Shanghai Baosight Software

Shanghai Baosight is an industrial software solutions provider in China which provides a full suite of products across the automation pyramid. It was founded in 1978 as the automation department within Baosteel (which is now part of China Baowu Steel, the world’s largest steel producer). That is why the company is highly regarded by the best stock websites. Baosight trades on the Shanghai Stock Exchange in 2 different classes, namely the ‘traditional’ A shares, and B shares, which are known as Domestically Listed Foreign Investment shares. The domestic A shares trade at approximately 34-35x trailing twelve-month (TTM) earnings, 33-34x free cash flow and 3% yield, whereas the B shares trade at a huge discount of around 12-13x TTM earnings, 12-13x free cash flow and 7% yield. I believe that the investor today can purchase a fractional ownership in a business that has been growing at a high teens rate per annum (topline has grown ~18% compounded while bottom line has grown about 35% compounded for past 6 years), with high returns on capital, strong cash flow generation, and very high % of recurring profits (~99%) at a heavily discounted price. I believe such an opportunity is present primarily due to a lack of attention on the archaic B share class, which has generally received less investor attention compared to H shares.

Brief history / background of Baosight

Shanghai Baosight Software was established in 1978 within Baosteel as their automation department. Baosteel took over Wuhan Iron and Steel to form Baowu Steel, which now owns around 65% of Baosight. Baosight currently offers the full suite of products across the International Standard of Automation (ISA-95) automation pyramid as depicted by the chart below.

Baosight has now developed the following core capabilities:

• Information Solutions (Manufacturing Execution Systems MES, Integrated Process Quality Management Systems IPQMS, Energy Management Systems EMS), Programmable Logic Controller (PLC)
• Smart Storage (Crane Location Tracking Systems CLTS, Unmanned Automatic Crane System UACS)
• Electromechanical Equipment (Industrial Robots, Bell-type Furnaces, Surface Inspection Device, Automation Solutions for whole metallurgical process and cold rolling process)

In particular, one of the main highlights of Baosight was when it managed to develop a large scale PLC product in mid 2021 after years of research, in a business that has traditionally been dominated by EU, US and Japan companies. Baosight’s medium and large sized PLC products are designed and manufactured in China, something which had proved technically hard for Chinese companies in the past.

The private steel company Hongwang Group chose Baosight as its partner and has applied Baosight's products in multiple projects, such as Hunan Hongguang's silicon steel production line, etc. The products have been promoted to Fujian Hong, Guangxi Hongmao and other projects which has shown some degree of confidence in Baosight’s products.

Challenges in the Iron & Steel Market and how Baosight solves these problems

The iron and steel industry faces intense competition and operational challenges that demand advanced solutions for efficient production and supply chain management. Key issues include the shift from a make-to-stock to a make-to-order production model, which has amplified the need for accurate and timely communication between sales and production, and effective tracking and control of production events.

Challenges in the Iron & Steel Industry

1. Inefficient Production Communication:
• Customer requirements are often not communicated to production lines in a timely or accurate manner, leading to delays and mismatches in production.
2. Inadequate Production Tracking:
• Events during production cannot be effectively tracked or controlled, which complicates the management of varied and complex production processes.
3. Complex Production Processes:
• Steel manufacturers face difficulties in managing products that are varied in nature and involve long process flows, multi-process lines, and complex manufacturing steps.
4. Lack of Real-Time Production Status:
• Manufacturers struggle to obtain accurate and current information on production status, which hampers their ability to provide clients with up-to-date shipping and order information.

How Baosight’s MES Addresses These Challenges

Baosight’s Manufacturing Execution System (MES) is designed to tackle these industry-specific issues by providing a comprehensive set of functions:

1. Order Management:
• Function: Receives sales orders from Enterprise Resource Planning (ERP) systems, effectively connecting sales and production teams.
• Benefit: Ensures seamless communication between customer orders and production processes, improving accuracy and reducing lead times.
2. Quality Management:
• Function: Manages quality design, control, and tracking through the Planning, Doing, Acting, and Checking (PDAC) cycle.
• Benefit: Standardizes manufacturing processes to ensure consistent product quality and compliance with industry standards.
3. Product Management:
• Function: Monitors the real-time status of customer contracts throughout their lifecycle—from contract signing to order delivery and contract closure.
• Benefit: Provides transparency and control over each contract’s progress, enhancing customer satisfaction and operational efficiency.
4. Schedule Management:
• Function: Forms detailed sequences of operations based on order status, material availability, and process unit limitations.
• Benefit: Optimizes scheduling and resource allocation to improve production efficiency and meet delivery deadlines.
5. Material Tracking and Results Management:
• Function: Collects and provides real-time access to production process information and status from production units.
• Benefit: Enables accurate tracking of materials and results, enhancing visibility and control over production processes.
6. Warehouse Management:
• Function: Manages raw materials, work-in-progress (WIP) inventory, and finished product inventory.
• Benefit: Organizes inventory to support productive operations and streamline material handling.
7. Shipping Management:
• Function: Coordinates delivery schedules based on product orders to ensure timely delivery.
• Benefit: Enhances logistics efficiency and customer satisfaction by ensuring on-time delivery of products.
8. Tool Management:
• Function: Manages tools that influence the main production line.
• Benefit: Ensures proper maintenance and usage of tools, contributing to smoother and more reliable production operations.

Overall landscape has been mostly dominated by foreign companies, with increasing substitution by domestic Chinese firms

Market Growth and Domestic Penetration

China's PLC market has seen fast growth over the past decade. China's market share for PLCs increased rapidly from less than 10% in 2015 to nearly 30% in 2021. This growth underscores both the technological advancements in Chinese PLCs and the increasing trust and recognition of domestic brands by local firms.

In 2022, the domestic medium- and large-sized PLC market was valued at 8,265 million RMB, reflecting a 3.93% increase year-on-year. The small-sized PLC market was valued at 8,341 million RMB, showing a 5.71% increase year-on-year. Notably, the localization rate of small-sized PLCs in China has reached 36.1%, signifying that domestic PLCs are starting to lead in specific market segments.

Baosight’s Role and Market Position

Baosight stands out as a leading player in the domestic large-scale PLC market, a sector previously dominated by foreign companies. After nearly a decade of development, Baosight has established over 200 core process algorithms and launched its self-developed large-scale PLC in July 2021. This move marked the beginning of the domestic substitution of large-scale PLCs and initiated a rapid growth phase for the company.

Currently, Baosight has expanded its offerings to include core domestic large-scale PLC & SCADA industrial control software, information software, AI large models, robots, and AIDC solutions. The company’s growth is closely linked with the steel industry, especially given its significant partnership with Baowu. Baosight holds approximately 20% of the market share in this sector, with 80% of revenue coming from the steel industry.

Development of domestic Chinese brands and difficulties faced

Recent years have witnessed a substantial increase in industry penetration by Chinese brands in the small PLC market. This success is attributed to their cost-effective solutions, flexible business models, and ability to develop customized models for specific industries. Technological innovation remains the core driver behind the rise of Chinese PLCs. For instance, Unionscience Technology has made significant strides by investing in R&D to produce high-performance PLC products with fully independent intellectual property rights. These products have effectively replaced imported products in industries such as metallurgy and transport.

However, the high-end market for Chinese PLCs faces several challenges. Technical barriers, industry constraints, and product exclusivity pose significant hurdles. For example, many production lines are entirely imported, and foreign brands have established long-term relationships with these companies, making it difficult for Chinese brands to penetrate these markets. Additionally, replacing PLCs involves extensive work, including redesigning processes and dealing with potential time costs and risks of errors.

Expansion of Baosight outside of China

Baosight has also expanded its reach internationally. Notable projects include:

• India: Collaboration with Steel Authority of India Limited (SAIL)

• Projects:
• Manufacturing Execution System (MES): Includes SYMS (Steel Yard Management System) and CYMS (Cold Yard Management System).
• CLTS (Conveyer Line Tracking System): Implemented for the Rourkela hot rolling mill.
• the MES and CLTS solutions provided support enhanced operational efficiency and tracking capabilities at their Rourkela facility.

• Vietnam: Partnership with Formosa Ha Tinh Steel Corporation (FHS)

• Projects:
• Manufacturing Execution System (MES): Facilitates real-time production monitoring and control.
• Advanced Planning System (APS): Enhances planning and scheduling for optimized production.
• Integration of MES and APS has enabled more efficient management of their production processes and improved planning accuracy.

Focus areas and development strategies

Baosight is strategically concentrating on advancing its core competencies in industrial software and artificial intelligence (AI). These focal areas are pivotal for the company’s growth and innovation in the competitive industrial automation sector.

1. Industrial Software Development

According to the best stock analysis websites, a primary objective for Baosight is to enhance and upgrade its industrial software systems, with a particular emphasis on PLCs. This involves the development of independent and controllable industrial software solutions, where Baosight drives iterative improvements and performs comprehensive reconstructions and upgrades of its software products. By focusing on these initiatives, Baosight aims to strengthen its position in the industrial software market and address the evolving needs of its clients.

1. Artificial Intelligence (AI)

In addition to industrial software, Baosight is investing in AI with the goal of developing large-scale models tailored to the metallurgical industry. Initiatives in this area include creating end-to-end solutions that span the entire industrial chain. This encompasses research into the application of humanoid robots within the steel industry, aiming to integrate AI technologies to enhance operational efficiency and innovation.

Investment and Development Highlights

Baosight has significantly increased its R&D for both industrial software and AI. In 2023, the company achieved notable milestones:

• Barobot Application Scenario: The successful construction of demonstration production lines for Barobot applications marked a significant advancement in showcasing the practical capabilities of its technologies.
• Integration with Baoluo Cloud: Baosight promoted the large-scale integration of robots with the Baoluo Cloud platform. This integration involved implementing the BOO (Build-Own-Operate) and RAAS (Robot-as-a-Service) models across multiple steel bases, underscoring the company's commitment to advancing robotic and AI applications in industrial settings.