Downstream price compression and the ongoing impact of the Swiss merger, Jiguang Technology (688167.SH) enters a period of integration.

On the evening of August 28, Jiguang Technology disclosed its semi-annual report for 2024.

In the first half of the year, the company achieved a total revenue of 311 million yuan, a year-on-year increase of 29.85%; the net profit attributable to shareholders of the listed company was -28.119 million yuan, a year-on-year decrease of 206.71%, and the non-IFRS net profit was -32.4788 million yuan, a year-on-year decrease of -416.26%.

Regarding the significant fluctuation in net profit, Jiguang Technology repeatedly mentioned the impact of the "Swiss merger."

In the first half of this year, Jiguang Technology completed the acquisition of 100% equity of Swiss micro-nano optical component company SUSS MicroOptics SA (hereinafter referred to as "SMO"). The target company is a wholly-owned subsidiary of the listed company and is included in the scope of consolidated financial statements.

It is worth mentioning that SMO's revenue has been declining in recent years, and the net profit has suffered significant losses. As a result, after the acquisition was completed, Jiguang Technology continues to face multiple pressures in terms of both consolidated financial statements and business synergy.

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Dual pressures loom

The predecessor of Jiguang Technology was Xi'an Argus Optoelectronic Technology Co., Ltd. Looking at the industry chain, Jiguang Technology is mainly engaged in the research and development, production, and sales of high-power semiconductor laser components and raw materials ("generating photons"), and laser optical components ("controlling photons") in the upstream of the photon industry.

Regarding the first half of the year's revenue, Jiguang Technology stated that it was "below expectations." The Swiss merger and the failure of most business growth were the key reasons.

With the layout and expansion of major domestic laser suppliers in the industry chain, the competition in the fiber laser market continues to intensify.As an upstream supplier, JG Technology's pre-fabricated gold-tin-aluminum nitride substrate materials are a substitute for imports. In 2023, amidst industry competition, JG Technology adopted rapid price reduction measures to maintain customer base and market share, leading to a rapid increase in shipments. However, costs have not decreased with the increase in production volume, which has lowered the overall gross margin level.

This situation did not show a significant improvement by the first half of 2024.

JG Technology stated that the sales price per unit of pre-fabricated gold-tin-aluminum nitride substrate materials has seen a substantial decrease compared to the same period last year. Due to pricing pressure, the company reduced shipments in the face of losses, and with the continuous increase in the power of fiber laser pump source chips, the new generation of pre-fabricated gold-tin thin film aluminum nitride substrate materials is still in the process of being introduced. Under the influence of these two factors, the shipment volume of pre-fabricated gold-tin-aluminum nitride substrate materials has significantly declined compared to the same period last year.

JG Technology indicated: "Apart from the general semiconductor process solutions business, the growth of other businesses has not met expectations."

For example, although the revenue from laser optical components has increased, the main reason for the increase is the acquisition of the target company, and the overall revenue from laser optical components has not met expectations. Among them, the shipment volume of fast-axis collimators (FAC) has achieved double-digit growth, but due to continuous downward pressure on prices, the revenue has decreased year-on-year.

Due to downstream compression and sluggish business, JG Technology's comprehensive gross margin in the first half of the year has also decreased. "The acquisition completed at the beginning of this year is still in the early stages of integration, the cost reduction plan has not been fully implemented, and the synergies in management and operations have not yet been fully realized. The gross margin of the automotive business's projection illumination micro-lens array is negative, which has a negative impact on profitability," said JG Technology.

In addition, the impact of cross-border acquisitions is also reflected in the increase in sales, R&D, and financial expenses. The salaries and operating costs of the target companies included in the consolidation in the first half of the year, as well as the company's increased investment in basic research and future business products, have further increased sales and R&D expenses. At the same time, the acquisition added a long-term loan of 350 million yuan, and the exchange rate fluctuations of the euro and Swiss franc have led to a significant increase in financial expenses.

Cross-border acquisitions bring additional volume.

The development of business synergies with SMO may be a key issue that JG Technology urgently needs to address.

Public information shows that SMO mainly engages in the research and development, production, and sales of precision micro-nano optical components based on refraction or diffraction principles, which are used for fiber coupling, laser collimation, light field homogenization, and beam shaping.It is worth noting that optical components are at the core of Jiguang Technology's strategic focus. SMO has a certain level of R&D and manufacturing capabilities in WLO (wafer-level optical components).

In an effort to further promote business synergy, in early July of this year, Jiguang Technology initiated the reorganization and integration of certain assets, involving three major divisions: the Automotive Business Unit, the Strategic Growth Department, and the Global Photonics Process and Manufacturing Services Division. This includes the company's strategic layout in three major application directions: automotive applications, general semiconductor processes, and medical health.

Jiguang Technology stated: "The acquisition of Swiss Jiguang in the first half of the year has brought additional revenue to the newly entered field of automotive projection lighting." The financial report shows that in the first half of the year, the automotive application solutions (i.e., midstream modules in automotive applications) achieved a revenue of 40.0798 million yuan, a year-on-year increase of 316.62%.

After the completion of the acquisition, assets related to automobiles were integrated into the Automotive Business Unit. Regarding the subsequent development plan, Jiguang Technology revealed that the Automotive Business Unit will serve global automotive intelligent projection, cabin projection, and new types of automotive lighting customers, and in combination with the integration of Swiss Jiguang, the production of automotive projection lighting will be merged domestically and in Southeast Asia.

The "Strategic Growth Department" will be one of the two newly established departments after the completion of the acquisition. Jiguang Technology stated that the department will mainly accommodate R&D teams and equipment related to assets in consumer electronics applications, consumer-level (disposable) endoscope applications, and other emerging applications.

The future business development direction of this department will also be anchored in consumer electronics applications, consumer-level (disposable) endoscopes, and R&D services for ams-OSRAM.

For the Global Photonics Process and Manufacturing Services Division (Global Photonics Foundry), Jiguang Technology positions it as a global center for photonics process and manufacturing services. This includes the reorganization and integration of some R&D assets and their integration into the headquarters R&D center, enhancing the global collaboration of R&D and engineering.