Since the beginning of October, the A-share market, which has just started to show signs of a bull market, has seen a pullback. After a period of widespread gains, differentiation has increasingly become the prevailing trend. Despite this, one sector stands out - the technology stocks. In particular, the exciting developments around Huawei's concepts have become the main focus of market attention. Indices related to Huawei’s various initiatives, such as Huawei Euler, Huawei HiSilicon, Huawei Kunpeng, Huawei Ascend, and HarmonyOS, have all surged by over 15%.

A significant factor driving the speculation around these Huawei concepts is the series of critical announcements planned for the fourth quarter. The most anticipated event is the Harmony Night on October 22, coinciding with the launch of numerous Huawei all-scenario products.

In response to the excitement generated by such announcements, the Harmony concept has already reached new historical heights even before the event itself.

【Breaking Through and Surpassing】

The enthusiasm surrounding HarmonyOS has been building since the beginning of the year. Under the backdrop of technological self-reliance, Huawei's HarmonyOS, developed over five years, has unleashed astonishing potential.

By the first half of 2024, HarmonyOS's market share in China rose to 17.2%, marking a staggering 66.7% increase year-on-year and surpassing iOS, positioning it as the second largest mobile operating system in the country after Android, while globally it ranks third.

The year 2024 also marks the beginning of the pure Harmony ecosystem. On October 8, the HarmonyOS NEXT began its official public testing for users, indicating that it is no longer compatible with the Android system, having evolved into a fully independent operating system with a self-controlled approach from the operating system kernel to file systems, programming languages, compilers, and programming frameworks.

The rise of HarmonyOS is noteworthy, especially since the operating system industry is known to be a winner-takes-all arena. For over a decade of the mobile internet era, Apple’s iOS and Google’s Android have dominated, leaving little to no room for any rival operating systems.

Other tech giants have attempted to challenge Android and iOS with their strategies, including Microsoft, Samsung, and Nokia, yet all ended in failure primarily due to a lack of technological innovation, security issues, and a weak ecosystem.

Huawei’s HarmonyOS has distinguished itself largely due to its technological and ecological advancements. The three pillars of HarmonyOS NEXT are native intelligence, native security, and full-scene capabilities.

In terms of technological innovation, HarmonyOS employs a microkernel architecture, providing high levels of intelligence and security. For instance, when an application encounters a security issue, the microkernel can effectively isolate system services from application programs, preventing potential damage to the overall system.

In its ecological development, HarmonyOS intentionally bypassed mobile internet, targeting full-scene connectivity among devices. This approach establishes a more open alternative beyond Android and iOS.

HarmonyOS has transcended the conventional limitations of operating systems that run exclusively on single devices. It uniquely operates across a multitude of devices, seamlessly integrating with smartphones, tablets, smart wearables, smart screens, and even vehicles, as well as various everyday devices like smoke detectors, lights, cameras, access controls, and locks.

This means that all devices can communicate through a single operating system, simplifying interactions between them.

As a result of its forward-thinking approach and commitment to open-source, the HarmonyOS ultimately facilitates a range of online services including mobile office, fitness and health, social communication, and media entertainment. Compared to iOS and Android, its advantage in full-scene interconnectivity attracts a large number of ecological partners.

According to the Huawei Developer Conference on June 21, 2024, the number of HarmonyOS ecological devices has surpassed 900 million, with 2.54 million developers engaged in Harmony ecosystem development. Monthly active users of the developer alliance's official website reached 4.5 million, with service call instances approximating 82.7 billion, covering 99.9% of the top 5000 applications that now fully support native Harmony adaptations, with at least 1500 applications successfully listed.

During the launch event on October 22, Yu Chengdong revealed the latest developments in the Harmony ecosystem:

As of now, the number of Harmony ecological devices has exceeded 1 billion, with registered developers reaching 6.75 million. The number of native Harmony applications and meta-services available has surpassed 15,000 - a significant increase compared to four months prior.

Supported by the Harmony system, Huawei's flagship phone shipments have increased by 71% year-on-year. In the first half of the year, the global shipment of wearable devices topped the list, while Huawei’s health app boasts over 100 million monthly active users. Additionally, its enterprise applications cover more than 38 million companies nationwide, marking historic expansion within its ecosystem.

【Which Harmony Concept Stocks Are the Best?】

Super species invariably bring massive opportunities to the industry chain; the rapid ascent of Apple, Tesla, and NVIDIA has similarly catalyzed growth for numerous A-shares companies. HarmonyOS will undoubtedly present valuable empowerment and development opportunities for its partners.

In the Harmony ecosystem, the upstream comprises hardware devices like communication modules and controllers; the midstream involves software development, while the downstream extends to various ecological applications. Given the timeline, performance elasticity, and realization timeframe, midstream software development perhaps stands to gain the most.

Over 200 listed A-share companies are tied to Harmony, with notable performers such as Changshan Beiming, Runhe Software, and Ruantong Power all hailing from the midstream software development sector. While these companies might not extensively disclose their collaboration details with Huawei, investors perceive them as the most authentic and potentially lucrative Harmony concept stocks.

All three companies have been strategic partners of Huawei for over a decade, deepening their collaborations. Particularly, Ruantong Power serves as Huawei's largest IT outsourcing provider.

In 2023, revenues from Huawei constituted close to 40% of Ruantong's total revenue, far exceeding that of Changshan Beiming and Runhe Software. This tight coupling with Huawei is a significant reason for Ruantong Power's outperformance in terms of revenue and market capitalization compared to the other two companies.

The trust established over years of collaboration allows all three companies to play vital roles in the development of Harmony.

Besides Huawei, both Ruantong Power and Runhe Software are significant contributors to the main open-source Harmony repository. Based on code volume, Ruantong ranks second, followed by Runhe at third, and Changshan Beiming at fourth; the top contributor is Shenzhen Kaihong, which is not listed in A-shares.

It’s noteworthy that Ruantong Power and Runhe Software have successfully collaborated with Huawei on another enterprise-level operating system, Euler, further strengthening their ties to Harmony. Both companies are selected as the initial four co-building units of open-source Harmony, alongside Shenzhen Kaihong and Jiulian Kaihong, whereas Changshan Beiming was not included.

As one of Harmony's most important strategic partners, Ruantong has achieved seamless interconnectivity with HarmonyOS across its product ecosystem, creating exemplary industry cases for its integration across various projects. Meanwhile, Runhe Software released China’s first full-scene smart IoT operating system, HiHopeOS, based on OpenHarmony on December 28, 2021, and its subsidiary RunKaihong has even received strategic investments from Huawei, making it one of the few software companies with direct Huawei equity.

When evaluating the true capabilities and potential of software companies, research and development investment and the intensity of that investment (as a percentage of revenue) are critically valuable metrics.

In 2023, Ruantong Power’s R&D expenses amounted to 957 million yuan, with an R&D intensity exceeding 5%. Meanwhile, Runhe Software reported R&D expenses of 279 million yuan, approaching 10% in R&D intensity, while Changshan Beiming disclosed merely 264 million yuan in R&D expenditure, which constitutes less than 3% relative to its 9 billion yuan in revenue.

From a historical performance perspective, Changshan Beiming has lagged behind the other two companies, experiencing non-recurring losses for eight consecutive years. In the first half of this year alone, the company reported a non-recurring loss of 320 million yuan, doubling its losses compared to the same period last year and marking the largest loss in nearly two decades. In contrast, Runhe Software, with the smallest revenue but the highest R&D intensity among the three, displayed the most stable profit potential.

However, short-term market performance is often irrational. Due to the volatility stemming from its relatively small market capitalization, Changshan Beiming's stock price has nearly tripled this year, making it the top performer of the trio; specifically, in the last two months, it has soared almost fivefold, becoming the highlight of Harmony concept stocks.

Yet, in the long run, the lackluster fundamentals of Changshan Beiming may hinder its success in the Harmony industry chain competition. Conversely, Ruantong Power and Runhe Software, boasting stronger R&D capabilities and tighter ties with Harmony, alongside more reliable past performance, are more likely to emerge as the primary beneficiaries among A-share companies involved with Harmony.