Zhongke Instrument's hematopoietic ability is weak, and cash flow pressure continues to rise

In recent years, supply chain security has become one of the hottest topics in the integrated circuit industry. Among many links, EDA, equipment and materials are the three strategic foundation pillars of the integrated circuit industry, and are also the areas most severely restricted by people.

Under this circumstance, domestic integrated circuit manufacturers continue to break through in their respective fields, striving to break the international monopoly and form an independent and controllable industrial chain.

Recently, the Shanghai Stock Exchange has officially accepted the IPO of the Science and Technology Innovation Board of the integrated circuit equipment manufacturer Zhongkeyi. According to the prospectus, Zhongkeyi is the only domestic manufacturer that can develop and produce dry vacuum pumps that meet the needs of integrated circuit manufacturing. Its products have passed process verification and mass application in integrated circuit manufacturing companies and integrated circuit equipment manufacturing companies such as SMIC, Yangtze Memory Technologies, Shanghai Huali, and North Huachuang, breaking the long-term monopoly of similar products by European, American and Japanese companies and realizing independent control of important equipment in the field of integrated circuits.

For domestic integrated circuit equipment companies, such results are undoubtedly gratifying. However, behind the breaking of the monopoly, Zhongke Instrument's development faces many problems, such as the continued increase in the amount of bad debts and inventory impairment provisions, the net profit turning from profit to loss and continuing losses, the gross profit margin of the main products is extremely low, even negative, and the industry is caught in a price war.

Government subsidies continue to increase, and inventory impairment provisions are high

As we all know, the integrated circuit equipment industry is a strategic industry that is encouraged and supported by the state. Therefore, domestic integrated circuit equipment companies generally receive key support from governments at all levels and receive a lot of government subsidies.

From 2017 to the first half of 2020, the amount of government subsidies included in other income of Zhongke Instrument was RMB 17.35 million, RMB 25.2781 million, RMB 45.9065 million and RMB 6.1098 million, respectively.

Judging from the situation of leading domestic integrated circuit equipment manufacturers, the amount of government subsidies is increasing, which is a common situation in the industry. However, such a large amount of government subsidies has not stopped Zhongke Instrument from falling into losses. Zhongke Instrument has been losing money since 2019, and the loss margin continues to expand.

From 2017 to the first half of 2020, Zhongke Instrument achieved operating income of 151 million yuan, 219 million yuan, 316 million yuan, and 156 million yuan, with corresponding net profits of 2.2472 million yuan, 9.4911 million yuan, -24.6417 million yuan, and -31.7052 million yuan.

The main reason why many companies planning to list on the Science and Technology Innovation Board suffer losses is excessive research and development expenses, but this is not the case for Zhongke Instrument. The depreciation of inventory is the main reason for its performance losses.

From 2017 to the first half of 2020, Zhongke Instrument's R&D expenses were RMB 17.3795 million, RMB 22.8092 million, RMB 39.3475 million and RMB 20.3223 million, respectively.

It is worth noting that at the end of each reporting period, Zhongke Instrument's inventory balance was RMB 147 million, RMB 202 million, RMB 251 million and RMB 319 million, respectively. In the early period, its inventory balance was basically the same as the current revenue, but by the end of the first half of 2020, its inventory balance increased to twice its revenue.

At the same time, the amount of inventory impairment provision also rose sharply, reaching RMB 34.672 million, RMB 38.36 million, RMB 47.6218 million and RMB 63.7596 million respectively, far higher than the current R&D expenses.

Zhongke Instrument said that in the future, if the prosperity of downstream industries declines, or the company's products cannot meet market demand, it may lead to a decline in the market price of the company's products, and the net realizable value of inventory will be lower than the book value, and then inventory impairment provisions will be made, affecting the company's profitability.

Weak hematopoietic capacity and rising cash flow pressure

Along with the increase in inventory amount, the balance of accounts receivable of Zhongkeyi also increased. At the end of each period of the reporting period, the balance of accounts receivable of Zhongkeyi was RMB 51.6336 million, RMB 63.8421 million, RMB 103.0335 million and RMB 104.5544 million, respectively.

Zhongkeyi stated that the company has fully made provisions for bad debts for accounts receivable, with the provision ratios for bad debts for accounts receivable in each period being 16.47%, 11.81%, 10.64% and 10.38% respectively.

Obviously, the high bad debt ratio and the continued increase in the amount of bad debt reserves as accounts receivable continue to rise are also the reasons for its performance losses.

In fact, the quality of net operating cash flow is directly related to the company's accounts receivable and inventory. During the reporting period, Zhongke Instrument's operating cash flow continued to be negative and continued to rise.

During the reporting period, the net cash flow generated from Zhongkeyi's operating activities was RMB8.8784 million, -RMB28.0172 million, -RMB38.1188 million and -RMB108.3217 million respectively.

It is worth noting that at the end of 2017, Zhongkeyi's cash and cash equivalents were RMB 76.2567 million. Due to its weak self-generating ability, by the end of 2018, the cash and cash equivalents on its books were only RMB 55.1646 million. The cash flow pressure is understandable.

In December 2019, Zhongke Instrument introduced strategic investors such as the National Integrated Circuit Fund, Hunpu Phase V, and Guoke Instrument, and completed nearly 300 million yuan in financing. The company's cash and cash equivalents increased to 352 million yuan at the end of 2019.

The good times did not last long. After Zhongke Yi successfully raised funds through external financing, its operating cash outflow also rose sharply in the first half of 2020, increasing to 108 million yuan. The company's cash balance at the end of the first half of 2020 was 202 million yuan. If it continues to burn money at this rate, Zhongke Yi will find it difficult to continue without external capital injection.

Zhongke Yi also admitted that in the future, as the company's business scale continues to expand, the demand for working capital will increase. If customers cannot settle or pay on time, it will affect the company's capital turnover and utilization efficiency, and may cause the company to face liquidity risks.

In this IPO, Zhongkeji raised a total of 770 million yuan from just one investment project and supplementary working capital. To some extent, this was to "replenish ammunition" for subsequent development, and it also reflected Zhongkeji's financial anxiety.