On July 20, Huaqin Technology, one of the leading ODMs in China, officially launched its IPO and plans to list on the main board of the Shanghai Stock Exchange. Previously, the company terminated the IPO on the Science and Technology Innovation Board due to problems such as technological advancement and insufficient scientific and technological innovation attributes.
Huaqin Technology was established in 2005. A few years later, it caught up with the golden age of global smartphones. According to the prospectus, the compound annual growth rate of global mobile phone shipments from 2010 to 2020 will be 16%. In 2021, the shipment volume of the three major smart hardware components (smartphones, tablets, and laptops) of Huaqin Technology will exceed 200 million units, ranking first in the global smart hardware ODM industry.
The three major components of intelligence also constitute its core pillar business sector, accounting for more than 93% of its business revenue in the past three years. However, according to the prospectus, the ODM giant's low gross profit margin and worrying future profitability are also very obvious.
The current global demand for consumer electronics is weak, including the performance of mobile phone giants and PC leaders, and the smart product OEM business is becoming more and more difficult. The smart car track has also become one of the outlets for many foundry giants.
For Huaqin Technology, entering the capital market is only the first step to survive in the cold winter of the industry. Only by truly solving the problems of low technology content and profitability of the business is the key to the company's survival in the fierce competition in the future.
The gross profit margin is lower than that of peers, and the operation is "hidden worry"
Low gross profit margin is a common problem in the ODM industry. This is very obvious in the performance of Huaqin Technology.
From 2020 to 2022, Huaqin Technology achieved revenues of 59.866 billion yuan, 83.759 billion yuan, and 92.646 billion yuan, respectively, and net profits attributable to the parent company were 2.191 billion yuan, 1.893 billion yuan, and 2.564 billion yuan. In the first quarter of 2023, the company's operating income was 16.821 billion yuan, a year-on-year decrease of 24.06%, and its net profit was 590 million yuan, a year-on-year increase of 205.64%.
Compared with the revenue scale close to 100 billion, its net profit is slightly meager.
During 2019-2022, the company's net profit margins are 1.43%, 3.66%, 2.26%, and 2.77%, respectively. Among them, in 2021, the shipment of the three major pieces of intelligent hardware of Huaqin Technology will reach 200 million units, which is also the year with the highest shipment volume in the past three years. Roughly calculated, the profit of a smart device OEM is less than 10 yuan.
As an OEM industry, the ODM industry has weak technological attributes and low market entry barriers, resulting in fierce competition in the ODM industry. In order to seize market share, ODM manufacturers do not hesitate to compete at low prices to obtain orders from upstream brand manufacturers, and the gross profit margin of the industry has always been at a low level.
From 2020 to 2022, the gross profit margin of Huaqin Technology will be 9.9%, 7.75%, and 9.85%, respectively, which is at the bottom of the already extremely low ODM industry; according to the prospectus, Goertek, Luxshare Precision and Wingtech The gross profit margin of science and technology in 2022 will be 11.12%, 12.19% and 18.16%, respectively.
Among them, in 2022, the gross profit margin of Huaqin Technology's mobile phone business is displayed as 10.36%, the gross profit of the notebook computer business is nearly 6.61%, and the gross profit of the tablet computer is 9.63%.
Unlike Luxshare Precision and Goertek which manufacture high-end Apple mobile phones, Huaqin Technology’s OEM mobile phone products are mainly low-end phones, and this is one of the reasons why its gross profit margin is lower than the industry average. According to the prospectus, the sales unit price of Huaqin Technology’s smartphone products has been in the range of 200-400 yuan per unit.
Among them, mobile phones are the revenue pillar of Huaqin Technology, accounting for 42% of the total revenue. Followed by laptops and tablets, accounting for about 26% and 24.6%. The total income of the three major items accounted for as high as 92.6%.
In 2022, the three major businesses showed a downward trend. Last year, Huaqin Technology sold 120 million mobile phones, a year-on-year decrease of 16.7% from 140 million units in 2021; notebook computer sales decreased by 5.8% year-on-year.
And this also affected its revenue performance at the same time. In 2022, Huaqin Technology's mobile phone revenue will be 37.607 billion yuan, a year-on-year decrease of about 0.2%. 14.2%; Tablet PC revenue was 22.028 billion yuan, a year-on-year increase of approximately 27.7%.
From the perspective of the industry and sales volume, there are also hidden concerns about the operation of Huaqin Technology, and the profitability of the next few years may be challenged to a certain extent.
According to data from third-party organizations, among the global mobile phone ODM/IDH shipment market share rankings in 2022, the shipments of Huaqin, Longcheer, and Wingtech rank in the top three respectively. In 2022, Huaqin’s market share will decline, while Both Longcheer and Wingtech rose.
In the second quarter of 2023, the global smartphone market shipments fell by 11% year-on-year. This is the eighth consecutive quarter of decline in the mobile phone market. Samsung's mobile phone shipments, the largest customer of Huaqin Technology, plummeted by 18%. However, the PC industry ushered in a short-term bonus period from 2020 to 2021, and fell into a cold winter again.
On the basis of the decline in global shipments in 2022, both the first and second quarters of 2023 reported sharp declines. Among them, the global PC product leader Lenovo’s shipments fell by 18.4% year-on-year, and ASUS directly fell out of the market. ranked fifth in the world, and these two companies are major customers of Huaqin Technology.
Although the listing of Huaqin Technology is conducive to improving its financing ability, how to increase the technological attributes and create a new profit growth engine is the top priority.
Emerging business accounted for less than 8%
In the business upgrading strategy of Hiqin Technology, it is necessary to increase the development of emerging markets such as smart wearables and AIoT products, and at the same time tap two important incremental markets of servers and automotive electronics .
In the field of smart wearables, it has entered the supply chain of well-known brand manufacturers such as Samsung and vivo. In 2022, the company's smart wear business revenue will be 2.982 billion yuan, a year-on-year decrease of 9.14%;
Another major new business, AIoT products (including smart POS machines, automotive electronics, smart speakers, etc.) has been sold to many well-known terminal manufacturers such as Xiaomi, Amazon, Lenovo, Sunmi, and Nauto. In 2022, the revenue will be 880 million yuan, a year-on-year decrease of 24.4%. In addition, the company's server ODM business revenue in 2022 will be 2.67 billion yuan, an increase of 565.34% over the same period last year.
In 2022, the combined revenue of smart wearables, servers, and AIoT products will account for less than 8% of total revenue. Among them, the gross profit margin of the wearable and AIoT business is relatively high, reaching 20.8% and 15.9% last year. However, due to the very low volume, the boost to the overall profitability of Huaqin Technology is extremely limited.
Since a few years ago, many foundries have been oriented towards high-profitability emerging industries. Among them, automotive electronics has become a good choice for major consumer electronics giants and ODM manufacturers to transform and upgrade their businesses. According to public information, Huaqin has also carried out multiple layouts in automotive electronics.
It not only established the automotive electronics business department within the company, but also established a wholly-owned subsidiary Shanghai Avalue Zhixing Automotive Electronics Co., Ltd. in 2022 (the actual business has not yet been launched) . In addition, it also participates in Diya Yiwei New Energy Vehicles and Shenzhen Youjia Innovation Technology Co., Ltd.
Of the 5.5 billion raised this time, more than 1.5 billion will be used for the Shanghai Emerging Technology R&D Center project. In addition to upgrading existing products, it also includes the development of emerging smart hardware products, deepening the layout of AIoT products such as automotive electronics, for example, automotive Electronics involves research and development of products and technologies such as vehicle-mounted robots, vehicle networking communication modules, central control screens, and smart dashboards.
According to its research and development projects, Huaqin Technology plans to launch products such as vehicle intelligent cockpit system, cockpit domain controller, DMS, in-cabin monitoring system (OMS), and driving recorder. However, according to the prospectus, these products are still in the research and development stage.
From the perspective of the market, the smart cockpit track has gathered all kinds of players, among which Tier 1 has completed the full-line layout of software and hardware in the fields of smart cockpit, smart driving, and intelligent network connection, and is leading the mass production. Competitors also gather in domain control, DMS, OMS, HUD, driving recorder and other segmented tracks, and major markets are in the process of product upgrading and integration, and it is also a price competition cycle for large-scale car launch.
Even compared with Luxshare and Wingtech, several ODM companies on the same track, Huaqin Technology's actions in the field of automotive electronics appear to be lagging behind.
For example, Luxshare Precision has launched a series of products in the field of smart cockpit and smart driving; Wingtech Technology also mentioned in its annual report that it has expanded its three major automotive product lines: in-car touch screen, ADAS (advanced driver assistance), car networking system Medium intelligent vehicle terminal. Among them, the vehicle-mounted smart cockpit products have been mass-produced and supplied to leading automotive customers, and multiple customer projects are actively advancing.
At present, it remains to be seen whether its investment layout in the high-tech field can bring expected benefits. Its prospectus shows that the company extends vertically to the upstream of the industrial chain such as semiconductors, chip manufacturing, automation equipment, and molds through foreign investment.
Due to the large scale of investment in the industrial chain, and the company's layout and R&D expenditures in emerging fields such as smart wearables, servers, and AIoT products have increased, the investment income from 2020 to 2022 (the negative number is the investment loss) is 185 million respectively. Yuan, 31.9819 million yuan and -132 million yuan.
In addition, the prospectus clearly hints at risks. If market competition intensifies in the future, costs rise, exchange rate fluctuations or product shipments shrink, the overall gross profit margin of the industry will be squeezed, which will further affect the company's gross profit margin. If the company's layout in emerging fields is not smooth, such as smart wearables, servers, and AIoT product development, it may have an adverse impact on the company's operating performance.
Just one year ago, on February 14, 2022, Huaqin Technology's "Automotive Electronics Lingang R&D Headquarters" and "Smart Manufacturing Base" projects with a total investment of 3.7 billion yuan were signed and landed in Shanghai Lingang. This is the first important layout after its strategic transformation from consumer electronics to automotive electronics.