Gross profit margin is lower than that of peers: Lingyun Optoelectronics' high growth in agency business raises doubts about its scientific and technological innovation attributes

The machine vision industry has always been monopolized by a few leading overseas manufacturers. Cognex of the United States and Keyence of Japan alone almost monopolize more than 50% of the global market share. However, with the accumulation of technology and experience, some domestic manufacturers have also begun to launch their own brand products. Machine vision supplier Lingyun Technology Co., Ltd. (hereinafter referred to as Lingyun Technology) is one of them.

Recently, Lingyun Optoelectronics officially started its journey to be listed on the Science and Technology Innovation Board. After checking the prospectus, it was found that despite the addition of major customers such as Huawei, Apple, and BOE, no customer accounted for more than 6% of its revenue, which inevitably raised questions about whether it has core customers and industry status. At the same time, even though the gross profit margin has increased year by year, it is still lower than the industry average. The main reason behind this is the agency business, which accounts for a large proportion of revenue and has a low gross profit margin. As the proportion of agency business revenue that does not have scientific and technological attributes increases rapidly year by year, it may have a greater negative impact on its scientific and technological attributes.

Core customers are not prominent and gross profit margin lags behind peers

The prospectus shows that since its establishment, Lingyun Optoelectronics has been based on optical technology innovation and has been engaged in machine vision and optical communication business for a long time. At present, it is strategically focused on machine vision business. In the field of machine vision, it has developed imaging solutions and application system solutions suitable for industry applications. In the field of consumer electronics, it has launched a series of products such as precision assembly/processing/intelligent identification/alignment/measurement for consumer electronics manufacturing; in the field of new display, it has developed a series of products such as semi-automatic/fully automatic lighting of LCD/OLED/miniLED/MicroLED display cell segment/module segment, appearance quality inspection equipment, etc.; in addition, it has also launched products in the fields of smart transportation, new energy, life sciences and high-end scientific research instruments, culture and entertainment, printing and packaging, etc.

At the same time, in the field of consumer electronics, Lingyun Optoelectronics has long served the industrial chain of Apple, Huawei, and Xiaomi, and has established cooperation with electronic manufacturers such as Hon Hai Precision, AAC Technologies, and Goertek; in the field of new display, its products are widely used in panel production lines such as BOE, CSOT, Tianma, Visionox, Wuxi Sharp, and Innolux; in the field of new energy, its products widely serve industry leaders such as Folangte Group, CATL, and Xinyi Group; in the field of optical communications, its agents introduce advanced foreign products to serve optical communications industry-university-research customers.

In terms of performance, from 2018 to 2020, Lingyunguang achieved operating income of 1.406 billion yuan, 1.431 billion yuan and 1.755 billion yuan, with a compound growth rate of 11.76% from 2018 to 2020; the net profit was 63.2164 million yuan, 40.0669 million yuan and 133 million yuan respectively, which obviously declined in 2019. The explanation was that the company granted employees share-based payment sharing that year, resulting in a large amount of management expenses.

Although the total revenue is increasing year by year, it can be seen from the segmented business that the revenue of its main machine vision products from 2018 to 2020 was 836 million yuan, 815 million yuan and 1.054 billion yuan, accounting for 59.50%, 56.95% and 60.03% of the revenue respectively, and the revenue showed a clear downward trend in 2019. Among them, the revenue of this product mainly comes from configurable vision systems and intelligent vision equipment products. The sales of the former depend on the product iteration speed and performance of mobile phone brands such as Huawei and Apple. In 2019, due to the reduction of Apple's supply chain business, its intelligent 3C configurable vision system revenue decreased by 30.28%.

At the same time, due to changes in the customer structure of display panel AOI inspection products and intensified industry competition, its business development was affected, and sales of intelligent vision equipment products also declined in 2019.

In terms of customers, the total sales revenue of Lingyunguang's top five customers was RMB 202 million, RMB 242 million and RMB 294 million, respectively, accounting for 14.34%, 16.91% and 16.77% of the main business income in the current period, among which the revenue of the top five customers of machine vision business accounted for 12.09%, 11.17% and 11.55%.

It is worth noting that BOE, the leading display industry company that has been cooperating with Lingyun Optoelectronics for the past three years, only accounted for 1.98%, 6.00% and 4.73% of its revenue in the past three years, and the revenue it contributed to Lingyun Optoelectronics has always remained at 80 million yuan and has not been broken through. In addition, although it has major customers such as AAC Technologies, TCL Group, and Hon Hai Precision, no customer accounts for more than 5% of its revenue (except BOE in 2019), which also highlights its current situation of having no core customers, a weak industry position, and the risk of unsecured revenue.

In addition, although its gross profit margin has maintained an upward trend, the comprehensive gross profit margin in recent years was 31.33%, 34.29% and 35.40% respectively, but compared with Jingce Electronics, Huaxing Yuanchuang, Tianjue Technology, etc., the industry average gross profit margin is 44.68%, 41.25% and 42.55%. After excluding the agency business, Lingyunguang's gross profit margin was 36.11%, 39.25% and 40.03% respectively. It can be seen that regardless of whether the agency business is excluded, its gross profit margin level lags far behind the industry average.

In fact, the main factor that lowered its gross profit margin is its agency business, which accounts for almost half of its revenue and has a low gross profit margin. For example, the gross profit margins of agency business products such as visual devices, optical fiber devices and instruments are only 23.66%, 27.16% and 29.34%. For Lingyun Optical, whose gross profit margin of independent business products is already lower than the industry average, the agency business with a lower gross profit margin has undoubtedly widened its gap with the industry.

The independent brand products are shrinking, while the agency business is growing rapidly

The prospectus shows that Lingyun Optoelectronics' main business products are divided into two parts according to the source: independent and agency, involving two major business segments: machine vision and optical communication products. Among them, the proportion of independent business revenue from 2018 to 2020 was 59.74%, 55.11% and 53.40% respectively, showing a downward trend year by year. The main reason is that the optoelectronic industry has weak user growth, and IPTV and mobile broadband have been severely impacted, resulting in a significant contraction in its optical access network business revenue and proportion, from 15.42% to 10.98% and then to 5.26%.

On the contrary, the changes in its agency business have shown a rapid growth trend, with revenues of 566 million yuan, 642 million yuan, and 818 million yuan in recent years, accounting for 40.26%, 44.89%, and 46.60% respectively. This business mainly includes optical fiber components and instrument products, covering most application areas of the optical industry chain such as optical communications and lasers.

At the same time, the difference in growth rates between the two is also very obvious. In terms of revenue amount, the independent business increased from 839 million yuan in 2018 to 937 million yuan in 2020, with a compound growth rate of 5.68%; the agency business increased from 566 million yuan in 2018 to 818 million yuan in 2020, with a compound growth rate of 20.26%. It can be said that Lingyunguang's agency business is growing rapidly year by year, both in terms of revenue share and compound growth rate. The explanation for the rapid growth of the agency business is that in recent years, my country is still limited to low- and medium-end products in the above-mentioned fields, but the demand for high-end products remains strong.

From the perspective of the machine vision industry, this field is mainly dominated by manufacturers such as Keyence and Cognex. Most domestic manufacturers are still mainly agents for foreign manufacturers' products, and the concentration of China's machine vision market is also declining. According to statistics from the China Machine Vision Industry Alliance, the combined sales of the top five companies in terms of sales accounted for 30.1% of the total sales, down from 33.0% in 2019 to 30.1% in 2020; the sales share of the top ten companies decreased from 44.6% in 2019 to 40.3% in 2020.

However, despite this, Lingyun Optoelectronics' market share still ranks at the forefront of the industry. Data shows that in 2020, Lingyun Optoelectronics' market share in China's consumer electronics configurable vision system field was 22.4% in terms of revenue, second only to Cognex and Keyence. In China, according to statistics, among its member companies in 2020, Lingyun Optoelectronics ranked first in sales in China's machine vision industry, ahead of Tianjue Technology, Optech and other companies.

Overall, Lingyun Optoelectronics is indeed in a leading position in terms of market share and sales in the domestic machine vision industry, but its agency business, which contributes a large amount of revenue, does not have scientific and innovative attributes. If the proportion of revenue from this business continues to increase and the proportion of independent business continues to decline, it will not only be detrimental to the development of independent business, but will also have a negative impact on its scientific and innovative attributes. At the same time, BOE, which has cooperated with it for three consecutive years, has always had a revenue share of less than 6%. The lack of core customers and the gross profit margin that lags behind its peers will cause Lingyun Optoelectronics to face the risk of unstable performance.