Huawei helps the main business to grow profits, but China Ceramics Electronics' gross profit margin continues to decline and there are risks

Electronic ceramic products have always been an integral and important part of high-end semiconductor devices. They are also an important bridge connecting chips and external system circuits. They directly affect the performance, quality and reliability of devices and can be widely used in communications, high-power lasers, automotive electronics, consumer electronics and other fields.

Among them, the high-end electronic ceramic shell market is mainly monopolized by foreign companies, and my country's high-end electronic ceramic shell products mostly rely on imports. However, with the dramatic changes in Sino-US relations, coupled with the fact that technologies and products in high-tech fields are facing a "neck-stuck" situation. Based on this, in recent years, my country's electronic ceramic manufacturers have been catching up, gradually narrowing the gap with foreign manufacturers and accelerating domestic substitution.

Hebei Zhongci Electronic Technology Co., Ltd. (hereinafter referred to as "Zhongci Electronic"), a "veteran" domestic electronic ceramics manufacturer, recently disclosed its prospectus, planning to be listed on the Growth Enterprise Market and leverage the capital market to expand its electronic ceramics production and R&D projects.

"Customer A" becomes the largest customer

According to information, Zhongci Electronics was established in 2009. Its main products include optical communication device housings, wireless power device housings, infrared detector housings, high-power laser housings, SAW crystal oscillator housings, 3D optical sensor module housings, 5G communication terminal module housings, aluminum nitride ceramic substrates, ceramic components, integrated heaters, etc., which are widely used in optical communications, wireless communications, industrial lasers, consumer electronics, automotive electronics and other fields.

After years of intensive cultivation and accumulation, Zhongci Electronics has become a supplier, even a core supplier, to a large number of leading companies in the electronics industry at home and abroad, and has established long-term and stable cooperative relationships with them. In the field of optical communications, many well-known optoelectronic device manufacturers in the world are customers of Zhongci Electronics; in the field of wireless communications, world-renowned semiconductor companies such as NXP and Infineon are customers of the company; Zhongci Electronics has also established cooperative relationships with well-known domestic communication manufacturers such as Huawei and ZTE, and the scope of cooperation is constantly expanding.

The prospectus disclosed that from 2017 to 2019, the operating income of China Ceramics Electronics was RMB 343.2373 million, RMB 407.0280 million, and RMB 590.4179 million, respectively; the net profit was RMB 46.5903 million, RMB 58.6869 million, and RMB 76.4159 million, respectively. Its revenue and net profit increased year by year, and the net profit saw a small peak in 2019.

From the product level, electronic ceramic housing products for communication devices are the company's main profit products, with revenues of 231 million yuan, 277 million yuan, and 404 million yuan, accounting for 69.56%, 70.59%, and 71.55% of the total revenue respectively; while the revenue capacity of electronic ceramic housings for industrial lasers, consumer electronic ceramic housings and substrates has increased year by year, but the proportion of revenue does not exceed 10%. In addition, the revenue of automotive electronic parts has increased year by year, but the proportion of revenue has declined.

In this regard, Zhongci Electronics stated that the sales revenue of electronic ceramic casings for communication devices has basically stabilized at around 70%. Based on long-term research and development and a number of world-renowned optical communication manufacturers have become the company's customers, and have maintained a long-term cooperative relationship, and sales have maintained a steady growth every year. From 2017 to 2019, the sales revenue scale and proportion of electronic ceramic casings for industrial lasers and consumer electronic ceramic casings and substrates in the main business revenue increased overall. The main reason is that emerging fields have developed rapidly in recent years. The company has developed new products in a timely manner to meet the application needs of electronic ceramics in emerging fields, resulting in an increase in sales year by year. In addition, the sales revenue of automotive electronic parts decreased by 7.95% in 2018 compared with the previous year. The main reason is that it was affected by the decline in sales in the automobile industry, which led to a certain decline.

It is worth noting that the sales revenue of the top five customers of China Ceramics Electronics were RMB 121.0922 million, RMB 131.4572 million and RMB 262.2589 million, respectively, accounting for 35.28%, 32.30% and 44.42% of the total revenue, respectively.

Among the top five customer systems, Customer A, namely Huawei, mainly provides electronic ceramic housing products for communication devices. In 2018, Customer A became the largest customer of Zhongci Electronics for the first time and the primary customer of its electronic ceramic housing products for communication devices. Its sales accounted for a continuously increasing proportion of total revenue, from 7.54% in 2018 to 14.77% in 2019.

Judging from the increase in net profit during the reporting period, the addition of Customer A and the growth in demand for electronic ceramic casing products for communication devices also led to a significant improvement in its performance.

Accounts receivable are too high and gross profit margin continues to decline

According to the prospectus, the end-of-period balances of accounts receivable were RMB 70.5314 million, RMB 113 million and RMB 111 million, respectively, accounting for 20.55%, 27.69% and 18.83% of the current period's operating income, respectively.

China Ceramics Electronics stated that during the reporting period, the company's accounts receivable balance increased with the growth of the company's operating income, mainly due to the increase in accounts receivable from customers as the company's revenue scale expanded.

The company also said that the proportion of accounts receivable to operating income is relatively high. If the customer's payment ability changes adversely, it is likely that the company's accounts receivable will not be recovered, forming bad debts, and in serious cases, it may lead to a break in the capital chain.

As accounts receivable continue to rise, China Ceramics Electronics also faces the risk of declining gross profit margin.

According to the prospectus, from 2017 to 2019, the gross profit of China Ceramics Electronics was 118 million yuan, 127 million yuan and 177 million yuan respectively, and the gross profit margin was 34.55%, 31.27% and 30.02% respectively, showing a continuous downward trend.

It is worth noting that the cost of raw materials of Zhongci Electronics accounts for more than 70% of the cost of its main business, which is a large proportion. The decline in the company's gross profit margin is also closely related to the fluctuation of raw material prices.

It is reported that the upstream industries of the electronic ceramics industry mainly involve resource industries such as alumina powder, ceramic powder, aluminum nitride powder and rare earth chemical materials. Driven by demand and factors such as inflation, the prices of some non-ferrous metals and chemical materials have risen, which has put certain pressure on the product costs of the electronic components industry.

Among them, the price of potassium gold cyanide changed the most. In 2019, the price of potassium gold cyanide was 196,400 yuan/kg, which was 32,400 yuan higher than 164,000 yuan/kg in 2017. Therefore, the sharp increase in raw material prices will increase the operating costs of Zhongci Electronics, leading to a decline in gross profit margin.

Overall, with the development of 5G communication technology, electronic ceramic shell products used in communication devices will also usher in an incremental period. As the main business and main profit product of Zhongci Electronics, Zhongci Electronics will also usher in a bonus period under this demand trend. However, despite the promotion of major customers such as Huawei and ZTE, the problems it faces, such as the growth of accounts receivable and the continuous decline in gross profit margin, are still "stumbling blocks" on its road to IPO.