On Tuesday, Citi issued a downgrade for Raycus Fiber Laser (300747:CH), shifting its rating from Buy to Sell and significantly reducing the price target from RMB30,000 to RMB12,400. The adjustment comes in response to Raycus' second-quarter financial results for 2024, which revealed a 22% year-over-year decline in revenue and a 0.6 percentage point quarter-over-quarter decrease in gross profit margin (GPM). These results have raised concerns about the resurgence of price competition amid a softening demand landscape.
The company's recent performance has led to a downward revision of earnings forecasts for 2024 and 2025 by 39% and 40%, respectively. This revision is due in part to an unexpected tenfold year-over-year increase in asset impairment charges reported in the second quarter. Management at Raycus acknowledged during the results briefing that demand for laser sources has been weakening since May 2024, attributing the downturn to macroeconomic challenges.
To navigate the tough market conditions, Raycus management indicated that the company might employ a flexible pricing strategy in the second half of 2024 for its major customers. This approach aims to preserve market share but also suggests that the company could experience continued pressure on its gross profit margins, mirroring the situation observed during the 2021-2022 period.
The new price target set by Citi is based on a revised price-to-book (P/B) ratio of 2.0 times the expected 2024 earnings, a significant decrease from the previous 4.6 times. This change reflects Citi's outlook on the industry's deteriorating conditions and the anticipated impact on Raycus' financial health moving forward.
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