Involution is medium to come and go

Author: Zhang Hanwen

Editor: Songgully

As BYD (002594. SZ) supply chain company, Guangdong Huixing Seiko Intelligent Manufacturing Co., Ltd. (hereinafter referred to as "Huixing Intelligent Manufacturing") has made new progress in the landing of the Beijing Stock Exchange, disclosing the reply to the third round of inquiry letters.

Huixing Intelligent Manufacturing is a supplier of intelligent transportation and logistics systems, and its products are used in new energy lithium batteries, photovoltaics, home appliances, 3C electronics, sanitary ware, intelligent logistics and warehousing industries.

In 2023, BYD and BYD's supplier Li Yuanheng (688499. SH) contributed a quarter of the revenue to Huixing Intelligent Manufacturing in total: 73.4917 million yuan and 50.6544 million yuan respectively, ranking among the top two customers.

Among them, BYD has become the top two customers since 2020, and it is deeply bound.

Huixing Intelligent Manufacturing is not the first BYD supply chain company to try to land on the Beijing Stock Exchange.

Prior to this, Anda Technology (830809. BJ) and Fuheng New Materials (832469.BJ), which sells lamp parts, both successfully landed on the Beijing Stock Exchange market in 2023.

Compared with the above two, Huixing Zhizao's road to listing on the Beijing Stock Exchange is not smooth.

It has been more than 10 months since the first listing application was submitted at the end of October 2023, which has exceeded the average waiting time of 266 days for 77 newly listed companies on the Beijing Stock Exchange last year.

There are two challenges in front of Huixing Intelligent Manufacturing.

One is the profitability challenge under involution.

Although the sales to BYD in 2023 increased by 42.7% year-on-year to 73.4917 million yuan last year, under BYD's vertically integrated supply chain management strategy, the gross profit margin of the products sold by Huixing Zhizao to "Diwang" in 2023 will not increase but decrease, from 17.04% to 12.79%.

In fact, before the decline, the gross profit margin of the products sold by Huixing Zhizao to BYD was much lower than that sold to other customers.

The second is that in the context of capacity reduction, the stability of orders needs to be examined.

At present, the original customers of Huixing Intelligent Manufacturing have slowed down the pace of expansion, and correspondingly reduced the purchase of intelligent transportation systems.

For example, TCL Smart Appliances (Viet Nam) Co., Ltd. (hereinafter referred to as "TCL Viet Nam") withdrew from the top five customers of Huixing Intelligent Manufacturing last year due to the "construction cycle arrangement", contributing a sharp drop of 70% in revenue year-on-year.

In the third round of inquiry, the Beijing Stock Exchange asked Huixing Zhizao to explain the stability of customer cooperation and whether there is a risk of declining performance.

Huixing Zhizao replied that fluctuations in customer demand and intensified market competition may have an impact on its performance, but it can cope with this risk through product structure optimization and overseas business expansion.

The risk may already be there.

In the first half of this year, Huixing Intelligent Manufacturing failed to reproduce its high performance, with revenue and net profit attributable to the parent company falling by 1.83% and 5.37% year-on-year respectively, falling into the predicament of declining performance again since 2020.

Huixing Intelligent Manufacturing explained in its reply to the inquiry that changes in the structure of sales products and intensified market competition led to a decline in performance.

　　01

Gains and losses of major suppliers

In the third round of inquiry, the relationship between Huixing Zhizao and BYD and Li Yuanheng has attracted much regulatory attention.

Before 2022, Li Yuanheng, as the general integrator of the lithium battery production line and BYD's Tier1 (Tier 1 supplier), purchased conveyor system products from Huixing Intelligent Manufacturing, and then sold part of them to BYD's complete production line after integrating them with its own production equipment.

Li Yuanheng is also the sixth largest shareholder of Huixing Zhizao with 3.67% of the shares, and the two constitute connected transactions.

Under BYD's supply chain vertical integration strategy, the proportion of direct sales to the former is increasing.

In 2023, Huixing Zhizao's sales to BYD will increase by 42.7% year-on-year, while the sales scale to Li Yuanheng will decrease by 47.24% year-on-year.

It seems that Huixing Intelligent Manufacturing has been able to surpass Li Yuanheng to become BYD's Tier1, but the return of Huixing Intelligent Manufacturing has not become thicker.

In 2023, the gross profit margin of Huixing Zhizao's sales to Li Yuanheng will be 17.79%, down 7.54 percentage points year-on-year, and the gross profit margin of products sold to BYD will be 12.79%, down 4.25 percentage points year-on-year.

In the third round of inquiry, the Beijing Stock Exchange asked Huixing Zhizao to explain the reasons and reasonableness of the large difference in gross profit margin between Li Yuanheng and BYD, and whether there were other interest arrangements or abnormal capital transactions in the related party transactions with Li Yuanheng.

Huixing Zhizao denied this, saying that the difference in gross profit margin was large, mainly related to the change in the structure of sales products, the increasingly fierce market competition and other reasons, and there was no other interest arrangement or abnormal financial relationship with Li Yuanheng and other aspects.

For the decline in the gross profit margin of Xiang Li Yuanheng, Huixing Zhizao attributed it to the fierce market competition in the warehousing and warehouse products sold, and the proportion of business with higher gross profit margin decreased.

Regarding the decline in the gross profit margin of sales to BYD, Huixing Intelligent Manufacturing said that in order to "maintain cooperative relations", it chose to "exchange profits for orders".

"BYD changed its procurement model in 2022 and dispersed the original group's unified procurement authority to all business divisions, resulting in lower barriers to entry for suppliers and fierce market competition." Huixing Intelligent Manufacturing said.

Excluding factors such as price wars, Huixing Zhizao is a non-standard "bitter business".

The main products of Huixing Intelligent Manufacturing include intelligent conveyor logistics systems, system modules and precision parts, except for some standardized precision parts products, are non-standard customized products.

The two non-standard businesses of intelligent conveyor logistics system and system module contributed nearly eighty percent of the revenue.

Customization means that the marginal cost is difficult to reduce with scale.

Downstream customers put forward different parameter matching and design requirements for suppliers according to different environments, working conditions and performance, and the know-how accumulated by Huixing Intelligent Manufacturing under a large number of orders has little improvement on the cost side.

On the profit side, from 2021 to 2023, the gross profit margin of Huixing Intelligent Manufacturing will remain at about 21%, but the net profit margin attributable to the parent company is only a single digit and extremely unstable, at 2.55%, 8.15% and 7.46% respectively.

Huixing Intelligent Manufacturing also has to face the financial pressure caused by the encroachment of cash flow by end customers. From 2021 to 2023, the cash flow generated by Huixing's operating activities has always been negative.

The main reason is that Huixing Intelligent Manufacturing has a large amount of accounts receivable for downstream customers.

As of the end of the first half of this year, Huixing's accounts receivable and notes receivable reached 264 million yuan, accounting for about 115.79% of its revenue in the first half of the year.

About 30% of them are from BYD's companies, and the maturity period is as long as 6 months.

Huixing Zhizao said frankly that the company and the main customers in the new energy battery industry use the "digital accounts receivable credit voucher settlement" has a high proportion, and this situation will not change in the short term.

The larger the business scale with BYD and its industrial chain members, the test of the amount of capital of Huixing Intelligent Manufacturing will also increase accordingly.

In the first half of this year, monetary funds decreased by 57.19% year-on-year, which was attributed to the increase in accounts receivable and the corresponding decrease in collections.

　　02

The risk of "retrograde" production capacity

In the third round of inquiry, the Beijing Stock Exchange had questions about the "stability of cooperation with major customers and the sustainability of performance growth" of Huixing Intelligent Manufacturing throughout.

The problem of overcapacity is imminent, and Huixing Intelligent Manufacturing, which has experienced a rapid increase in orders, is now facing a test.

If the end customer shrinks its production capacity, it means that Huixing Intelligent Manufacturing will also have the challenge of order decline.

Goldman Sachs reported in August this year that seven industries, including air conditioners, photovoltaic modules, lithium batteries, new energy vehicles, power semiconductors, steel and construction machinery, are facing varying degrees of overcapacity challenges.

In the first quarter of this year, except for power semiconductors and steel, the production capacity of the other five industries exceeded global demand. The production capacity of photovoltaic modules and lithium batteries is 197% and 153% of global demand, respectively.

Lithium batteries, home appliances, photovoltaics and other industries are the industries in which Huixing's major customers are located. Customers in the three industries will contribute a total of 60% of Huixing's revenue in 2023, of which the lithium battery industry is the most.

Huixing Zhizao bluntly said in the prospectus, "In the foreseeable future, the company's transactions with Li Yuanheng and BYD will continue to exist and have a certain dependence." If Li Yuanheng and BYD reduce the amount of the company's product purchases, or if there are adverse changes in downstream demand in the future and are unable to obtain new large-scale orders, the company's operating results will be adversely affected. ”

Risks are gradually revealed, and Huixing Intelligent Manufacturing will have three customers exit the top five in 2023.

For example, TCL Viet Nam's revenue from the "construction cycle arrangement" fell sharply by 70% year-on-year, and Shenzhen Jingshi Electromechanical Technology Co., Ltd. and Han's Holdings Group Co., Ltd. all reduced their purchases of Huixing Intelligent Manufacturing due to their own production plans and production planning arrangements.

However, the only purpose of Huixing Intelligent Manufacturing is to expand production, and it is planned to raise 165 million yuan for the "first phase of Huixing Intelligent Equipment Manufacturing Capital Increase and Production Expansion Project - Intelligent Equipment Production Base Construction Project".

Under the risk of potential capacity contraction, Huixing still regards expansion as a top priority, and expects a compound revenue growth rate of 20% in the next five years.

In the first half of this year, after Huixing Intelligent Manufacturing has handed over the performance of both revenue and net profit, the reasonableness and necessity of the fundraising project are waiting for the final decision of the market regulator.

(Redirected from: TradeWind).