Maolai Optics' overseas business has been hit by multiple shocks, and the loss from inventory depreciation has become a hidden concern

According to data released by the German Mechanical Engineering Industry Association (VDMA), the global precision optics industry market size was approximately 530 billion euros in 2017 and will reach 800 billion euros by 2022. Data shows that global precision optics has developed rapidly in recent years and has been widely used in aerospace, semiconductor lithography and testing equipment, unmanned driving, biometrics and other fields. With the rapid development of these market fields, the demand for precision optical products has further increased, providing a good market prospect for the development of the precision optics industry.

With the good market prospects of optical devices and optoelectronic application industries, many domestic companies have entered a stage of rapid development, and Maolai Optics is one of them. In order to better develop its optical business, Maolai Optics recently applied for listing on the Science and Technology Innovation Board and was accepted.

According to the prospectus, as a provider of comprehensive precision optical solutions, Mauley Optics' products have a wide range of applications, but its products are mainly customized. The inventory of products that cannot be upgraded will face the risk of being eliminated, and the corresponding asset losses will also increase. In addition, Mauley Optics' overseas business accounts for as much as 70%. Under the influence of unstable international trade relations and the epidemic, Mauley Optics' overseas business activities will be impacted.

70% of revenue depends on overseas markets

Recently, in the article "[IPO Values] Supplying Shanghai Microelectronics, Maolai Optics has achieved domestic substitution of core optical components for lithography machines!", Jiwei.com mentioned that Maolai Optics has successfully entered the supply system of Shanghai Microelectronics with its continuous R&D investment in precision optical components, and achieved domestic substitution of core optical components for lithography machines. The development of Shanghai Microelectronics has also driven the growth of Maolai Optics' performance. In 2019, Maolai Optics' high-end optical lens revenue increased by 25.78% compared with 2018.

In fact, the performance growth of the semiconductor business is only part of the overall performance of Mautech. In addition to the field of semiconductor lithography and testing equipment, Mautech's optical products are also used in life sciences and medical (such as gene sequencing and nucleic acid testing), aerospace, unmanned driving, biometrics, AR/VR testing equipment and other high-end technology application fields.

Multiple application fields have brought broad product sales channels to Maolai Optics, driving its performance growth. According to the prospectus, from 2017 to 2019, Maolai Optics achieved operating income of 152 million yuan, 184 million yuan and 222 million yuan respectively, with a compound growth rate of 20.82%.

A careful analysis of the regional composition of its main business shows that the main market of Maolai Optics is overseas. From 2017 to Q1 2020, Maolai Optics' overseas sales revenue was RMB 107 million, RMB 129 million, RMB 155 million and RMB 32.24 million, respectively, accounting for 70.30%, 69.98%, 69.70% and 83.31% of its operating income, respectively. At the end of each period, overseas sales revenue accounted for about 70% of the total sales revenue.

The prospectus shows that the main customers of Maulight Optics include advanced equipment manufacturers in North America, Europe and other regions, but it does not specify the specific regional composition of its overseas business in the prospectus. From the downstream customers disclosed in the prospectus, the author can see that its overseas customers mainly include Microsoft, Facebook, Mack Technologies and Alphabet's autonomous driving platform in the United States.

Industry insiders said that under the current macro-context of the continued escalation of Sino-US trade frictions and the spread of the global epidemic, changes in trade policies of relevant countries and intensified trade frictions will have an impact on the overseas operating performance of local companies, especially those with a high proportion of overseas business, which will have a greater impact on their overall future performance.

In fact, due to the high proportion of overseas business, Maolai Optics' expenditure on administrative expenses and sales expenses is far higher than its peers.

It can be seen from the prospectus that from 2017 to Q1 2020, the management expense ratio of Maolai Optics was 13.35%, 12.6%, 13.82% and 24.91% respectively, while the averages of comparable companies were 6.54%, 7.04%, 6.82% and 8.8% respectively. Maolai Optics' management expense ratio far exceeds the average of its peers. In addition, according to the author's statistics, its sales expense ratio is also about 2% higher than the average of its peers.

Maolai Optics explained that the high sales and administrative expenses were due to the high salaries of external sales service consultants and overseas managers, as well as the relatively high salary scale of administrative employees.

From the perspective of company operations, excessive management expenses and sales expenses increase the overall cost of the enterprise and will encroach on profit margins to a certain extent.

Inventory depreciation losses increase under the "customized" business model

Maolai Optics' overseas business accounts for a large proportion, which is closely related to its business model.

The business model of Maolai Optics is "multi-variety, small batch, customization". Its customers and orders are widely distributed and are affected by customer project budgets, demand customization, R&D production and delivery acceptance rhythm. Since its products are mainly customized, in the course of operations, Maolai Optics will consider the temporary demand for corresponding products, customer's intended demand and production capacity utilization, and retain a certain amount of raw materials and product inventory.

Under this "multi-variety, small batch, customized" model, due to the rapid technological updates of some products, the high proportion of inventory size of Maolai Optics has caused obvious impairment losses.

From the above asset impairment loss table, from 2017 to 2019 and from January to March 2020, the asset impairment losses of Maolai Optics were -5.1843 million yuan, -5.2105 million yuan, -4.9682 million yuan and -3.9301 million yuan, respectively, accounting for -23.17%, -15.07%, -10.05% and -499.81% of the total profit for the period, respectively. The main source of this is inventory depreciation losses.

The author noticed that in the first quarter of this year, the inventory depreciation loss of Maolai Optics was as high as 3.9301 million yuan, which emptied all profits in the first quarter. Maolai Optics said that this was mainly due to the epidemic environment in early 2020, and it prepared for the pressure of subsequent concentrated orders in advance.

In terms of book value, the inventory of Mau Lai Optics in the first quarter of this year was as high as 78.6 million yuan, and the inventory impairment provision was 12.45 million yuan. The inventory in the first quarter alone was higher than the full year in previous years. If customers cancel orders or purchase intentions, or if the market demand for other products in stock changes unfavorably, the inventory prepared in advance by Mau Lai Optics may be at risk of large impairment provisions.

In addition to the increasing inventory depreciation year by year, the inventory turnover rate also reflects the shortcomings of Lemo Optics in inventory management. From 2017 to Q1 2020, Lemo Optics' inventory turnover rates were 1.59, 1.90, 1.80 and 0.24, respectively, while the averages of comparable companies were 2.85, 2.55, 2.29 and 0.50, respectively. At the end of each period of the reporting period, Lemo Optics' inventory turnover rate was much lower than that of its peers.

In addition, as another indicator of asset turnover, the accounts receivable of Maolai Optics has risen sharply. As of the end of 2017, the end of 2018, the end of 2019 and the end of January-March 2020, the book value of accounts receivable of Maolai Optics was RMB 19 million, RMB 41.07 million, RMB 69.95 million and RMB 46.05 million, respectively, accounting for 12.5%, 22.35%, 31.52% and 119.02% of the current operating income, respectively. The accounts receivable turnover rate dropped from 7.05 in 2017 to 3.69 in 2019, which is lower than the average of comparable companies in the same industry.

According to calculations, the growth rates of accounts receivable of Mauley Optics in 2018 and 2019 were 116.16% and 70.32% respectively, far exceeding the growth rate of revenue in the same period. If the collection measures are ineffective or the credit of customers changes, Mauley Optics will face a greater risk of bad debts.

Overall, Maolai Optics has achieved good results in performance and R&D, but because its products have a wide range of applications and most of them are customized products, it will face the problem of product categories being eliminated and leading to increased asset losses; under the current instability of international trade relations and the impact of the overseas epidemic, Maolai Optics' overseas business, which accounts for 70%, may be affected to a certain extent.