - Laser TV 306.63 22.13% 80.66 10.01% 3.41 0.96% Laser Education Projector 326.7 23.58% 253.71 31.49% 178.44 50.27% Laser Large Venue Projector 65.91 4.76% 61.96 7.69% 57.32 16.15% Other products 55.54 4.01% 45.83 5.69% 25.49 7.18% Leasing Service 304.32 21.96% 118.43 14.70% 21.46 6.05% Others 22.73 1.64% 44.6 5.54% 12.02 3.39% Total 1,385.73 100.00% 805.59 100.00% 354.95 100.00%

SOURCES: CGIS RESEARCH, COMPANY DATA

The Company’s main purchased product and cost source is the optical engine, which includes a laser (mainly produced by Japanese company Nichia), a lens (mainly UST lenses produced by Japanese company Ricoh), and chips (mainly DMD (Digital Micromirror Device) chips produced by US company Texas Instruments (TI)) .

Applications and advantages of laser display technology The company's ALPD® technology focuses on solving the industrialization problems of laser displays. Through the adoption of high-efficiency, cost- effective GaN (gallium nitride)-based blue laser, the company overcame the limitations of poor temperature stability of red laser materials, and the low efficiency and short life of green lasers, and uses high-efficiency fluorescent materials to achieve red and green spectrum. By combining the high brightness of lasers with the high performance of fluorescence, the problem of visual speckle caused by the coherence of laser light sources is overcome, and the ideal projection light source with high brightness, high efficiency and low cost is realized, allowing the large-scale application and production of laser display technology.

Film industry Laser cinema projectors are better than traditional lamp-based (mainly Xenon light source) cinema projectors in terms of luminance, lifetime, light attenuation, contrast, and complexity of maintenance. In 2015, the company became the exclusive supplier of the laser light source engine to Belgian company Barco, which is a global leader in the cinema projector industry.

Technology Components│China Appotronics Corp│September 16, 2019

According to China's State Film Administration, as at the end of 2018, China had 60,079 commercial film screens, and about 39% of them (23,431 film screens) had laser cinema equipment. According to Company data, as at the end of 2018, the Company had deployed 14,018 laser light sources nationwide, representing a market share of 60%.

The Company provides ALPD® laser light sources to cinemas mainly through its leasing service rather than sales, which is an innovative business model. This business model reduces the CAPEX of the cinemas that previously bought lamp-based cinema projectors, because the cinemas only need to change the light source of the projector, and thereafter are charged only for service time.

Currently, the rate of adoption of laser cinema projectors in tier-1 and tier-2 cities is high, and the Company is trying to achieve a breakthrough in tier-3 and tier-4 cities. After the successful application of ALPD® in China, Appotronics established a joint venture company, called CINIONIC, in Hong Kong with China Film Group Corporation, Barco (a Belgian listed company with a 55% global market share of cinema projectors) and the CITIC Industry Fund. CINIONIC is committed to providing "global high-end cinema solutions" and using the Belt and Road Initiative to promote this film projection technology with China's independent intellectual property rights in the international market.

TV industry Combining an ultra-short throw (UST) projector with advanced laser display (ALPD) technology, the Company can deliver up to 150 inches of full HD quality images from a distance of 50 centimeters, with 1500 lumens and 3000:1 contrast quality, and a product life up to 20,000 hours. Compared with traditional LCD TV (liquid crystal display television), laser TV is smaller in terms of volume and easier to carry, has better eye protection, and requires only a DVD player size space on the ordinary TV cabinet for the UST.

In the TV industry, the Company will cooperate mainly with internet companies with high recognition but low TV technology capability, such as Xiaomi, Baofeng TV and JmGO. The Company will also offer its own brand, WEMAX. The Company is positive about the laser TV industry, and will actively pursue the B2C market.

Education industry Compared with laser education projectors, lamp-based projectors cannot achieve UST with normal power consumption, so teachers are exposed to the light of the projector, harming their eyes. The company expects its growth in the education industry to remain stable, since the industry has started cooling down after years of informatization.

The development history of Appotronics In 2007, Appotronics pioneered the first generation of ALPD laser display technology. This technology was regarded as the development direction of the next generation of laser display, and the Company was the first to realize the industrialization of laser display technology on a global scale, establishing China's global leadership in the field of laser displays. The ALPD 1.0 was the first generation technology combining blue light with phosphors. In Aug 2018, the Company released its ALPD® 4.0 laser display technology.

In 2013, Appotronics launched the world's first 100-inch laser TV. In 2014, Appotronics captured the most challenging cinema projection technology in the field, and launched DCI-certified laser digital cinema projectors. The first ALPD® laser cinema was successfully installed in the Shenzhen OCT Harbour China Film International Cinema and is still in use now. In 2017, Appotronics launched the Fengmi Laser TV at a price below RMB10,000 for the first time, beginning the rise of the laser TV market.

Technology Components│China Appotronics Corp│September 16, 2019

Figure 3: The technology architecture of ALPD® display Figure 4: Comparison of architecture of RGB laser technology technology and ALPD® (advanced laser display)

SOURCES: CGIS RESEARCH, COMPANY DATA SOURCES: CGIS RESEARCH, COMPANY DATA

Figure 5: Inscription of Shuji Nakamura (recipient of the 2014 Nobel Prize for Physics): ALPD is a great technology!

SOURCES: CGIS RESEARCH, COMPANY DATA

Figure 6: Laser DLP video wall Figure 7: Laser ultra-mobile projector Figure 8: Laser TV

SOURCES: CGIS RESEARCH, COMPANY DATA SOURCES: CGIS RESEARCH, COMPANY DATA SOURCES: CGIS RESEARCH, COMPANY DATA

Technology Components│China Appotronics Corp│September 16, 2019

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