Zhongtu Technology's largest customer is also a supplier, and the purchase amount of many customers has plummeted and the performance has dropped

In recent years, with the support of national policies, my country's LED industry has developed rapidly, chip companies have actively expanded production, and the industry's production capacity has increased significantly. At the same time, the global emerging market demand is weak, and the demand for LED lighting applications is lower than expected, resulting in an imbalance between supply and demand of LED chips, overcapacity in the industry, and a sharp drop in LED chip prices, which is gradually transmitted to upstream PSS substrate materials and other fields.

In the article "【IPO Values】Zhongtu Technology's PSS product prices "cut in half", insufficient R&D relies on purchasing patents to "meet standards"," the author pointed out that under the background of a sharp drop in PSS product prices, Zhongtu Technology's gross profit margin continued to decline, and its operating performance also showed a clear fluctuating downward trend.

The decline in its performance is closely related to the sharp drop in purchases from several major customers. At the same time, the author also found that Zhongtu Technology has a high concentration of customers and suppliers, and the largest customer and supplier are the same company, which inevitably raises questions about the fairness of Bolant's related-party transactions and the independence of its business.

HC Semitek is both a major customer and a supplier

As a professional substrate material manufacturer for GaN on Sapphire semiconductor technology, Zhongtu Technology's main products currently include 2 to 6-inch patterned sapphire substrates (PSS) and patterned composite material substrates (MMS), which are widely used in the manufacturing of GaN-based LED chips.

In recent years, as the concentration of the global LED chip industry has further increased, the concentration of Zhongtu Technology's top five customers and suppliers has also been high, and there is also the phenomenon that its largest customer is also its supplier.

From 2017 to January-September 2020, Zhongtu Technology's sales to its top five customers were RMB 760 million, RMB 795 million, RMB 623 million and RMB 501 million, respectively, accounting for 72.70%, 69.76%, 73.06% and 74.84% of the operating income in the current period.

During the above period, HC Semitek was Zhongtu Technology's largest customer, and Zhongtu Technology's sales to it were RMB 398 million, RMB 234 million, RMB 211 million and RMB 173 million, respectively, accounting for 38.01%, 20.54%, 24.63% and 25.79% of the operating income in the same period, respectively. The sales amount and proportion were both relatively high.

In terms of suppliers, from 2017 to January-September 2020, Zhongtu Technology's procurement amounts from the top five suppliers were RMB 733 million, RMB 734 million, RMB 605 million, and RMB 401 million, respectively, accounting for 89.27%, 89.64%, 88.88%, and 83.80% of the total procurement amount in the period, respectively, all of which accounted for more than 80%.

Among them, Yunnan Blue Crystal Technology Co., Ltd. (hereinafter referred to as: Blue Crystal Technology), a subsidiary of Huacan Optoelectronics, was the first, second, second and first supplier of Zhongtu Technology during the above-mentioned period. The purchase amount of Zhongtu Technology from it was RMB 358 million, RMB 179 million, RMB 195 million and RMB 176 million, respectively, accounting for 43.65%, 21.82%, 28.58% and 36.67% of the total purchase amount in the current period.

From the above, we can see that during the reporting period, Huacan Optoelectronics and its subsidiary Blue Crystal Technology were both on the list of the top five customers and the top five suppliers of Zhongtu Technology, and were the largest customer and the top two suppliers respectively. Huacan Optoelectronics is both a customer and a supplier, and Zhongtu Technology has a phenomenon of integrated supply and sales.

It is worth noting that the fluctuation curve of Zhongtu Technology's sales amount and proportion to Huacan Optoelectronics is relatively consistent with the fluctuation curve of its purchase amount and proportion from Blue Crystal Technology. Both started from the highs in 2017, fell "halfway" in 2018, and then showed a gradual upward trend in 2019 and January-September 2020.

The industry believes that Huacan Optoelectronics is both a customer and a supplier of Zhongtu Technology. Whether its sales and purchase transactions are fair, whether the two parties have an affiliated relationship or other special relationship, whether there is a problem of interest transfer, and whether the sales and purchases of both parties are independent purchase and sales business or commissioned processing business, and whether the gross method or net method is used for accounting treatment. In the subsequent review, the company may still need to further verify the rationality and necessity.

Purchases from multiple customers plummeted

In addition to Huacan Optoelectronics, which is both the largest customer and the second largest supplier, Zhongtu Technology also saw a sharp decline in purchasing amounts from several major customers.

From the perspective of the top five customers, Aoyang Shunchang was the second largest customer of Zhongtu Technology in 2017 and 2018, and was still its fifth largest customer in 2019, but was not even among the top five customers in 2020. From 2017 to 2019, Zhongtu Technology's sales to Aoyang Shunchang were RMB 109 million, RMB 232 million, and RMB 76 million, respectively, accounting for 10.46%, 20.38%, and 8.91% of total revenue, respectively, and fell sharply after 2018.

It is worth noting that while Aoyang Shunchang has reduced its purchases from Zhongtu Technology, it has increased its purchases of similar products from Bolant, showing signs of "replacing" Zhongtu Technology with Bolant. According to the author's observation, Aoyang Shunchang was among Bolant's top five customers in 2019, with a purchase amount of 30.2679 million yuan that year, accounting for 8.71% of the current revenue, making it its fourth largest customer. In the first half of 2020, Aoyang Shunchang's purchases from Bolant amounted to 29.4028 million yuan, accounting for 17.34% of the current revenue, making it its third largest customer.

At the same time, although Jingyuan Optoelectronics has always been among the top five customers of Zhongtu Technology, Zhongtu Technology's sales to it have shown a downward trend. From 2017 to January-September 2020, Zhongtu Technology's sales to Jingyuan Optoelectronics were 103 million yuan, 140 million yuan, 99 million yuan, and 53 million yuan, respectively, accounting for 9.86%, 12.27%, 11.54%, and 7.86% of the current revenue, respectively; in the Zhongtu Technology customer ranking, they ranked third, third, fourth, and fifth, respectively. In addition, manufacturers such as Dehao Runda, Yuanrong Optoelectronics, and Kaifajing have only appeared in the list of Zhongtu Technology's top five customers once.

From the above, it can be seen that there are obvious and frequent changes in the top five customers of Zhongtu Technology, and this change is closely related to changes in the industry.

According to the author, in recent years, with the release of domestic manufacturers' expansion capacity, LED chip production capacity has continued to be in excess, causing LED chip prices to continue to fall, directly leading to a decline in profits or even losses for many manufacturers. As a leading domestic company, Elec-Tech chose to close its LED chip factory in July 2019, while HC Semitek, Jingyuan Optoelectronics, Aoyao Shunchang, and Kaifajing also adjusted their business directions and reduced their purchases of Zhongtu Technology products.

The business changes of the above customers have also had an adverse impact on Zhongtu Technology's operations. From 2017 to January-September 2020, Zhongtu Technology achieved operating income of 1.046 billion yuan, 1.14 billion yuan, 857 million yuan, and 669 million yuan, respectively, showing a downward trend since 2018.

Overall, HC Semitek is the largest customer of Zhongtu Technology and also its second largest supplier, which not only makes people doubt the fairness of its related-party transactions and business independence. At the same time, the high customer concentration makes Zhongtu Technology's risk resistance ability fragile. In the case of a reduction in orders from many customers, it directly leads to a reduction in revenue. Even though it has entered the supply system of international LED chip manufacturers in Taiwan, China and South Korea through suppliers Jingzhi Co., Ltd. and Eternity Global Co., Ltd., it still cannot prevent the dilemma of declining revenue.