Stone Technology's third-quarter report revealed numerous underlying concerns, such as a surge in inventory and high selling expenses. Let's see how Chang Jing and his team will address these issues.

Source | Digital Intelligence Research Institute

After delivering an impressive first-half report, Stone Technology released a third-quarter report with a 43% drop in net profit.

The financial report showed that Stone Technology achieved revenue of 2.591 billion yuan in the third quarter, a year-on-year increase of 11.91%; net profit attributable to shareholders was 351 million yuan, a year-on-year decrease of 43.40%; and non-recurring net profit was 325 million yuan, a decrease of 45.25%.

The Digital Intelligence Research Institute found that from the third quarter of 2020 to the third quarter of 2024, Stone Technology's performance has fluctuated significantly. In the third quarters of 2021 and 2022, performance declined markedly, but there was a strong rebound in the third quarter of 2023. By the third quarter of 2024, growth had clearly slowed.

Regarding the change in performance, Stone Technology explicitly mentioned in its financial report, "It was mainly due to the further strengthening of market expansion at home and abroad in the third quarter and the launch of multiple new products, leading to increased sales and R&D expenses."

Judging from the performance in the first three quarters, Stone Technology performed reasonably well. Data showed that revenue for the first three quarters was 7.007 billion yuan, a year-on-year increase of 23.17%; net profit attributable to shareholders was 1.472 billion yuan, a year-on-year increase of 8.22%. However, net cash flow from operating activities decreased by 38.77% year-on-year to 1.06 billion yuan.

Compared to the half-year report, the Digital Intelligence Research Institute found that Stone Technology's underperforming third-quarter report dragged down the company's overall performance for the first three quarters.

Following the release of its earnings, Stone Technology saw a significant drop in its share price in the capital market, opening nearly 20% lower on the day. The closing price was 236.50 yuan per share, a decrease of 11.02%. On November 1, Stone Technology fell another 4.74%. Over the two trading days, the share price of Stone Technology fell by nearly 16%, and market value evaporated by over 7.5 billion yuan.

As of the close on November 7, Stone Technology's share price was 220 yuan per share, with a total market value of 40.64 billion yuan.

Back in 2020 when it was first listed, Stone Technology was hailed as "the most profitable IPO in history." Its share price later soared to over 1,000 yuan, making it one of only two stocks priced above 1,000 yuan along with Kweichow Moutai, and its market value exceeded 605 billion yuan. It was a time of unparalleled success.

However, over the years, Stone Technology has lost some of its former glory. What has happened to Stone Technology now?

Behind the decline in both gross profit margin and net profit margin

The reason for the 40% drop in net profit margin is self-evident.

In terms of net profit margin, Stone Technology's third-quarter margin was 13.57%, a year-on-year decrease of 13.26 percentage points.

From the perspective of gross profit margin, Stone Technology's gross profit margin for the third quarter of 2024 was 53.95%, a year-on-year decrease of 8.47%.

Comparing these two key indicators, the decline in net profit margin is significantly faster than that of gross profit margin. Disregarding differences in financial reporting standards, this to some extent indicates a rapid increase in costs during the third quarter.

The Digital Intelligence Research Institute found that Stone Technology's sales expenses for the first three quarters were 1.564 billion yuan, a year-on-year increase of 39.64%. For the third quarter alone, sales expenses increased by 51.53% year-on-year to 679 million yuan. The sales expense ratio for the quarter reached 26.21%, an increase of 9.31 percentage points compared to the same period last year, marking a significant growth.

Sales expenses are the face of a company, but ultimately, it is the products supported by research and development that win the favor and loyalty of customers. Especially in the current context of severe product homogenization and intense price competition, developing high-quality products with better user experiences seems to give customers more peace of mind than relying solely on marketing to drive sales.

Fortunately, Stone Technology is not lacking in commitment to research and development. For the first three quarters, Stone Technology's R&D expenses were 640 million yuan, a year-on-year increase of 42.87%. For the third quarter alone, R&D expenses of 230 million yuan represented a 30% year-on-year increase. However, compared to the growth rate of sales expenses, the growth rate of R&D expenses is clearly lagging.

Reviewing financial reports from the past few years, the Digital Intelligence Research Institute found that the company's sales expenses have been increasing along with the growth of its revenue scale. From 2020 to 2023, Stone Technology's sales expenses surged from 620 million yuan to 1.817 billion yuan, with growth rates of 75.24%, 67.74%, 40.48%, and 37.85% respectively over the four years, far exceeding the growth rate of revenue over the same period.

Simultaneously, from 2020 to 2023, Stone Technology's R&D expenses increased from 263 million yuan to 619 million yuan, with growth rates of 5.80%, 7.55%, 7.37%, and 7.15% respectively over the four years, failing to exceed 10% even by the third quarter of 2024.

Whether compared to revenue growth or sales expense growth, the growth rate of R&D expenses can be described as "glacial," and it is not an exaggeration to say that it represents only symbolic investment.

Currently, China is in the midst of the "Singles' Day" sales event, and overseas, Amazon is holding Prime Day 2.0. Although Stone Technology has publicly stated that it has achieved impressive results during these periods, there are still thousands of complaints against Stone Technology on the HeiMao Complaints App. A company's brand value is hard-earned, and customers have plenty of options. Why choose Stone Technology just because of its high sales expenses and effective advertising?

The Boss Embarks on a 'Second Entrepreneurial Journey'

With products covering over 170 countries and regions worldwide and serving more than 15 million households, Stone Technology's founder, Chang Jing, had already quietly embarked on a "second entrepreneurial journey" when the company ranked first in global sales of robot vacuum cleaners in 2023.

In January 2021, Chang Jing established Shanghai Luoke Smart Technology Co., Ltd. and personally took the helm to start manufacturing cars under the brand name Jishi Automobile.

The Digital Intelligence Research Institute learned from public sources that the company secured funding within 100 days of its establishment, with a post-investment valuation of 240 million USD. In January 2022, the company completed a B-round of funding of 100 million USD, followed by another 200 million USD in April, increasing its post-investment valuation to 2 billion USD. Among the investors were well-known firms such as Sequoia Capital, IDG, and Gaorong Capital.

With such a star-studded lineup of investors, the Jishi 01 was poised for launch. However, amid intensifying industry competition, the Jishi 01 did not have many opportunities to shine. As of August 2024, data from the China Passenger Car Association showed that sales of the Jishi 01 were less than 2,400 units.

Despite the low sales, Chang Jing remains determined. "As a new brand, it is certainly not easy for Jishi to grow from scratch. But Jishi Automobile is a global enterprise, not just targeting the Chinese market."

In the view of the Digital Intelligence Research Institute, Xiaomi is the only company that has been most successful in venturing into the automotive industry in recent years. Relying on in-depth understanding of user needs, Lei Jun has managed to temporarily break through the fiercely competitive industry with Xiaomi Automobile in just a few years and has even ventured into the 800,000 yuan price range.

Stone Technology's products have always focused on differentiated competition, and Jishi Automobile has also developed products tailored to specific user needs. However, these products currently appeal to a niche market. While they can meet the personalized needs of specific consumer groups, automobiles are inherently mass-market products.

Chang Jing mentions that Jishi Automobile is a global brand, but regardless of where one looks globally, competition is fierce. Ultimately, the quality and core competitiveness of the product will speak for itself.

Currently, Chang Jing's vision is halfway realized, and capital injection is urgently needed. Reducing his stake in Stone Technology has become a routine operation for Chang Jing. In September 2023, Stone Technology announced that Chang Jing had reduced his stake and cashed out 392 million yuan through centralized bidding. In June 2024, he further reduced his stake and cashed out nearly 500 million yuan.

The two stake reductions together cashed out nearly 900 million yuan, which is likely to be transferred to support Jishi Automobile, fueling Chang Jing's ambitious vision.