Benefiting from the concepts of smart homes and the Internet of Things, Haier Smart Home and Midea have grown into consumer electronics giants with market values of RMB 300 billion and RMB 600 billion, respectively. However, Wuhan Honghai Technology Co., Ltd. (hereinafter referred to as "Honghai Technology"), the "little brother" following in the footsteps of these giants, has not enjoyed a high market valuation. Since the issuance of its prospectus last year, it has yet to cross the threshold into the A-share capital market.

Honghai Technology plans to conduct an initial public offering (IPO) on the Beijing Stock Exchange, with an expected public offering of no more than 25 million shares, aiming to raise RMB 187.5 million. These funds will be used to advance the construction of a smart manufacturing base for heat exchangers and CNC sheet metal, build a research and development center for household electrical appliance accessories, and supplement working capital. On the 10th of this month, an update was made to the review status of its listing application, and multiple indicators appear to be trending positively. However, the pending resolution of three major issues remains a key concern for the Issuance Examination Committee and investors.

Low capacity utilization rate, high R&D investment may encounter bottlenecks

Honghai Technology plans to invest RMB 143 million in its IPO to build a smart manufacturing base for heat exchangers and CNC sheet metal. Last month, the company acquired a plot of land in Wuhan Economic and Technological Development Zone for RMB 30.93 million to be used for the construction of Wuhan Honghai's new-generation smart manufacturing innovation production base project. However, according to its prospectus, Honghai Technology's capacity utilization rate is not ideal.

Data shows that Honghai Technology's capacity utilization rates for air conditioner structural parts were 52.72%, 94.53%, 98.69%, and 86.62% in different years, respectively, while those for display structural parts were 74.31%, 53.31%, 45.29%, and 58.39%, respectively. These figures reveal that Honghai Technology's production capacity is not fully utilized.

In the first half of 2022 and 2023, Honghai Technology's subsidiary, Thai Guanhong, had capacity utilization rates of 15.61% and 36.46% for metal structural parts of household appliances, respectively. Over the same period, the capacity utilization rates for injection-molded structural parts of household appliances were 16.12% and 38.85%, respectively.

During the reporting period, Honghai Technology's overall capacity utilization rates were 33.82% and 82.65%, respectively. Given these figures, it is evident that Honghai Technology's capacity utilization rate is not high. Therefore, the question of how to absorb this newly added capacity is worthy of attention.

Furthermore, Honghai Technology's R&D investment is not commensurate with its patent output.

According to data from the reporting period, Honghai Technology's R&D expenses as a percentage of revenue were 7.2%, 9.22%, 9.18%, and 5.32%, respectively, while the average for comparable companies over the same period was 4.8%, 4.13%, 4.08%, and 4.07%, respectively. Honghai Technology's R&D investment is significantly higher than that of comparable companies in the same industry, but its patent output is meager.

As of the reporting period, Honghai Technology held a total of 69 patents, including 7 invention patents and 62 utility model patents. Since 2015, Honghai Technology has only applied for one invention patent, which was submitted in August 2021 for a protective panel for an outdoor air conditioner unit. The lack of prominent patent achievements may be one reason for the gradual decrease in its R&D expenses year by year.

Over 90% of revenue comes from five major customers, limiting corporate discourse power

Honghai Technology specializes in the research, design, production, and sales of home appliance accessories such as air conditioner structural parts, heat exchangers, and display structural parts.

In recent years, the company's profits have continued to grow. Specifically, from 2021 to the first half of 2024, Honghai Technology's operating revenues were RMB 188 million, RMB 253 million, RMB 350 million, and RMB 231 million, respectively, with year-on-year growth rates of -37.57%, -45.73%, 38.55%, and 22.92%, respectively.

Over the same period, net profits attributable to shareholders were RMB 25.63 million, RMB 26.66 million, RMB 48.72 million, and RMB 45.24 million, respectively, with year-on-year growth rates of 31.88%, 3.86%, 82.77%, and 51.12%, respectively.

Honghai Technology's business growth is highly dependent on five major customers. From 2020 to the first half of 2023, Midea Group, TPV Technology, Haier Group, Jiujiang Huicheng and its affiliates, and Lixda Group contributed 95.83%, 94.12%, 95.28%, and 94.01% of Honghai Technology's operating revenues, respectively.

During the period from January to June 2023, Midea Group accounted for 48.74% of Honghai Technology's operating revenues, TPV Technology for 16.82%, Haier Group for 16.08%, Jiujiang Huicheng and its affiliates for 9.42%, and Lixda Group for 2.95%.

Honghai Technology's cooperation with Midea Group and Haier Group adopts a dual distribution model, which means that Honghai Technology procures raw materials from these major customers and sells finished products to them. Under this model, Honghai Technology's procurement from Midea Group and Haier Group also accounts for a significant portion of its total procurement. During the reporting period, the proportion of Honghai Technology's procurement from Midea Group to its total procurement in the same period was 63.2%, 68.29%, 72.97%, and 73.54%, respectively. This further exacerbates Honghai Technology's dependence on these major customers.

According to Honghai Technology's response to the inquiry letter, under the dual distribution model, the company's procurement of raw materials from Midea Group and Haier Group is restricted in its use and can only be used to produce and sell products to specific customers in quantitative amounts, limiting the company's autonomy.

At the same time, as raw material prices under the dual distribution model are dominated by customers, Honghai Technology can only passively accept them, resulting in a lack of pricing power for its final products. Heavy reliance on major customers may weaken Honghai Technology's bargaining power in the supply chain and limit the diversity and flexibility of its business.

Market supply and demand imbalance, future growth potential may be limited

As a company specializing in the production of air conditioner accessories, Honghai Technology's future revenue growth potential is directly influenced by the growth potential of the air conditioner market. The growth potential of the air conditioner market is primarily driven by three factors: the development of the real estate market, the prevalence of air conditioners, and market supply and demand conditions.

According to data from the National Bureau of Statistics, in the first half of 2024, the completed area of commercial residential buildings in China decreased by 21.7% year-on-year. This trend indicates a slowdown in the real estate market, which directly affects the growth potential of the air conditioner market.

As of the end of 2023, the number of air conditioners per 100 households nationwide reached 145.9 units, with 171.7 units per 100 urban households and 105.7 units per 100 rural households. China's air conditioner market is approaching saturation, and future growth will rely more on replacement demand rather than new demand.

According to data from AVC Revo, domestic sales of household air conditioners through all channels reached 39.114 million units from January to July 2024, a year-on-year decrease of 10.2%, while retail sales amounted to RMB 132.13 billion, a year-on-year decrease of 13.9%. These figures reflect weakening market demand.

From a macro perspective, the current market demand for electrical accessories such as air conditioners is gradually decreasing, which contrasts sharply with Honghai Technology's low capacity utilization rate of 67%, reflecting an issue of overcapacity on the supply side. This imbalance in supply and demand may trigger price wars, further compressing corporate profit margins.

Specifically for upstream companies in the air conditioning industry, the electrical accessory industry where Honghai Technology operates is characterized by a large number of enterprises, small scale, and low industry concentration. This industry structure leads to fierce market competition. Taking industry leader Deye Industry as an example, its revenue scale has grown rapidly in the past two years, from RMB 3.024 billion in 2020 to RMB 7.48 billion in 2023, continuously encroaching on the shares of other market participants. Given Honghai Technology's relatively small revenue scale, its growth ceiling is also evident.

Additionally, judging from the current ratio and quick ratio indicators in its semi-annual report this year, Honghai Technology's cash flow is relatively tight. However, in 2022, Honghai Technology still conducted a cash dividend of RMB 16 million, which, to a certain extent, reflects the company's emphasis on shareholder returns but may also exacerbate its cash flow pressures.