This article is based on publicly available information and is intended for information purposes only and does not constitute any investment advice.

Products | Company Lab

Wen | Wang Yanqiang

how long can the "story" of hkust xunfei (002230.SZ) AI be told?

Following a 60% drop in net profit in 2022, HKUST Xunfei's results in the first half of 2023 continued to be under pressure.

According to the China Daily, from January to June 2023, HKUST Xunfei achieved operating income of 7.842 billion yuan, down 2.26 percent year-on-year; realized net profit of 0.074 billion yuan, down 73.54 percent year-on-year; and realized net profit loss of 0.304 billion yuan, down 208.99 percent year-on-year.

In this regard, HKUST Xunfei said that the company should respond to the extreme pressure of the United States, in the core technology independent control and industrial chain control and other aspects of firm investment, actively seize the new historical opportunities of general artificial intelligence, increase the general artificial intelligence cognitive model of strategic investment.

Shortly after the disclosure of the interim report, the company issued an announcement on the reduction of the actual controller's holdings. The announcement said that in July 2021, in order to consolidate the company's control right, meet the working capital needs brought about by the rapid development of the company's business, and enhance the company's ability to resist risks, Chairman Liu Qingfeng borrowed 2.35 billion yuan through pledge financing and other means to subscribe for the company's non-public offering shares, and the above debt has expired. To this end, Chairman Liu Qingfeng needs to reduce his shareholding to repay the principal of the above-mentioned loans.

But the company's research office noticed that Liu Qingfeng's reduction price this time has increased by 76.21 compared with the non-public offering price subscribed two years ago, and the net profit from the reduction is about 1.016 billion yuan.

As of August 18, 2023, iFLYTEK closed at 56.68 yuan per share, with a market value of 131.3 billion yuan and a rolling P/E ratio of 368 times.

hkust xunfei stock price trend in the past year (yuan/share)

Data source: Wind

Accounts Receivable Continues to Increase Net Sales Margin to Decline

iFLYTEK is a national backbone software enterprise specializing in intelligent voice and language technology research, software and chip product development, voice information service and e-government system integration.

from 2018 to 2022, hkust xunfei will realize operating income of 7.917 billion yuan, 10.079 billion yuan, 13.025 billion yuan, 18.314 billion yuan and 18.82 billion yuan respectively, up 45.41, 27.30, 29.23, 40.61 and 2.77 year on year. Realize net profit of 0.542 billion yuan, 0.819 billion yuan, 1.364 billion yuan, 1.556 billion yuan and 0.561 billion yuan, yoY growth of 24.71 per cent, 51.12 per cent, 66.48 per cent, 14.13 per cent and -63.94 per cent.

from the above data, iFLYTEK's revenue has been growing steadily in the past five years. Although the growth rate declined in 2022, it still achieved positive growth. After reaching a new high in 2020, the growth rate of net profit attributable to the parent continued to decline, with a sharp drop of 63.94 in 2022.

Regarding the sharp drop in net profit in 2022, the company stated in its annual report that on the one hand, due to the special social and economic environment, the progress of the company's related projects has been delayed to a large extent, especially in the fourth quarter for more than 20 projects and more than 3 billion yuan. Contract extension. On the other hand, after the company was included in the U.S. entity list in 2019, it was again under extreme pressure on October 7, 2022, and the process of adjusting from the supply chain to the related contract signing also affected the pace of current order signing.

Although the external environment has had a certain impact on iFLYTEK, the company's research office has noticed that the company's net sales margin has been low in recent years.

In 2018-2022, HKUST's net sales margins were 7.81, 9.36, 11.07, 8.80 and 2.65 percent, respectively. With the exception of more than 10 per cent in 2020, net sales margins are below 10 per cent in all years, falling to 2.65 per cent in 2022.

net sales margin of iFLYTEK in the past 5 years (billion yuan)

Data source: Wind

And the lower net sales margin corresponds to rising accounts receivable.

according to Wind data, from 2018 to 2022, the accounts receivable of iFLYTEK were 3.389 billion yuan, 5.087 billion yuan, 5.468 billion yuan, 7.486 billion yuan and 9.87 billion yuan respectively. in 2022, the accounts receivable of iFLYTEK accounted for 52.44 percent of the revenue.

accounts receivable of iFLYTEK in the past 5 years (billion yuan)

Data source: Wind

In addition, the company's research office noticed that the return on net assets of iFLYTEK has not been high.

According to Wind data, in 2018-2022, the return on net assets (diluted) of HKUST Xunfei was 6.80 per cent, 7.17 per cent, 10.77 per cent, 9.28 per cent and 3.42 per cent, respectively. Significantly below the 15% target line recommended by Warren Buffett.

Return on net assets of iFLYTEK in the past 5 years (%)

Data source: Wind

High government subsidies, high capitalization rate of R & D investment

Since the establishment of iFLYTEK, the proportion of government subsidies in its profit composition has not been low.

From the data of the past 5 years, from 2018 to 2022, the amount of government subsidies included in the current profit and loss of iFLYTEK was 0.276 billion yuan, 0.412 billion yuan, 0.426 billion yuan, 0.439 billion yuan, and 0.473 billion yuan, respectively, accounting for the current period. The proportion of net profit is 50.92, 50.31, 31.23, 28.21, and 84.31.

From the above data, in 2018, the government subsidy of HKUST Xunfei accounted for 50.92 of the current profit, but with the growth of the net profit attributable to the mother, the proportion of government subsidies is also declining, but after the net profit attributable to the mother fell by 63.94, the proportion rose to 84.31.

In addition, for a high-tech company, R & D investment has always been an important indicator that the market focuses on. To some extent, it determines the future development potential of the company. The R & D capitalization rate index has also become an important window to observe the profit quality of enterprises.

The annual report shows that from 2018 to 2022, iFLYTEK's R & D investment has continued to grow, at 1.773 billion yuan, 2.143 billion yuan, 2.416 billion yuan, 2.936 billion yuan, and 3.355 billion yuan respectively.

However, over the same period, the company's R & D capitalization rates were 47.02 percent, 48.52 percent, 42.74 percent, 38.49 percent, and 42.10 percent, respectively, significantly higher than the R & D capitalization rates of about 30 percent for technology companies.

In general, if R & D investment is expensed, R & D expenses need to be deducted when accounting for net profit. And if research and development costs are capitalized, not only does it not affect profits, but it also increases total assets.

From the above data, although the capitalization rate of iFLYTEK's R & D investment has decreased in recent years, it has increased significantly after the decline in net profit attributable to the parent company in 2022.

deducts non-net profit loss of 0.304 billion yuan, can the benchmark Chat GPT be as expected?

According to the China Daily, from January to June 2023, HKUST Xunfei achieved operating income of 7.842 billion yuan, down 2.26 percent year-on-year; realized net profit of 0.074 billion yuan, down 73.54 percent year-on-year; and realized net profit loss of 0.304 billion yuan, down 208.99 percent year-on-year. The net sales margin was 0.19 per cent and the return on net assets (diluted) was 0.45 per cent. Accounts receivable are as high as 10.875 billion yuan, 1.39 times of revenue.

it is worth mentioning that the non-net profit loss of 0.304 billion yuan is the first time since the listing of hkust xunfei. In the non-recurring profit and loss, the investment income from holding available-for-sale financial assets is 0.221 billion yuan, mainly from the sale of shares held by Cambrian (688256.SH) and Sanren (605168.SH); the government subsidy is 0.221 billion yuan.

in the face of the sharp decline in the performance of the interim report, hkust xunfei stressed in its semi-annual report that since the company released versions V1.0 and V1.5 of the spark cognitive model on may 6 and June 9 this year, the company's c-side hardware GMV has reached a record high, doubling year on year. Taking the learning machine as an example, in May and June, the GMV of the learning machine after the large model blessing increased by 136 and 217 respectively. Sales of xunfei AI hardware (AI learning, AI office, AI health) increased 125 year on year during the "618" period.

at the same time, xunfei of HKUST proposed that the spark model will achieve the goal of benchmarking Chat GPT on October 24.

but in the investor interaction platform, some investors said that GPT5 will be released soon, and the domestic level will be close to GPT3 at best, while the spark model will not be able to target GPT3.5 until the end of October. At the same time, investors ask soul questions, when can we surpass GPT4?

In response, HKUST Xunfei did not face the problem directly, saying that it would push forward the milestone plan of upgrade iteration step by step.

before that, some organizations asked "when is the xunfei spark large model expected to be officially opened for commercial use". iFLYTEK onlyHe said that "the full opening of commercial time can be expected, and he is confident to become the first batch of manufacturers".

according to the company's research office, at present, xunfei spark, whether it is official website, App or applet, still needs to provide personal information and company information before it can be reviewed and used, and is not fully open to the public. The number of downloads in the application treasure is only 6150 times, and the number of downloads in the software store is only 88000 times.

looking at the business layout of hkust xunfei, it not only covers traditional projects such as smart cities and smart medical care, but also involves new advances in these years such as yuan universe and automatic driving. the overall tonality is the same as AI concept stocks living in the tuyere.

Artificial intelligence has always been a track that burns money and brains. For iFLYTEK, which has poor profitability, there are still many uncertainties.

chairman's cash-out debt repayment additional issue price is less than 60% of the average cash-out price

Shortly after iFLYTEK released its interim report, the company immediately disclosed the announcement of the company's actual controller's reduction.

according to the announcement on August 14, Liu Qingfeng, chairman of iFLYTEK, sold a total of 39.96 million shares through block trading, involving an amount of 2.35 billion yuan, while the shareholding ratio was reduced from 7.27 per cent to 5.54 per cent.

hkust xunfei said that Liu Qingfeng reduced his holdings because the 2.35 billion yuan debt of the increased financing loan in 2021 needs to repay the principal of the loan when it matures.

It is understood that due to the development of iFLYTEK, which has experienced many rounds of financing, Liu Qingfeng, as the actual controller of the company, has a low personal shareholding ratio. At the beginning of 2021, Liu Qingfeng's combined direct and indirect shareholding in the company was only 6.71 per cent, lower than the 11.60 per cent shareholding of China Mobile (600941.SZ), the single largest shareholder.

in order to stabilize the control of the company, members of the xunfei entrepreneurial team of hkust entrusted the voting rights, proposal rights and nomination rights to Liu Qingfeng, making his voting rights 12.43 percent, slightly higher than China mobile 0.83 percent;

At the same time, it signed the "Concerted Action Agreement" with the shareholder China University of Science and Technology Asset Management Co., Ltd. ("HKUST Holdings"), so that the actual controller has a total of 16.17 of the voting rights.

However, the practice of Liu Qingfeng and HKUST Holdings acting in concert will face possible policy variables at the end of 2020. The "Guiding Opinions on the Reform of the Enterprise System of Higher Education Institutions" issued by the General Office of the State Council requires universities to "gradually realize the separation of universities from their subsidiaries".

Considering that the existence of the Concerted Action Agreement is facing greater uncertainty, which will affect the stability of the company's control rights. At the same time, in order to meet the working capital needs brought about by the rapid development of the company's business and enhance the ability to resist risks, in 2021, iFLYTEK launched an additional issuance, and the actual controller subscribed for the company's non-public offering shares.

At that time, the determined issue price was 33.38 yuan per share, the number of shares issued was 76.393 million shares, and the total amount of funds raised was about 2.55 billion yuan. The issuing objects are Liu Qingfeng and Yanzhi Technology, of which Liu Qingfeng subscribes for 70.4014 million shares with a subscription amount of about 2.35 billion yuan. The number of shares subscribed by Yanzhi Technology is 5.9916 million shares with a subscription amount of about 0.2 billion yuan.

according to the announcement on August 14, Liu Qingfeng sold a total of 39.96 million shares through block trading, accounting for 56.76 of the number of shares subscribed in 2021. the average price of the reduction was 58.82 yuan/share, an increase of 76.21 from the additional offering price in 2021. the same 39.96 million shares made a net profit of about 1.016 billion yuan.