The main business changes frequently under the "profit anxiety", and Juguan Technology's asset impairment loss exceeds 100 million yuan

In recent years, the global laser industry has developed rapidly. According to Laser Focus World's forecast, global laser sales revenue is expected to continue to grow by about 10% to reach US$16.2 billion in 2020. Benefiting from the development of the industry, the upstream semiconductor laser manufacturer Focus Technology has begun to take shape and has started the road to IPO on the Science and Technology Innovation Board.

Previously, Jiwei.com mentioned in "[IPO Values] Relying on overseas customers to expand laser radar business, whether Juguan Technology's products can be mass-produced and installed on vehicles is in doubt" that the company's reliance on a single large overseas customer, Germany's Continental AG, to expand its laser radar business may become a major uncertainty factor in its future performance. At present, many companies have begun to take shape in the laser radar track. If Continental AG cannot achieve mass production and installation, it will directly affect Juguan Technology's shipments.

In addition, in the prospectus, Juguan Technology's non-net profit was negative for three consecutive years from 2017 to 2019. The reason behind the continuous losses was that the company's main business fluctuations led to frequent changes in major customers, which pushed up its inventory and caused asset impairment losses.

Non-GAAP net profit has been negative for three consecutive years

From the prospectus, we know that Juguan Technology's main revenue comes from semiconductor laser and laser optics business. At present, the company is expanding its automotive applications and optical system business areas. At present, its products have been gradually applied to five major fields: advanced manufacturing, medical health, scientific research, automotive applications, and information technology.

In terms of main business income, from 2017 to 2019 and from January to September 2020 (during the reporting period), the operating income of Juguan Technology was RMB 264 million, RMB 357 million, RMB 335 million and RMB 265 million, respectively, and the net profit attributable to the parent company's shareholders was RMB -9.447 million, RMB 18.8586 million, RMB -80.6237 million and RMB 25.1561 million, respectively. After deducting non-recurring gains and losses, the net profit attributable to the parent company's owners was RMB -29.1239 million, RMB -492,000, RMB -80.7789 million and RMB 18.0580 million, respectively.

Overall, its operating income and net profit fluctuated greatly, especially in terms of non-net profit, and it continued to suffer losses until 2020 when it turned losses into profits.

As of the end of the reporting period, the accumulated losses on a consolidated basis of Juguan Technology were RMB 84.9905 million. Even if it can be successfully listed on the Science and Technology Innovation Board, if it fails to make a profit and make up for the accumulated losses in the short term, it will not be able to pay cash dividends to shareholders.

Regarding the reasons for the unrecovered losses, Juguan Technology stated that it was mainly due to problems such as high period expense rate, inventory depreciation and goodwill impairment.

In terms of goodwill impairment, Jiwei.com previously reported that in 2019, the revenue of LIMO, a subsidiary acquired by Juguan Technology, decreased compared with 2018 due to the economic downturn in Germany and the decline in sales revenue to the downstream fiber laser industry. After careful evaluation, Juguan Technology made a goodwill impairment provision of RMB 57.0826 million in 2019. As of September 30, 2020, the book value of Juguan Technology's goodwill was still RMB 78.6970 million.

During the reporting period, the period expense rate of Juguan Technology was 41.79%, 38.09%, 54.62% and 40.30% respectively. This was mainly due to investment in R&D and marketing, as well as the layoff of some redundant employees. Juguan Technology paid termination compensation and other restructuring-related expenses, so the expenditure was relatively high.

The main business fluctuates greatly and customers change frequently

In terms of main business composition, Focus Technology's main businesses include semiconductor laser business, laser optics business, automotive application business and optical system business.

As can be seen from the above table, from 2017 to 2019 and the first three quarters of 2020, the operating income of the four major businesses of Focus Technology experienced large fluctuations.

Specifically, the semiconductor laser business and laser optics business are the company's main profit sources, and the two contribute about 90% of the main business gross profit. In 2018, the semiconductor laser business received orders from downstream major medical and beauty customers, increased demand for downstream industrial application modules, and the merger of Yushi Optoelectronics, which led to an increase in sales and revenue of corresponding products; however, due to the shrinking demand for downstream industrial application modules in 2019 and the impact of the epidemic in 2020, the performance of the semiconductor laser business has declined significantly since 2019, and the business share has dropped from 64.53% to 36.58%.

In 2019, the revenue of laser optics business declined significantly, and the revenue of optical systems business was almost zero; the German laser industry was in recession, and the business revenue of German LIMO dropped sharply.

Since 2018, the automotive application business launched by Focuslight Technology has begun to receive orders, and its performance has continued to grow in the past three years. However, overall, the proportion of business revenue is still relatively small.

Fluctuations in the main business also affected changes in its major customers.

As can be seen from the above table, Focuslight Technology's major customers have changed almost every year from 2017 to 2019 and in the first three quarters of 2020. From 2017 to 2019, the Chinese Academy of Sciences has always ranked in the top two, contributing nearly 80 million in sales revenue.

From the perspective of customer base, during the reporting period, its customer base has changed significantly along with the main business, from South Korea's LG Electronics, Yushi Optoelectronics to Germany's Continental AG, Maxphotonics, Raycus, etc.

Large provisions for inventory depreciation and large asset impairment losses

As mentioned earlier, one of the reasons for the unrecovered losses is the inventory problem.

From the inventory structure of Juguan Technology, it is mainly raw materials, work-in-progress, self-made semi-finished products and inventory goods, etc. At the end of each period of the reporting period, raw materials accounted for 48.67%, 48.89%, 48.82% and 57.56% of the inventory book balance, respectively, and the proportion showed a fluctuating upward trend.

In the past three years and one period, the inventory amount of Juguan Technology is at a relatively high level. At the end of each period of the reporting period, the book value of Juguan Technology's inventory was RMB 110 million, RMB 150 million, RMB 130 million and RMB 140 million, respectively, accounting for 33.46%, 41.01%, 41.92% and 30.02% of the current assets at the end of each period. The inventory balances were RMB 140 million, RMB 190 million, RMB 170 million and RMB 180 million, respectively.

Among them, the balance of inventory impairment provision accounted for 23.11%, 22.61%, 22.40% and 19.74% of the inventory balance at the end of the current period respectively. After calculation, it can be known that during the reporting period, the amount of inventory impairment of Juguan Technology was RMB 25 million, RMB 34 million, RMB 29 million and RMB 27 million respectively.

In addition, during the reporting period, Juguan Technology's asset impairment losses were -19.945 million yuan, -15.2966 million yuan, -71.1377 million yuan and -2.5977 million yuan, respectively, with a total loss of more than 100 million yuan. This was mainly due to the company's provision of corresponding inventory depreciation losses and goodwill impairment losses, of which the corresponding goodwill impairment losses in 2019 were mainly LIMO goodwill impairment losses.

In terms of inventory turnover rate, the average inventory turnover rates of comparable peers Raycus Laser, JPT Laser and Lianying Laser from 2017 to 2019 and the first three quarters of 2020 were 1.4 times/year, 1.24 times/year, 1.15 times/year and 0.76 times/year, respectively, showing a downward trend year by year. The average inventory turnover rates of comparable peers Raycus Laser, JPT Laser and Lianying Laser from 2017 to 2019 were 2.32 times/year, 2.14 times/year and 2.50 times/year, respectively, which are significantly higher than that of Juguan Technology.

Regarding the inventory turnover rate being lower than the industry average, the prospectus mentioned that it was mainly because in order to meet customers' supply needs in a timely manner, a large amount of safety inventory of laser diode chips and other products was kept.

Overall, due to the instability of Juguan Technology's main business and the fact that related inventory has not been able to effectively expand sales channels, optimize inventory management or improve inventory turnover within the product life cycle, if its main business cannot remain relatively stable, this will undoubtedly continue to increase its inventory scale, leading to inventory backlogs and bringing higher inventory depreciation and asset impairment losses.