The high growth of domestic distributors' performance "came to a sudden halt", and the industry accelerated its reshuffle

Since 2017, due to strong downstream demand and the withdrawal of Japanese manufacturers, electronic components have generally been in short supply, resulting in a continuous rise in prices. As a result, electronic component distribution companies have generally achieved rapid growth since 2017.

At the same time, capital has deeply intervened in the distribution industry, and operations have been frequent, and the industry has entered a period of rapid integration. The highly prosperous market conditions and acquisitions have driven performance growth, allowing Shenzhen Huaqiang, Yingtang Zhikong, and Liyuan Information, three local distributors, to collectively exceed 10 billion yuan in revenue in 2018. Shenzhen Huaqiang achieved revenue of 11.8 billion yuan in 2018, Yingtang Zhikong achieved revenue of 12.1 billion yuan in 2018, and Liyuan Information achieved revenue of 10.8 billion yuan in 2018.

The market is no longer in a good state, and performance generally declines

Since the second half of 2018, the Sino-US trade war has continued to escalate, the global semiconductor industry has been in a serious downturn, and end customers have been cautious in stocking up. At the same time, the prices of electronic components have returned to rationality, domestic distribution manufacturers have had weak revenue growth, and net profits have generally declined.

According to the author's understanding, before 2017, Cogobuy had always been the leading local electronic component distributor, but due to the impact of the "short-selling incident", its stock price and performance were greatly reduced.

While Ketong Chip City's performance was plummeting, other domestic distributors such as Shenzhen Huaqiang, Yingtang Zhikong, and Liyuan Information encountered a rare shortage and price increase of electronic components in the past decade, and their revenues quickly exceeded 10 billion yuan.

Judging from the financial reports of the above companies, the high growth period of domestic component distributors' performance has ended in the first half of 2019. In terms of revenue, domestic distribution giants Shenzhen Huaqiang, Yingtang Zhikong, and Liyuan Information only saw a growth of about 20%, while the revenue of relatively small distributors such as Cogobuy, Runxin Technology, and Lierda began to decline.

In terms of net profit, except for Yingtang Intelligent Control, the performance of other component distributors has declined.

Like all industries, the semiconductor industry is in a downturn and the industry will be reshuffled at an accelerated pace. A wave of bankruptcies of small and medium-sized enterprises will follow, and the industry pattern of "the big get bigger and the strong get stronger" will emerge.

Shenzhen Huaqiang also pointed out in its semi-annual report that the concentration of the local electronic components distribution industry has further increased, and the trend towards scale and platformization is obvious. At the same time, under the combined influence of many factors such as rising manufacturing costs and the strengthening trend of domestic semiconductor substitution, the local electronic components distribution market is facing more intense market competition and industry reshuffle on the one hand, and new development opportunities on the other. It is expected that leading companies will further enhance their industry status in the competition.

How long can the company continue to expand its performance through mergers and acquisitions?

It is understood that distributors mainly rely on expanding product line coverage and spot stock capacity to influence the market and realize value, and acquisitions can achieve product coverage as soon as possible. In recent years, domestic component distributors have achieved rapid growth in performance through continuous acquisitions.

It is worth mentioning that when the market environment is not good, the goodwill risk brought by high premium acquisitions must be prevented. After consulting the data, the author found that as of the first half of 2019, the goodwill scale of Yingtang Zhikong accounted for about 54% of its net assets, the goodwill scale of Liyuan Information accounted for about 50% of its net assets, and the goodwill scale of Shenzhen Huaqiang accounted for about 38% of its net assets.

The damage caused by goodwill impairment to a company's performance is enormous. Both Changdian Technology and National Technical have fallen into losses due to goodwill impairment and are unable to extricate themselves. Semiconductor manufacturers such as Fenghua High-Tech and Shanghai Xinyang have also suffered greatly.

In May 2019, Yingtang Zhikong was also ordered by the China Securities Regulatory Commission to rectify its imprudent goodwill impairment testing.

In July 2015, after Yingtang Zhikong completed the acquisition of Huashanglong, Huashanglong successively acquired 11 subsidiaries and incorporated the revenue costs of 5 business units into the merger through business consolidation.

From 2015 to 2017, Huashanglong achieved net profits of 122 million yuan, 150 million yuan and 185 million yuan respectively, exceeding its performance commitments for three consecutive years and achieving a net profit of 242 million yuan in 2018.

It is worth mentioning that after excluding the income from equity and business mergers, Huashanglong’s revenue in 2016 and 2017 was less than 50% of the predicted revenue. It failed to meet its performance commitments in 2016 and 2017. The difference was RMB 16.4732 million and RMB 48.038 million respectively, showing an expanding trend.

In fact, Huashanglong itself did not fulfill its performance commitments, and the illusion of "exceeding performance commitments" due to mergers and acquisitions was eventually exposed.

In the face of goodwill risks, the era in which local distributors rely solely on mergers and acquisitions to improve performance may be coming to an end.

On September 3, Shenzhen Huaqiang announced the termination of its acquisition of 75% of Shenlei Technology due to the inability to reach an agreement on commercial terms. Coincidentally, a month ago, Runxin Technology also announced the termination of its acquisition of Bosda.

Runxin Technology said that since 2019, the volatility of the capital market and the Sino-US trade frictions, especially the US ban on sales to some mainland Chinese companies, have had an impact on the sales of overseas communications, smartphone chips and core technologies in mainland China. In a market environment where the uncertainty factors in planning this major asset reorganization have increased significantly, the company has decided to suspend the planning of this asset reorganization from now on.

Obviously, the Sino-US trade friction and industry cycle fluctuations have a huge impact on the operating performance of component distributors. When the economic and market situation is unclear, high-premium acquisitions may involve huge risks.