Zhongyi Technology's revenue increased but profits did not, gross profit margin decreased and cash flow continued to be negative

In recent years, driven by the rapid growth of the global lithium-ion battery market, the demand for lithium battery copper foil has maintained a steady growth trend. According to statistics from Gaogong Industry Research Institute of Lithium Battery (GGII), global shipments of lithium battery copper foil reached 170,000 tons in 2019, a year-on-year increase of 16.4%.

Driven by the growing market demand, related lithium battery material suppliers have also benefited. Not long ago, Hubei Zhongyi Technology Co., Ltd. (hereinafter referred to as "Zhongyi Technology") submitted a prospectus for listing on the Growth Enterprise Market.

It is worth noting that since 2017, Zhongyi Technology's revenue has continued to grow significantly, but its net profit has been declining year by year, and its overall performance has shown a situation of increasing revenue but not increasing profits. At the same time, the selling price and gross profit margin of its main products have also shown a downward trend, and the net cash flow generated by operating activities has continued to be negative, which may be one of the reasons for its sprint IPO.

Increased revenue but no increased profit, gross profit margin continues to decline

It is understood that Zhongyi Technology is mainly engaged in the research, production and sales of various single-sided and double-sided high-performance electrolytic copper foil series products, and has two major electrolytic copper foil production bases in Yunmeng and Anlu. Electrolytic copper foil refers to metal copper foil produced by electrolysis using copper as the main raw material. It is an important material for the manufacture of lithium-ion batteries, copper-clad laminates and printed circuit boards. According to different application fields, it can be divided into lithium battery copper foil and standard copper foil. Its products are widely used in new energy vehicle power batteries, energy storage equipment and electronic products, copper-clad laminates, printed circuit boards and other fields.

In terms of lithium battery copper foil, its lithium battery copper foil products have gradually shifted from ultra-thin copper foil to ultra-thin copper foil, and 6µm and below lithium battery copper foil has become the focus of its layout. As the concentration of the downstream power battery industry continues to increase, the company has introduced CATL as a customer and gradually strengthened its cooperation with it, and the proportion of sales revenue to CATL has gradually increased.

From the performance point of view, from 2017 to the first half of 2020, Zhongyi Technology achieved revenue of 498 million yuan, 602 million yuan, 831 million yuan and 449 million yuan respectively; net profit was 57 million yuan, 66 million yuan, 41 million yuan and 34 million yuan respectively. Its main business income mainly comes from lithium battery copper foil and standard copper foil, among which the revenue of lithium battery copper foil accounted for 43.13%, 37.70%, 49.01% and 49.12%, and the revenue of standard copper foil accounted for 56.87%, 62.30%, 50.99% and 50.88%.

It can be seen intuitively from the above figure that during the reporting period, while its revenue continued to grow year by year, its net profit showed an overall downward trend, which means that the situation of increasing revenue but not profit has continued for many years.

Regarding the growing revenue, Zhongyi Technology said that in terms of lithium battery copper foil, it was mainly from 2018 to 2019 that its new production lines were gradually built and put into production, and the production capacity of its main products increased year by year, which led to a rapid increase in the output of this product. In addition, the 6μm ultra-thin lithium battery copper foil it developed can meet the needs of first-tier customers for power lithium battery products and promote sales growth; while the growth in standard copper foil revenue benefited from the increase in product demand in the PCB industry and the upgrading of production lines, which increased product output.

Regarding the decline in net profit, Zhongyi Technology said that it was due to changes in the market operating environment of the electrolytic copper foil industry and the low yield rate of the company's new production line during the commissioning phase. In addition, since 2017, the prices of its main products have continued to decline, and costs and period expenses have continued to increase, which has also led to its net profit failing to achieve year-on-year positive growth.

At the same time, the phenomenon of increasing revenue but not increasing profits is also reflected in its declining gross profit margin. During the reporting period, its comprehensive gross profit margin was 29.39%, 21.48%, 15.51% and 17.49% respectively. Zhongyi Technology said that changes in the downstream market of electrolytic copper foil, increased manufacturing costs due to the commissioning of new production lines, low yield rate in the trial production stage of new production lines, and changes in the main business products and customer structure have all led to a decline in gross profit margin.

Comparing its gross profit margin with that of Nord, Chaohua Technology and Jiayuan Technology, it is found that the average industry comprehensive gross profit margin is 23.91%, 23.51%, 27.54% and 22.19%, which is significantly higher than that of Zhongyi Technology. To a certain extent, in the field of lithium battery materials, its products are not competitive enough and are relatively weak compared with its peers.

In terms of customers, in recent years, the sales of its top five customers accounted for 48.22%, 32.97%, 27.05% and 46.88% respectively, with slight fluctuations, but its customer structure is relatively stable. Among them, CATL was added to the top five customers in 2019 and directly jumped to its largest customer. In the first half of this year, the revenue share of this customer further increased to 29.35%.

Judging from the basic financial data, its revenue has achieved substantial growth year by year, benefiting from the increasing demand for power lithium batteries from new energy vehicles. However, the corresponding decline in net profit and gross profit margin has also raised questions about its actual profitability.

Cash flow from operating activities continues to be negative, and accounts receivable are increasing year by year

The decline in net profit and gross profit margin is mainly closely related to the development of the industry in which it is located and its own operating capabilities.

From the perspective of the downstream new energy vehicle market, the rapid development of the new energy vehicle industry in the past five years has been the main driving force for the continuous growth of the power lithium battery field. Driven by government subsidies from 2017 to 2018, China's new energy vehicle market grew rapidly, and by 2018, the output of new energy vehicles exceeded one million for the first time.

However, due to the decline in subsidies in the second half of 2019, the annual output of new energy vehicles declined, and the corresponding growth rate of the power battery market also slowed down, with shipments of 71GWh, a year-on-year increase of only 9.2%. GGII predicts that due to the impact of the epidemic, China's power battery shipments in 2020 will be around 73GWh.

In this scenario, the performance of its major customer, power battery manufacturer CATL, is not optimistic. The 2020 third-quarter report shows that CATL achieved revenue of 31.522 billion yuan in the first three quarters, a year-on-year decrease of 4.06%; and achieved a net profit of 3.357 billion yuan, a year-on-year decrease of 3.10%.

As a supplier of power batteries for new energy vehicles, Zhongyi Technology's future profitability may weaken as a result. At the same time, its long-standing cash flow problem is becoming increasingly prominent. From 2017 to the first half of 2020, despite a significant increase in revenue, its net cash flow from operating activities has always been negative, at -0.59 billion yuan, -1.03 billion yuan, -2.58 billion yuan and -0.88 billion yuan, respectively. It said that this was mainly affected by depreciation of fixed assets, inventory, operating receivables, and operating payables.

Specifically, on the one hand, since 2018, customers have used bills of exchange more frequently, resulting in a larger amount of bills received; on the other hand, after obtaining the bills, Zhongyi Technology mainly used them for discounting or paying for fixed asset purchases, while its upstream raw material suppliers still mainly settled in cash, resulting in a higher amount of cash paid for purchasing goods and accepting services.

Generally speaking, negative cash flow from operating activities indicates that the company's "blood supply" capacity is insufficient. Zhongyi Technology's products are mainly sold on credit, and its cash has not increased during the operation period. Its performance is maintained by "living off its old capital". The electrolytic copper foil industry to which it belongs is a capital-intensive industry with the characteristics of a long investment cycle and large investment scale. If the net cash flow generated by its operating activities continues to be negative and continues to expand, it will face greater debt repayment and financing pressure in the long run.

Therefore, in order to increase cash flow from operating activities, Zhongyi Technology used 200 million yuan out of the 716 million yuan raised in this IPO to supplement working capital. It can be seen that one of the purposes of its IPO is to solve this cash flow problem.

At the same time, from the perspective of its current assets, in recent years, the book value of its accounts receivable was RMB 36 million, RMB 96 million, RMB 201 million and RMB 195 million respectively; the book value of inventory was RMB 65 million, RMB 86 million, RMB 145 million and RMB 178 million respectively, all of which have been increasing rapidly year by year.