PCB "some are happy and some are sad": small manufacturers go bankrupt while leading companies perform well

On May 7, a PCB (printed circuit board) manufacturer in Foshan, Guangdong, was on the verge of bankruptcy due to high debt. In March this year, a long-established PCB manufacturer in Panyu, Guangzhou, also declared bankruptcy due to a broken capital chain.

The person in charge of a PCB manufacturer interviewed by Cailianshe revealed that low-end and mid-end PCBs mainly rely on lowering unit prices to attract customers, and most of the gross profit margins are below 10%. Due to their weak position in the industrial chain, they have to give downstream customers generous payment terms on the one hand, but they cannot get "convenience" from relatively strong suppliers on the other. Once they are unable to recover funds in time, the liquidity of the manufacturer will inevitably be under tremendous pressure.

The sudden outbreak of the COVID-19 pandemic has put many small and medium-sized PCB manufacturers in such a predicament. But at the same time, leading PCB companies have attracted much attention from the market due to their outstanding performance. With the continuous upgrading of technology and processes, the survival of the fittest is expected, but the epidemic has become a catalyst, and the reshuffle and differentiation of the PCB industry has also accelerated.

Small and medium-sized manufacturers face liquidity problems

Mr. Pang currently runs a "board factory" with more than 100 employees in Guangzhou. He told reporters that he has been engaged in this industry for more than 20 years and has been running a factory for 13 years. Although competition in the industry has always been very fierce, the impact of the epidemic has made him feel that "life is not easy."

"Especially for overseas orders, many were stopped by customers halfway through because of the epidemic. We invested in raw materials and labor, but we couldn't get paid." Mr. Pang revealed that in the PCB industry, especially for small and medium-sized manufacturers, the payment period for downstream customers was originally relatively long. After the orders were stopped, not only could the payment not be collected, but the labor and factory rental costs of more than 1 million yuan per month had to be borne, and the liquidity pressure was very high.

"PCB is an asset-heavy industry, and upstream raw material suppliers are very powerful. Especially small and medium-sized board factories, they rarely get "care" from suppliers. When it comes to settlement, you will be given a grace period of a week or 10 days at most. But the payment period we give to customers is very long, 6 or 7 months is common, and it is not uncommon to delay it for more than a year. Once the payment is not collected in a certain month, it will be impossible to pay the supplier, and the capital chain will have problems." Mr. Zhang, the person in charge of a PCB manufacturer in Shenzhen, also revealed.

Mr. Zhang's PCB boards are mainly supplied to customers in the electronics and electrical appliances industries. He pointed out that the technical threshold for low-end and mid-range PCB boards is low and the competition is fierce, so manufacturers can only attract customers by competing on unit prices. "This has resulted in very low gross profit margins for small and medium-sized board manufacturers, usually below 10%," said Mr. Zhang. Low profits and weak market voice have led to a very difficult survival situation for small and medium-sized PCB board manufacturers.

The sudden outbreak of the COVID-19 epidemic has further exacerbated their operating difficulties. On May 7, the industry circulated a "notice" sent by a PCB manufacturer in Foshan, Foshan Gaoming Haowang Circuit Board Co., Ltd., to suppliers and creditors. The manufacturer stated in the "notice" that "due to difficulties in recovering funds and the impact of the epidemic, the company's operations are now struggling, heavily in debt, and facing bankruptcy." A reporter from Cailianshe contacted the attorney responsible for its creditor's rights on the afternoon of May 11 and confirmed the news.

Prior to this, in March, a manufacturer named "Wannuo (Guangzhou Panyu) Circuit Board Co., Ltd." located in Panyu District, Guangzhou, announced its dissolution. The reason was also due to the impact of the epidemic. The company had been shut down for a long time and its capital chain had been broken. According to publicly available information, the company is a well-established PCB board factory with a history of more than 20 years.

The epidemic has accelerated the reshuffle and differentiation of the industry

PCB is the support body of electronic components and is widely used in various electronic products. It is also an indispensable component. At present, the commonly used classification method divides PCB into single-sided board, double-sided board, multi-layer board, HDI board, IC package carrier board, flexible board, rigid-flexible board, special board and other categories.

According to statistics from the China Electronic Circuit Industry Association, the output value of China's printed circuit board industry was 227.499 billion yuan in 2019, of which multilayer boards accounted for 45.97% of the total output value, HDI accounted for 16.59%, package substrates accounted for 3.29%, and flexible boards accounted for 16.68%. Multilayer boards have become the main products of PCB applications, while HDI and flexible boards are the latest development directions of the industry.

The distinction between "high-end and mid-to-low-end" mentioned by Mr. Zhang can be reflected in the above classification and downstream applications. Industry leaders such as Shenzhen South Circuit (002916.SZ), Shanghai Electric (002463.SZ), and Shengyi Technology (600183.SH) mainly serve relatively high-end downstream customers such as communications, automobiles, and consumer electronics.

The profit margin of high-end PCB boards is much higher than that of mid- and low-end products. According to the 2019 annual report data, the gross profit margin of Shenzhen South Circuit's PCB business was 27.98%, the gross profit margin of Shanghai Electric Co., Ltd. was 30.42%, and the gross profit margin of Shengyi Technology's PCB business also reached 28.92%.

Under the epidemic, "some are happy while others are sad" is a true portrayal of the PCB industry: small and medium-sized manufacturers are struggling, but the performance of leading companies in the first quarter is very impressive. Shenzhen South Circuit's net profit increased by 48.19% in the first quarter, Shanghai Electric's profit increased by 31.68% year-on-year, and Shengyi Technology's net profit in the first quarter also increased significantly by 36.09%.

"Most of the board factories in Zhongshan and Foshan supply to downstream electrical appliances and lighting companies. Their customers have low credibility and often default on payments. If production is suspended for a long time and there is no capital inflow, there will definitely be no money to pay suppliers." In Mr. Zhang's view, high product premiums, strong market position, and high-quality customers are the core elements that enable leading PCB companies to achieve stable performance under the impact of the epidemic. It is these elements that are widening the gap between leading companies and small and medium-sized manufacturers, and the industry reshuffle and differentiation will also accelerate.

A person from the Guangdong Circuit Board Industry Association who declined to be named said that similar "bankruptcy" and "operational difficulties" occur every year, but the epidemic has aggravated the adverse effects and the market attention is also higher.

Shengang Securities research report pointed out that from the perspective of industry concentration, the spread of the epidemic has led to a decrease in overseas customer orders. Domestic small and medium-sized manufacturers may encounter another round of supply-side reforms. Industry concentration may further increase, and leading manufacturers will have the opportunity to obtain orders and technical resources from small and medium-sized manufacturers.

The head of a listed company in the PCB industry chain in Dongguan said that the strong will always be strong and accelerated differentiation of the industry is inevitable.