The sharp increase in accounts receivable and inventory has led to negative cash flow, and Longhua Film has sounded the alarm for operating risks

In recent years, with the rapid development of industrial chains such as consumer electronics and home appliances, polymer functional film manufacturing materials and their related supporting industries have gradually shifted from Japan and Taiwan to mainland China, leading to the rapid development of my country's functional film materials industry.

Longhua Film, which mainly produces polymer functional film materials such as PC materials, PMMA materials and their composite materials, has also seized market opportunities and achieved rapid development, and its operating performance has also increased rapidly.

However, as more companies enter the industry, the overall capacity of the industry has increased, leading to intensified market competition, and Longhua Film has also been greatly affected. Recently, in the article "[IPO Value] Longhua Film's performance has reached a bottleneck: Can betting on the polarizer base film business reverse the situation? ", the author pointed out that with the decline in the purchase amount of major customers Xinlun Technology and Huawei, the company's backplane composite material revenue has shown a downward trend, causing its operating performance to once again face the problem of stagnation.

Against the backdrop of weak performance growth, Longhua Film's accounts receivable and inventory balances remain high, which has led to a high asset-liability ratio. At the same time, its short-term debt repayment ability is poor, and the company may face certain pressure in capital operation. In addition, it is difficult to quickly realize inventory, which may lead to a series of financial risks such as insolvency or capital chain rupture.

Inventory and accounts receivable are rising year by year

Benefiting from the demetallization of backplane materials for 5G consumer electronics products, Longhua's sales of film backplane composite materials soared in 2018. However, with the decline in procurement volume from major customers Xinlun Technology and Huawei, the business's revenue declined in the first half of 2020, which also led to the problem of inventory backlog and pressure on payment collection.

From the end of 2017 to the end of June 2020, the inventory balance of Longhua Film was RMB 109.0988 million, RMB 139.7086 million, RMB 165.9480 million and RMB 190.2232 million, respectively, accounting for 39.08%, 35.00%, 31.57% and 34.89% of current assets, respectively, all exceeding 30%.

Longhua Film, which has high inventory, has also seen its inventory turnover rate gradually decline since 2018. Data shows that Longhua Film's inventory turnover rates from 2017 to the first half of 2020 were 2.51 times, 2.89 times, 1.96 times and 1.44 times respectively. The average inventory turnover rates of comparable companies in the same industry during the same period were 4.61 times, 5.46 times, 5.75 times and 5.12 times respectively, all higher than Longhua Film.

To some extent, the decline in Longhua Film's inventory turnover rate means that the company's inventory is unsalable. As the company's business scale continues to expand, the inventory scale may continue to grow in the future. If the company's inventory management is poor, there are major adverse changes in the company's product market, or the relevant products fail to pass customer acceptance, resulting in the inability to realize inventory in time, the company will face the risk of inventory depreciation, and at the same time affect the company's capital turnover and cash flow.

During the above period, Longhua Film's inventory increased while its accounts receivable also increased year by year. At the end of each reporting period, its accounts receivable balances were RMB 126,037,100, RMB 183,326,200, RMB 203,565,600 and RMB 219,061,900, accounting for 45.02%, 36.33%, 39.97% and 105.72% of the current operating income, respectively.

It can be seen that the balance of accounts receivable of Longhua Film has increased year by year, especially in the first half of 2020, when basically no payment was received for product sales. This may be because Longhua Film adopted an aggressive market strategy in order to go public against the background of declining performance!

At the same time, its accounts receivable turnover rate has shown a downward trend since 2018. During the reporting period, Longhua Film's accounts receivable turnover rates were 2.24 times, 3.97 times, 3.17 times, and 2.33 times, respectively, while the industry comparable companies' averages were 4.23 times, 4.13 times, 4.23 times, and 3.66 times, all higher than Longhua Film.

As we all know, accounts receivable turnover rate is an indicator to measure the turnover speed and management efficiency of a company's accounts receivable. The higher the accounts receivable turnover rate, the faster the collection of accounts receivable. On the contrary, it means that too much working capital is occupied in accounts receivable. In the past three and a half years, Longhua Film's accounts receivable turnover rate has been lower than the industry average, which means that the company's accounts receivable turnover speed and management efficiency are weaker than its peers.

Industry insiders pointed out that "while the amount of accounts receivable of Longhua Film has increased year by year in recent years, the accounts receivable turnover rate has decreased year by year, which shows that the company faces financial risks of huge bad debts due to sales on credit." This can be reflected in the amount of bad debts it has set aside. From 2017 to the first half of 2020, the amount of bad debt provisions of Longhua Film was RMB 22.1364 million, RMB 33.2813 million, RMB 32.1285 million, and RMB 35.2463 million, respectively, and the provision ratios were 17.56%, 18.15%, 15.78%, and 16.09%, respectively.

Debt repayment capacity is worrying

Longhua Film's inventory and accounts receivable account for a high proportion of current assets. As the scale of operations continues to expand, the company's accounts receivable and inventory balances have increased accordingly. If Longhua Film's accounts receivable cannot be collected in time and its inventory cannot be turned over in time, it will face liquidity risks, especially in terms of its debt-to-asset ratio.

The prospectus disclosed that from 2017 to the first half of 2020, the asset-liability ratio of Longhua Thin Film was 66.78%, 63.17%, 33.20% and 34.46%, respectively, while the average asset-liability ratios of comparable listed companies in the same industry were 40.27%, 38.70%, 32.29% and 35.13%, respectively. It can be clearly seen that the asset-liability ratio of Longhua Thin Film fell sharply in 2019, but reversed in the first half of 2020, showing signs of rising.

As for the main reason for the reduction in the debt-to-asset ratio, Longhua Film explained that the company's profitability has increased, with retained earnings increasing year by year. At the same time, the company has increased its share capital and capital reserves by introducing external investors and increasing capital and expanding its shares.

However, in the first half of 2020, Longhua Film's operating performance fell into trouble again. While its net profit declined, its monetary funds also dropped rapidly, from 109.2593 million yuan in 2019 to 71.6085 million yuan, and the proportion of current assets dropped from 21.97% to 13.73%, showing a downward trend.

In contrast, its short-term loans increased from 76.165 million yuan in 2019 to 97.6442 million yuan. It can be seen that its monetary funds were not enough to repay short-term loans in the first half of 2020, which also caused its operating cash flow to drop from 160.3223 million yuan in 2019 to -2.4698 million yuan.

Against the backdrop of high debt-to-asset ratio, reduced monetary funds, and rising short-term loans, Longhua Film's debt repayment ability also began to weaken in 2020. During the reporting period, Longhua Film's current ratios were 1.06, 1.02, 2.12, and 1.96, and its quick ratios were 0.66, 0.66, 1.45, and 1.27, respectively. The average current ratios of comparable listed companies in the same industry were 1.84, 2.12, 2.06, and 2.13, and the average quick ratios were 1.45, 1.63, 1.67, and 1.65, respectively. Longhua Film's current ratio and quick ratio are both far below the industry average, so its debt repayment ability is relatively insufficient compared with its peers.

In this regard, Longhua Film explained that the company's operating performance was affected by the epidemic. The net cash inflow generated by operating activities in the first half of 2020 was small, monetary funds decreased, current assets increased by 4.91% from the end of 2019, a small increase, and quick assets decreased slightly from the end of 2019; on the other hand, in order to ensure normal production and operation, the company increased short-term loans. At the same time, some of the company's long-term payables and loans will mature within one year and will be reclassified as current liabilities, resulting in an increase of 13.44% in current liabilities from the end of 2019, which is greater than the increase in current assets and quick assets.

Overall, Longhua Film's asset-liability ratio has increased year by year, and the monetary funds in current assets have declined, and there may be certain pressure on its capital operation. In addition, with a high proportion of inventory and accounts receivable, once the company's funds cannot be recovered in time or the inventory is difficult to quickly realize, Longhua Film may face risks such as insolvency or a broken capital chain.