As Space X founder Elon Musk continues to mark new milestones in his net worth, the Hong Kong Aerospace Technology Group, Ltd. (HKATG) (SEHK:1725) which Bloomberg has hailed as the “mini Space X” has also made a highly positive announcement earlier, disclosing the details of strategic sale and purchase made between HKATG and CGWIC. According to the announcement, HKATG agreed to purchase the entire set of integrated supporting ground facilities and related services from CGWI, which means HKATG will soon be able to manufacture a satellite from scratch and own the testing capability. The announcement has given a boost to investor sentiment especially those with a strong appetite for “Space Tech” investment.

Local Integrated Solution On The Way

In case people don’t understand why this announcement stirs up the market, here is the background of China’s Great Wall Industry Corporation (CGWIC). It is the only commercial organization authorized by the Chinese government to provide commercial launch services, satellite in-orbit delivery, aerospace infrastructure construction, consulting, and human resources solutions, etc. Under the sale and purchase agreement, HKATG will “inherit” the all-round capability from CGWIC, it not only lays the foundation for ‘the Re-industrialization of Hong Kong”, but also means that HKATG is about to have the core competency requirements for manufacturing satellite, including the ability to create satellite assembly, to launch and carry out full examination and control.

Improve bargaining power and productivity

As an international financial centre, Hong Kong is well known for its highly attractive tax regime. With low corporate tax rates between 8.25% and 16.5%, this fragrant harbour imposes no value-added tax or sales tax and offers zero-tariff treatment to local exporters.

On the contrary, Mainland China imposes a value-added tax (VAT) for manufacturers at 13%, while under the CIT law, the standard tax rate is between 15% and 25%. In a tax-unfriendly country like the United States, sales tax rates vary from state to state (between 0.5% and 9.45%), and there is also a tax on the profits of US resident corporations at a rate of 21%. Simply put, the cost to manufacture satellites for HKATG in Hong Kong, is expected to be 30% to 40% lower than in Mainland China or the United States. What’s more, Hong Kong has unparalleled speed and efficiency of logistics processes in customs procedures, everything is done within 30 minutes, way faster than the 1-month clearance time in Mainland China, Europe and the United States (sometimes up to 1-2 months.)

As one of the then four “Asian Tigers” economies, both employees and employers in Hong Kong glorify hard work and work nearly 300 days a year, the productivity, efficiency, and competitiveness of the labour force in Hong Kong are beyond doubt. These turbo-boost factors play a significant role in the localization of satellites manufacturing, putting the company in extremely well-positioned to capture market share at home or aboard.

With the evolution of technology, space has become an accessible place, it is not surprising to see satellites being classified under “consumer staple”. It is estimated that more than 40,000 Low-Earth Orbit Satellites will be produced and being used annually in various fields. The operation life of a satellite is around 3 years. In other words, there are defunct satellites needed to be replaced every year, such demand-supply dynamics will continue to drive the industry forward. Low-Earth Orbit Satellites may not be a story of looming, acute shortages yet, it’s just a matter of time.

It is known that the average profit of each satellite of HKATG is about HKD 10 million, let’s keep in mind that the marginal cost formula, if HKATG manufactures over 1,000 satellites, the marginal cost will go down and the company can see profits as high as over HKD 10 billion.

Based on an average P/E ratio of 30 and the estimated revenue of HKD 10 billion, HKATG as a high-growth stock still has plenty of room left to grow, an explosion of market value is yet to come. It is no surprise that analysts describe this Hong Kong-based space tech firm as “the goose that laid the golden egg”, alike the Chinese idiom, “being with the right person at the right time in the right place”, the company simply has the most favourable conditions, including time, place, and people, it seems the best time to capture the infinite possibilities with space tech stock is now.