OFILM's 2018 performance announcement: profit shrunk by 2.3 billion, scaring shareholders...

Speaking of OFILM, you may be unfamiliar with it, but its products are used in smartphones that everyone has, such as Apple, Samsung, Huawei, Xiaomi, etc. However, OFILM, which has the halo of a protagonist, released its 2018 financial report on the 26th, with a profit shrinkage of 2.3 billion, which scared shareholders...

OFILM recently released its 2018 performance announcement. During the reporting period, OFILM achieved operating income of RMB 43.043 billion, a year-on-year increase of 27.38%.

Gionee and LeEco "assist", and OFILM is left with nothing left

It is worth noting that the company's net profit attributable to shareholders of listed companies last year was RMB -519 million, down 163.10% year-on-year, and the net profit after deducting non-recurring items was RMB -871 million, down 226.62% from RMB 688 million in 2017. At the same time, the net assets attributable to shareholders of listed companies in 2018 were RMB 8.59 billion, down 5.67% year-on-year. According to the revenue situation in each quarter of last year, OFILM suffered a large loss in the fourth quarter of last year, with a net profit attributable to shareholders of listed companies of RMB -1.895 billion and a net profit after deducting non-recurring items of RMB -2.107 billion in a single quarter.

Regarding the problem of large performance deviation, OFILM mentioned in its annual report: "On the base date of the internal control evaluation report, the company failed to pay sufficient attention to the production cost carry-over and the provision of inventory impairment losses, resulting in a serious deviation between the 2018 performance forecast and the audited profit."

The author carefully observed the annual report and found that there are two major "pitfalls" in OFILM's accounts receivable - Gionee and LeTV. Among them, Gionee's accounts receivable bad debt provision is 60%, and as of December 31, 2017, 300 million yuan has been provided, and 75 million yuan has been added this year; LeTV's accounts receivable bad debt provision is 100%, and as of December 31, 2017, 108 million yuan has been provided, and 80 million yuan has been added this year. In addition, the company made an inventory impairment provision of 69 million yuan at the beginning of the year, and this time, it made an impairment provision of 1.6 billion yuan based on the difference between the cost of inventory and the net realizable value.

On the other hand, observing OFILM's annual reports in recent years, it is found that the total amount of notes receivable and accounts receivable has continued to grow, and its dispute over debts with Gionee has long laid the groundwork for huge impairment.

In December 2017, there were rumors that Gionee Chairman Liu Lirong was suspected of misappropriating public funds for gambling, which caused Gionee's capital chain to be tight. As Gionee's upstream supplier, OFILM was "suspected" of stepping on the thunder. OFILM once tried to distance itself from Gionee. On the day the rumor spread, OFILM's market value shrank by more than 4 billion. Afterwards, OFILM reluctantly admitted that Gionee had been in arrears for two months, with the amount reaching 626 million yuan.

Performance "Rashomon": Net profit revised down by more than 2.3 billion

In the 2018 full-year performance report disclosed by OFILM in January this year, the net profit was RMB 1.839 billion, but it was not until April 26 that the company announced a revised loss of RMB 519 million. In response to the major change in performance that quickly "changed", OFILM gave the main reasons in the revised announcement of the 2018 performance report:

(I) Differences in performance reports

On January 31, 2019, the company disclosed the "2018 Annual Performance Express" (Announcement No.: 2019-018). It is estimated that during the reporting period, the company will achieve total operating revenue of 43.05 billion yuan, an increase of 27.40% over the same period last year; operating profit of 1.893 billion yuan, an increase of 97.98% over the same period last year; total profit of 2.057 billion yuan, an increase of 109.19% over the same period last year; net profit attributable to shareholders of listed companies of 1.839 billion yuan, an increase of 123.64% over the previous year.

According to the audit adjustments made by the accounting firm, the company confirmed and adjusted the financial statements. In 2018, the company achieved total operating revenue of 43.042 billion yuan, an increase of 27.38% over the same period last year; operating profit was -670 million yuan, a decrease of 170.06% over the same period last year; total profit was -496 million yuan, a decrease of 150.43% over the same period last year; net profit attributable to shareholders of listed companies was -519 million yuan, a decrease of 163.10% over the same period last year.

2. Main reasons for the above differences

Based on the principle of prudence, the company and its subsidiaries conducted a comprehensive inventory and asset impairment test on assets that may have shown signs of impairment at the end of 2018. The provisions for inventory impairment and cost transfers totaled RMB 2.437 billion. The possibility of recovering accounts receivable was assessed and bad debt provisions of RMB 0.75 billion were made, resulting in a difference between the actual net profit and the forecast net profit during the reporting period.

Data shows that as of the reporting period, OFILM's inventory amounted to 8.941 billion yuan, accounting for 23.55% of its total assets, and its accounts receivable amounted to 7.923 billion yuan, accounting for 20.87% of its total assets. In addition, the company and its subsidiaries set aside a total of 1.84 billion yuan in asset impairment provisions for 2018.

Optical components are the core: with the support of major customers, the market share has grown

Although the performance is not satisfactory, it cannot obscure the outstanding performance of OFILM's products in quickly gaining market share.

During the reporting period, OFILM's total camera module shipments were 551 million units, with traditional single-camera modules achieving operating revenue of RMB 8.351 billion and shipping 290 million units, of which 13 million pixels (inclusive) and above accounted for 50% of shipments and 67% of revenue; major customer products achieved operating revenue of RMB 5.71 billion and shipped 136 million units; multi-camera modules achieved operating revenue of RMB 10.25 billion and shipped 123 million units. During the full-year reporting period of 2018, the production capacity of Android single-camera modules was 40kk/month, the production capacity of multi-camera modules was 25kk/month, and the production capacity of major customer modules was 14kk/month.

At the same time, the optical lens business progressed smoothly. The company has completed the lens product qualification certification for some customers and started batch shipments. As of the end of the reporting period, the company's optical lens production capacity has reached 15kk/month.

Touch products achieved operating income of RMB 12.919 billion, a year-on-year increase of 14.44%, and a comprehensive gross profit margin of 11.19%. During the reporting period, the traditional touch market was highly competitive, and the impact and erosion of technical routes such as incell had a certain impact on the company's touch business, and the profit effect of new customers and new projects has not yet appeared, resulting in a decline in the profitability of the touch business during the reporting period. As of the end of the reporting period, the company's touch module production capacity was 25kk/month.

Biometric products achieved operating income of 4.919 billion yuan, a year-on-year decrease of 7.12%, with shipments of 210 million units and a comprehensive gross profit margin of 12.91%. This is mainly because on the one hand, traditional capacitive fingerprint recognition modules have gradually penetrated from high-end models to mid- and low-end models, with low technical barriers, intensified market competition, and falling product prices; on the other hand, the penetration rate of under-screen fingerprint recognition module products needs to be further improved. As of the end of the reporting period, the company's traditional capacitive fingerprint recognition module production capacity was 25kk/month, and the under-screen fingerprint recognition module production capacity reached 8kk/month.

In addition, the company's smart car business achieved operating income of 423 million yuan, a year-on-year increase of 35.60%, and a comprehensive gross profit margin of 21.12%. The company's product technology has a solid foundation in hardware and software, and the early precipitation has begun to show results. The client project is carried out smoothly and orders are steadily released.

Great social impact, being "targeted" by exchanges

Although it is not uncommon for profits to turn into losses in the business world, the author believes, through observation and analysis of the incident, that OFILM is in big trouble this time.

It is worth noting that from the time when OFILM announced a substantial increase in earnings on January 31 this year to the time when it released its earnings revision, its stock price rose by more than 50%. However, the actual profit in the annual report was negative, with a gap of more than RMB 2.3 billion. On the other hand, OFILM explained its abnormal performance too late, which seemed to be not very "sincere" and unconvincing, which led to the fact that OFILM, which had always performed well, caused public outrage because of a serious "mistake"...

In response to the serious performance change of OFILM, after OFILM issued the "Apology Announcement", the Shenzhen Stock Exchange issued a letter of concern, requiring OFILM to carefully check and fully explain the following issues:

1. Please explain the reasons and specific time points for your company’s inventory impairment and cost settlement differences in 2018, as well as the reasons and specific time points for inventory impairment in the first quarter of 2019.