Which Hongmeng Concept Stock is the Best?
Since October, the A-shares, which had only recently shown early signs of a bull market, have begun to experience a correction. Following a broad-based surge across the market, the current scenario is characterized by significant divergence.
At the heart of this divergence is the standout performance of technology stocks, particularly those related to Huawei. The call for investment in Huawei concepts, including HarmonyOS, HiSilicon, Kunpeng, Ascend, and Hongmeng, has surged, with concept indices reporting gains exceeding 15%.
A major driver behind the fervor for Huawei-related stocks is the anticipated series of key events for the company in the fourth quarter, notably the "Original Harmony Night" and the launch of new products scheduled for October 22.
Before this highly anticipated event, the HarmonyOS concept had already hit a record high a day before, fueled by speculative interest.
The enthusiasm surrounding HarmonyOS had been building since the beginning of the year. Emerging amid a backdrop of technological self-reliance, Huawei's HarmonyOS has exhibited remarkable energy after five years of development.
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In the first half of 2024, HarmonyOS’s market share in China soared to 17.2%, showing a staggering year-on-year growth of 66.7%. This performance allows it to surpass iOS, ranking as the second-largest mobile operating system in China and third globally, following Android.
The year 2024 marks the beginning of the native Harmony ecosystem. On October 8, the HarmonyOS NEXT entered its public testing phase, officially establishing itself as a completely independent operating system, moving away from its previous Android compatibility. The operating system now boasts its own kernel, file system, programming languages, compilers, and frameworks, all under Huawei's control.
However, the rise of HarmonyOS has not come without challenges. The operating systems industry has historically been dominated by a winner-take-all mentality. For over a decade, Apple’s iOS and Google’s Android have maintained an overwhelming duopoly, leaving almost no room for other operating systems to thrive.
Many tech giants have aspired to challenge the duopoly, including Microsoft, Samsung, and Nokia, all of whom once launched their operating systems, but ultimately, they failed due to a multitude of factors:
1. Lack of technological innovation2. Deficiencies in security3. Insufficient ecosystem support.
Huawei’s HarmonyOS succeeded whereas others have failed by achieving technological and ecological advances. The three pillars of HarmonyOS NEXT are native intelligence, native security, and all-scenario support.
In terms of technological innovation, HarmonyOS utilizes a microkernel architecture, providing robust intelligence and security features. For instance, if an application encounters a security issue, the microkernel structure allows the effective isolation of system services from applications, thereby minimizing potential damage to the entire system.
On the ecological side, HarmonyOS bypassed the conventional mobile internet model, aiming instead at an all-scenario Internet of Everything. This opens a new path beyond Android and iOS, promoting greater openness.
HarmonyOS breaks away from the limitations of previous operating systems that could only run on single devices. It is the only operating system capable of running on a plethora of devices, supporting smartphones, tablets, smart wearables, smart screens, vehicle systems, and even household items like smoke detectors and smart locks.
This capability means that all devices can communicate through a single operating system, simplifying interaction among devices.
Thanks to its forward-thinking approach and transformation, the open-source HarmonyOS can deliver comprehensive online services spanning mobile office applications, health tracking, social communication, and media entertainment. In this regard, it holds advantages over iOS and Android in the realm of all-scenario connectivity, thereby attracting numerous ecological partners.
According to data from Huawei's developer conference on June 21, 2024, the number of devices in the Harmony ecosystem has exceeded 900 million, with over 2.54 million developers engaged in its development. The developer alliance's website reports around 4.5 million monthly active users, with 82.7 billion service calls made, covering 99.9% of the top 5000 applications, all of which have transitioned to native HarmonyOS adaptations, with at least 1500 applications successfully launched.
During the press event on October 22, Yu Chengdong revealed the latest milestones achieved by the Harmony ecosystem:
As of now, there are over 1 billion Harmony ecosystem devices, with registered developers numbering 6.75 million. Over 15,000 native Harmony applications and meta-services have been launched, showing significant growth compared to four months prior.
With the support of the Harmony system, Huawei's flagship phone shipments have surged by 71% year-on-year, the brand leads global shipments of wearable devices, and the Huawei Health App boasts over 100 million active users globally. Additionally, general office applications cover more than 38 million enterprises across the nation, showcasing monumental growth in the ecosystem.
Any revolutionary entity can bring substantial opportunities to the supply chain, as seen with the rapid advancements of companies like Apple, Tesla, and NVIDIA, which have positively impacted numerous A-share companies. The introduction of HarmonyOS is undoubtedly a potential catalyst, providing invaluable empowerment and growth prospects for its partners.
The Harmony ecosystem’s supply chain consists of hardware devices such as communication modules and controllers upstream, software development in the midstream, and various ecological applications downstream. In terms of certainty, performance elasticity, and realization timelines, the midstream software development segment appears to be the most poised to benefit.
Over 200 listed companies in the A-share market are connected to the Harmony brand. Among the best-performing stocks this year are Changshan Beiming, Runhe Software, and Softcom Power, predominantly stemming from the mid-stream software development sector. Although these companies have not disclosed extensive details regarding their collaborations with Harmony, investor sentiment indicates that these three firms are perceived as the most authentic and potentially lucrative Harmony concept stocks.
All three companies have enjoyed partnerships with Huawei for over a decade and are crucial strategic collaborators. Of particular note is Softcom, which stands as Huawei's largest IT outsourcing service provider, boasting deeper ties with the company.
In 2023, nearly 40% of Softcom's revenue stemmed from Huawei, significantly surpassing the revenue contributions from Changshan Beiming and Runhe Software's largest clients. This close alliance is a pivotal reason for Softcom's superior standing in both revenue and market value.
Leveraging the trust established through years of partnership with Huawei, each of the three companies plays a vital role in the development of HarmonyOS. Aside from Huawei, Softcom, Runhe Software, and Changshan Beiming are leading contributors to the OpenHarmony main repository, with Softcom positioned as the second-largest contributor by code volume, followed closely by Runhe Software, and Changshan Beiming in fourth place, with the largest contribution coming from an unlisted company, Shenkai Hong.
Interestingly, both Softcom and Runhe Software have a history of successful collaboration with Huawei's enterprise-level operating system, Euler, intensifying their connection to Harmony. Both companies were selected as foundational co-constructors of OpenHarmony, alongside Shenkai Hong and Jiulian Kaihong, with Changshan Beiming not cutting.
As one of the key strategic partners of Harmony, Softcom has achieved early connectivity with HarmonyOS in its product ecosystem, establishing several demonstration projects showcasing the industry’s transformation toward Harmony. Meanwhile, Runhe Software launched China's first all-scenario smart IoT operating system, HiHopeOS, based on OpenHarmony as early as December 28, 2021. Furthermore, its subsidiary, Runkai Hong, has secured a strategic investment from Huawei, positioning it as one of the select few software companies with direct shareholding from Huawei.
To accurately gauge a software company's genuine competence and potential, research and development investment and intensity—carefully measured as a percentage of revenue—emerge as crucial indicators.
In 2023, Softcom recorded R&D expenditures of 957 million, with an intensity exceeding 5%, while Runhe Software's R&D costs reached 279 million, nearly 10% of its revenue. In contrast, Changshan Beiming's R&D expenses were relatively modest at 264 million, corresponding to less than 3% of its 9 billion revenue scale.
Historically, Changshan Beiming has underperformed among the three, with its net profits excluding non-recurring items showing losses for eight consecutive years. In the first half of this year, the company reported a net loss of 320 million, nearly doubling the loss from the previous year, marking its largest deficit in nearly two decades. In contrast, Runhe Software, which has a smaller revenue footprint but the highest research intensity, has exhibited the most stable profitability.
It’s important to acknowledge that short-term performances in capital markets may not always reflect rationality. Due to speculative elasticity associated with its relatively small market capitalization, Changshan Beiming's stock price has skyrocketed by nearly threefold this year, making it the top performer among the three, particularly with the stock price witnessing a nearly fivefold increase in just over two months, solidifying its status as the most eye-catching Harmony concept stock.
However, in the long run, the less favorable fundamentals of Changshan Beiming may pose challenges to its sustainability in the competitive landscape of the Harmony ecosystem. Companies like Softcom and Runhe Software, boasting superior R&D capabilities, closer ties with Harmony, and more reliable past performance, are likely to emerge as the biggest beneficiaries within the A-share landscape concerning the Harmony concept.