Source: Market Capitalization

The first half was great. How did you play the second half?

"other people's children", two generations help

There are three adjacent counties in central Zhejiang, Yongkang, Wuyi and Jinyun. Although they are not as famous as Yiwu next door, they are one of the most important hardware industry clusters in China.

Riding on the east wind of Zhejiang's private economy, the industrial output value of the "Yongwujin" hardware industry belt has now exceeded 100 billion, and many listed companies have been bred, such as Taotao Automobile Industry (301345.SZ).

In the 1970 s, Cao Guicheng, who was born in Jinyun County, began to do business and accumulated a lot of wealth through poultry trade, clothing and stove processing and sales. In 1985, Cao Yuejin, son of Cao Guicheng, started a hardware casting business and co-founded Taotao Group with his wife Ma Wenhui in 2004, which focused on the security door sector.

just one year before Cao yuejin set foot in hardware casting, that is, 1984, the only son of his family, Cao matao, was born.

according to Cao matao himself, his parents' Tao Tao group's business is too complicated and does not conform to his own development orientation. he has no intention of inheriting Tao Tao group, so he decided to start his own business and set up Tao Tao car industry in 2015.

it is a dream for many people to have a brilliant child in their family. However, the so-called self-employment obviously does not mean starting from scratch. The eldest son and grandson start a business. The Cao family has no reason not to support it. In the process of Cao Ma Tao's entrepreneurship, the elders of the Cao family and Tao Tao Group have contributed a lot.

for example, when setting up the company, Cao matao and Tao Tao group contributed 2850 yuan and 1.5 million yuan respectively, of which Cao matao's 28.5 million yuan came directly from the gift of grandpa Cao guicheng. Coincidentally, in October 2018, Cao Xiashu (the sister of Cao Ma Tao) increased the company's capital by more than 3000 million yuan, which ultimately came from the loan of Tao Tao Group.

(source: taotao car industry announcement)

At the intellectual property level, Taotao Group has transferred at least 25 patents and 15 trademarks to the company free of charge since 2017.

At the employee level, many of the company's senior executives and core technical personnel have worked in Taotao Group. As the focus of work shifted to opening up the U.S. market and staying in the U.S. for longer and longer, Cao Matao even authorized his father Cao Yuejin to stick to the rear on March 29, 2017 and act as the company's chairman and general manager.

(source: taotao car industry announcement)

At the business level, some of the company's main business assets also come from Tao Tao Group.

For example, in July 2016, the company acquired inventory and fixed assets related to all-terrain vehicles and motorcycles from Taotao Group. In December 2017, the company once again acquired fixed assets such as balance car assembly lines and strapping machines from Taotao Group.

Before Cao Ma Tao set up the company, Tao Tao Group actually had all-terrain vehicles, motorcycles and other businesses. In other words, parents paved the way for Cao Ma Tao early.

Although the related party represented by Taotao Group is not a major shareholder of the company and the amount of related transactions with the company is not large, it still has a significant impact on the company's operations.

from establishment to capital increase to market development, almost every step of the company's development is closely related to taotao group. In intellectual property, employees, business and many other aspects, the company also has close ties with Tao Tao Group.

it is difficult to estimate how independent the company run by Cao matao, the actual controller of the company, and how capable its personal management ability is. the Shenzhen stock exchange also questioned the independence of the company before.

And the way to verify it depends on the development of the company's main business, especially in overseas markets.

The United States becomes the largest source of income

Since its inception, the company has been mainly engaged in the production and sales of recreational vehicles.

Due to the topography, consumption habits and leisure and entertainment culture, North America and Europe have always been the main sales markets for leisure and entertainment vehicles in the world. Many Chinese manufacturers, including the company, are export-oriented enterprises.

From 2017 to 2022, the combined revenue share of North America and Europe has been above 90%, with the United States consistently being the company's largest source of revenue. Although the share of revenue in the US market continues to decline due to the promotion of business in Canada and Europe, it is still above 60%.

(Charting: Market Value Fengyun App)

The company's current main models include all-terrain vehicles, electric scooters and electric balance vehicles. The combined revenue share of the three models increased from 64% in 2017 to 84% in 2022.

During the period, the income of the three models increased year by year, of which the income of electric scooters increased the fastest, from 0.003 billion yuan to 0.687 billion yuan, with CAGR as high as 203. In 2022, electric scooters have become the company's primary source of revenue, accounting for nearly 40% of revenue.

The revenue growth rate of electric scooters is so high. On the one hand, the demand for this model is relatively strong. On the other hand, the business was launched late and the early revenue base was low.

(Charting: Market Value Fengyun App)

the company's overall revenue increased from 0.486 billion yuan in 2017 to 2.018 billion yuan in 2021, with a CAGR of 43%.

2022 by the epidemic, the Russian-Ukrainian war, inflation in Europe and the United States and other factors, market demand slowed down significantly, the company's revenue fell 13% year-on-year to 1.766 billion yuan, of which all-terrain vehicle revenue fell the most serious, down 34% year-on-year.

(Charting: Market Value Fengyun App)

The profit trend is basically the same as the revenue. During 2017-2021, the net profit of the parent company maintained growth, with CAGR reaching 73%. Net profit for 2022 fell 15% year-on-year.

(Charting: Market Value Fengyun App)

In the first three quarters of this year, the company's performance showed a recovery trend. Revenue and home-grown net profit increased by 12% and 50% year-on-year, respectively.

(source: taotao car industry 2023 third quarter report)

From 2017 to 2022, the gross profit margin fluctuates roughly in the range of 30%-40%. Due to the company's effective control of sales expenses, the net profit margin of the parent company showed an upward trend, from 6% to 12%.

(Charting: Market Value Fengyun App)

Obviously, under the leadership of Cao Ma Tao, the company has achieved remarkable results and deserves recognition.

Except for 2022, the company's annual performance growth is relatively fast. This is not only related to the relatively high prosperity of the entire industry, but also related to the company's own advantages. This advantage is cost.

Low-end OEM, cost wins

There are currently two paths for Chinese manufacturers to go out to sea, one is to establish a brand, fight for technology, and focus on the high-end market, and the other is to reduce costs, fight for prices, and focus on the low-end market.

Chunfeng Power (603129.SH) and No. 9 Company (689009.SH) chose the former path, and the company chose the latter path. Cost advantage is the company's core competitiveness.

The cost advantage has a lot to do with the location on which the company is based. Fengyun Jun mentioned at the beginning of the article that the "Yongwujin" area has formed industrial clusters such as automobiles, motorcycles and accessories. The hardware resources are very rich and the supply of raw materials is sufficient. Therefore, the company can keep the product cost and price very low.

Take all-terrain vehicles as an example. The company's all-terrain vehicles are currently priced at about 5,000 yuan per vehicle. The models are all small-displacement vehicles with simple functions and low technical thresholds. Chunfeng Power mainly sells large-displacement all-terrain vehicles (as shown in the figure below), and the price is basically above 40000 yuan/vehicle.

(source: Chunfeng Power official website)

With cost advantages, the company began to do OEM production for large European and American chain supermarkets. The company's share of non-private label revenue increased from 17% in 2017 to 41% in 2021, and will remain at around 40% in 2022.

(Charting: Market Value Fengyun App)

unlike the company's gradual preference for the foundry model, spring breeze power focuses on building its own brand, with related revenue accounting for more than 90% for a long time. Company 9 used to be Xiaomi's foundry, but now it has also transformed from a foundry to a private-brand enterprise, with private-brand revenue accounting for more than 60% in 2022.

for more details about spring breeze power and company 9, you can download the market value Fengyun App to view relevant research reports.

(Source: Market Capitalization App)

Low academic qualifications of R & D personnel

If having a cost advantage is the positive side of the company, then insufficient R & D investment and weak technological innovation capabilities are the negative side of the company.

from 2017 to 2022, the company's research and development cost rate is only about 3%, and the research and development intensity is significantly lower than that of Chunfeng Power and No. 9 Company.

(Charting: Market Value Fengyun App)

As of the end of the first half of 2023, the company has 425 patents, of which only 10 are invention patents, accounting for only 2.4 percent. During the same period, Chunfeng Power had 86 invention patents, accounting for 7.1 per cent. Company No. 9 has 440 invention patents, accounting for 14.6 per cent. The company not only has the least number of invention patents, but also the lowest percentage.

In addition, the overall quality of the company's R & D personnel is also the lowest among the three.

in 2022, the company will have 199 research and development personnel, of which only 9 have bachelor's degree and no master's degree or doctor's degree. 95.5 per cent of R & D personnel have less than a bachelor's degree.

During the same period, Chunfeng Power had 1210 R & D personnel, including 880 undergraduates, 139 masters, and 4 doctors. The proportion of personnel with bachelor's degree or above reached 84.5. Company No. 9, on the other hand, has 83.3 per cent of its research and development staff with a bachelor's degree or above.

Obviously, under the company's current business model, there is no need for a large number of highly educated R & D personnel, which also shows from the side that the company's products are lack of technical content, and there is no systematic technological innovation.

(Source: Taotao Auto Industry 2022 Annual Report)

In the past few years, the company has seized the dividends of the rapid development of the industry and achieved rapid growth in performance, but the hidden danger is that it relies too much on cost advantages. This path dependence may lead the company to be more inclined to OEM production, and ultimately make the company trapped in the low-end market for a long time.

In addition to the limited development space, in the context of Sino-US trade frictions, OEM companies that rely on cost advantages are too easy to be "pinched.

in any industry, the most competitive manufacturers are still those with brands, technologies and high-end capabilities. naturally, they will take more revenue and profit share.

when the industry is going well, you may not see any problems with the company. once the industry is facing a headwind, the company's problems will be revealed.

For example, in 2022, when demand in Europe and the United States was weak, the company's performance declined. And with the brand and technical strength of the spring breeze power is against the wind, revenue and home-to-home net profit increased by 45% and 70% year-on-year, respectively.