As major customers have reduced their orders one after another, will Zijian Electronics, which has insufficient capacity utilization, still expand production?

Benefiting from the explosive growth of TWS headsets, the revenue and net profit of lithium-ion battery supplier Chongqing Zijian Electronics Co., Ltd. (hereinafter referred to as "Zijian Electronics") have shown rapid growth in recent years. In 2020, it achieved revenue of 639 million yuan and net profit of 118 million yuan, a year-on-year increase of 51.78% and 84.38%, respectively. However, due to changes in the selling prices and costs of some products, its gross profit margin has also fluctuated greatly. As more and more manufacturers deploy TWS headset battery business, industry competition will continue to intensify, which will also place higher demands on the profitability of enterprises and the core competitiveness of products.

Earlier, in the article "[IPO Value] Benefiting from the explosion of TWS headphones: Huawei and Xiaomi supplier Zijian Electronics' performance has skyrocketed", Jiwei.com focused on analyzing Zijian Electronics' performance in recent years. Through further combing through the prospectus, it was found that the company was also facing instability in the top five customers, and some customers' sales revenue decreased or even withdrew from the list of the top five customers.

In addition, the capacity utilization rate of its main products has been declining and has not reached 100% for many years. In 2020, the overall capacity utilization rate fell below 80%. Even so, after its listing, it still needs to raise 318 million yuan for the "consumer lithium-ion battery expansion project", which makes people wonder whether its new capacity will be "indigestible"? The rationality of the expansion is also questionable.

The top five customers change frequently

It is reported that Zijian Electronics products are widely used in brands such as Huawei, Xiaomi, OPPO, vivo, Harman (JBL, AKG, etc.), B&O, Sennheiser, Jabra, Plantronics, Sony, LG, Panasonic, Pioneer, Audio-Technica, Marshall, 3M, Anker, Google, Jlab, Edifier, JVC, OnePlus and 1more.

From the perspective of customers, from 2017 to 2020, the sales amounts of Zijian Electronics' top five customers were RMB 53 million, RMB 97 million, RMB 243 million and RMB 227 million, accounting for 36.97%, 41.18%, 57.66% and 35.51% of revenue, respectively. The sales amount and proportion of major customers declined in 2020. In addition, there are frequent changes in major customers, and some customers disappear from the list of major customers.

First, from the perspective of customer composition, in the past four years of the reporting period, there was no long-term and continuous cooperation enterprise among the top five customers of Zijian Electronics, which led to the continuous change and instability of its major customers. This also shows that it is difficult for its products to form a fixed customer base, and the end customers are not willing to cooperate with it for a long time.

From the perspective of customer share, although it has obtained the support of major customers in the acoustic field such as Goertek, Edifier, and Jiahe Intelligent, the sales amount to the above customers is not high, and there is a fluctuating decline.

Product prices continue to drop, and major customers continue to reduce orders

In fact, in order to retain orders from major customers, Zijian Electronics has made concessions on the unit price of its products.

First, let's look at the price to Goertek. From 2018 to 2020, the unit price of square batteries and cylindrical batteries dropped significantly, from 8.38 yuan to 6.83 yuan, and from 16.25 yuan to 9.95 yuan, respectively. The price to Edifier also dropped year by year, with the unit price of square batteries dropping from 7.07 yuan to 4.64 yuan, and button batteries from 13.11 yuan to 9.98 yuan.

However, despite repeated concessions on the selling price, Zijian Electronics seems unable to reverse the reduction of orders or withdrawal of major customers. Specifically, the prospectus shows that it established cooperation with Goertek in 2016, and it was not until 2018 that Goertek appeared in its list of top five customers, with sales of only 20.0156 million yuan, accounting for less than 9% of revenue. The following year, Goertek's revenue did increase, but the growth only lasted for one year. By 2020, although Goertek jumped to become its largest customer, its sales amount was actually declining, and its share of revenue also dropped from 16% to 9.82%. At the same time, the reason why Goertek became its largest customer is also due to the large decline in Edifier's sales revenue.

Its cooperation with Edifier began in 2018. The following year, its sales revenue to this customer increased significantly, and the revenue share increased from 8% to 17%, a two-fold increase. However, in 2020, it also did not escape the fate of decline. Zijian Electronics' sales revenue to Edifier was almost halved, falling from 70.25 million yuan in the previous year to 39.63 million yuan, and the revenue share also fell to 6%.

Its revenue share from Jiahe Smart remained stable at around 10% between 2017 and 2019, but the customer suddenly dropped out of its top five customer list in 2020. Zijian Electronics explained that the decline in sales revenue to the customer in 2020 was mainly due to the high proportion of Anker in its products sold to Jiahe, as some Anker projects were adjusted to other foundries for ordering, and the proportion of direct battery purchases increased.

除此之外，2019年和2020年退出其前五大客户名单的客户还包括奥声电子、声电电子、乾合毅、科奈信和佳禾，其中乾合毅是万魔的指定合作伙伴，且与科奈信都是2019年新增的大客户，两家公司都是短短一年便退出了其大客户名单。据其表示，上述客户的退出主要是受终端品牌合作方或客户自身业务调整，不存在产品质量争议问题。

不过，其前五大客户主要是消费电子行业知名品牌的代工厂，对供应商的标准较高，且有较强的议价能力，而且疫情致相关智能硬件设备的显著提升，推动了智能无线耳机等产品的需求增长，自然令厂商对电池产品的采购有增不减。而紫建电子大客户的纷纷减单，显然与行业发展需求相悖。

With the capacity utilization rate less than 80%, will the expansion of production by more than 300 million yuan lead to "indigestion"?

It is worth noting that Zijian Electronics, whose products are used in communications, audio, Internet, smart wearables and other fields, is rushing to the GEM with a fundraising plan with the support of terminal brands such as Huami, OV, LG, and Panasonic. Once the fundraising projects reach full production, it will expand the production capacity of consumer lithium-ion batteries and enrich the company's product structure.

Among them, the "Consumer Lithium-ion Battery Expansion Project" is to expand the production of its hard-shell button batteries, soft-pack button batteries, square batteries and other products. It plans to invest 318 million yuan in raised funds and plans to reach full production in three years. In the first year of production (the second half of T2), it will achieve 30% of the production capacity, 65% in the second year, and 100% in the third year. After the project is completed, the company will have an annual production capacity of 85.86 million consumer lithium-ion batteries.

According to it, the expansion was due to the fact that the company's production capacity could no longer meet the company's business needs, becoming a bottleneck restricting the company's development.

However, judging from the data disclosed in the prospectus, its capacity utilization rate does not seem to be saturated at present, and the capacity utilization rate of some products has declined or there is overcapacity. In this case, if it still raises funds for expansion, will its new capacity be "indigestible"? The rationality is also debatable.

It can be seen from the prospectus that from 2018 to 2020, its capacity utilization rate totaled 94.75%, 73.36% and 79.74%, of which the capacity utilization rate of square batteries was 97.18%, 84.47% and 89.98% respectively. In 2019, due to the low efficiency of the new start-up of Chongqing Weiduli Wanzhou Factory, the capacity utilization rate and gross profit margin both declined; the capacity utilization rate of cylindrical batteries was 91.04%, 54.37% and 52.27% respectively, and the capacity utilization rate of button batteries was 97.40%, 63.04% and 73.11% respectively, all showing a clear downward trend. The capacity utilization rates of needle-type batteries were 5.27%, 43.45% and 31.22% respectively, indicating overcapacity.

Based on this, with the capacity utilization of the main product lines not saturated and the sales revenue to major customers declining, is it necessary for Zijian Electronics to raise more than 100 million yuan to expand production, and does it have the capacity to absorb the capacity? These will become unavoidable issues before its listing.