China Capital Goods:Global laser update,higher power/microelectronics trending,R&D spends strong;Buy Han¡¯s

Global laser leaders¡¯ sales up by teens in China/Asia, higher power & microelectronics trending.

1) High power leader Trumpf on Sept 16reported FY16 (Jun-end) laser tech sales of €1.0bn($1.1bn), +4.6% yoy, mainly achieved from its 55%exposure in Europe, while flat in China/N America;2) Microelectronics leader Coherent on Nov 2reported FY16 (Sept-end) sales of $857mn, +7%yoy, with new orders +85% yoy benefiting fromits OLED-related orders in Korea; 3) Criticalcomponent leader IPG Photonics on Oct 27reported 9M16 sales of $726mn, with China +13%on a constant currency basis driven mainly byhigher-power applications. IPG also expects risingASPs going forward with its product mix movingto higher power output (to 4kw/6kw/10kw). Piecingtogether with Han¡¯s Laser¡¯s 9M16 revenue ofRmb5.0bn ($738mn) +17% yoy, and HG Tech¡¯s9M16 laser sales likely +40-50% yoy, we estimatethat the laser market in China is growing in teens.

Consumer electronics turned out not to be amajor driver ytd, but high-power (enabling fasterspeeds for laser systems) and microelectronics/FPD (flat panel display) were the two most buoyantareas, especially in China/Asia.

Stronger R&D/Capex spends for future growth.

We estimate Han¡¯s Laser¡¯s 9M16 R&D spend grew+17%-30% yoy (in line with its 22% CAGR in 2010-2015), as it remained an active player in R&Damong global peers (IPG Photonics +32% in 9M16;Coherent/Trumpf +7%/+12% yoy in FY16). WhileIPG is moving up the power output and seeking todiversify its end-use (including display & medical),Han¡¯s Laser greatly raised its capex in 3Q16. Webelieve global leaders mostly are more committedto future growth.

One more step toward acquiring criticalcomponent; reiterate Buy on Han¡¯s Laser.

On Nov. 3, Han¡¯s Laser proposed an Rmb1.7bnacquisition of 80% interest in Canada¡¯s CoractiveHigh-Tech, whose main products include specialoptical fiber (the transmission medium to pointlaser beam in the right direction and amplify laserpower). We see this as a critical step to expeditethe development of Han¡¯s high-power fiber lasergenerator and, in the long run, a necessary step todefend its margins against the value chain. Wereiterate our positive view on the company¡¯s longtermcommitment and our Buy rating on the stock.