"Bay Harbor Business Observer" Shi Zifu

In early September, the Beijing Stock Exchange website disclosed Guangzhou Jinghua Precision Optics Co., Ltd.'s (hereinafter referred to as Jinghua Optics) response to the third round of review inquiry letter, and the company's listing process continued to progress.

Public information shows that on March 5, 2015, Jinghua Optics was first listed on the New Third Board, with GF Securities as the lead underwriter. It was delisted on January 22, 2021. On November 30, 2023, Jinghua Optics was listed for the second time, with Haitong Securities as the lead underwriter. Shortly after being listed on the New Third Board, on December 28, Jinghua Optics' IPO application to the Beijing Stock Exchange was accepted.

01

Revenue and net profit continue to decline

Founded in 1997, Jinghua Optics is engaged in the R&D, design, production, and sales of precision optoelectronic instruments, automotive intelligent sensing systems, and precision optical components.

Jinghua Optics' main products are precision optoelectronic instruments, automotive intelligent sensing systems, and precision optical components. Due to increased downstream consumer demand, Jinghua Optics' revenue from precision optoelectronic instruments increased significantly in 2021. However, the following year, due to geopolitical conflicts affecting supply constraints, sales of precision optoelectronics declined year-on-year.

From 2020-2022 and January-June 2023 (hereinafter referred to as the reporting period), Jinghua Optics' revenue from precision optoelectronic instruments was 786 million yuan, 922 million yuan, 777 million yuan, and 274 million yuan, respectively, accounting for 79.44%, 76.96%, 66.78%, and 61.6% of the main business revenue for each corresponding period.

Fluctuations in main business revenue also indirectly affected Jinghua Optics' overall revenue performance. During the reporting period, Jinghua Optics achieved revenues of 1.003 billion yuan, 1.221 billion yuan, 1.195 billion yuan, and 456 million yuan, with the company's revenue declining by 2.13% year-on-year in 2022.

In terms of net profit, in 2020, Jinghua Optics recognized asset disposal gains of 107 million yuan from demolition compensation, resulting in a relatively high net profit for that period. Subsequently, the company's net profit declined slightly over the next two years. During the reporting period, Jinghua Optics' net profits were 172 million yuan, 78.2577 million yuan, 103 million yuan, and 19.8765 million yuan, respectively, with non-GAAP net profits attributable to shareholders of the parent company being 62.1919 million yuan, 52.6463 million yuan, 91.9597 million yuan, and 16.1915 million yuan, respectively.

During the reporting period, Jinghua Optics' comprehensive gross profit margins were 32.64%, 27.69%, 31.48%, and 28.17%, respectively.

According to data disclosed in the second round of review inquiry letter, Jinghua Optics' audited revenue in 2023 was 1.113 billion yuan, a year-on-year decline of 6.81%; net profit attributable to shareholders of the parent company was 64.1263 million yuan, a year-on-year decline of 28.89%; and the gross profit margin was 30.04%, a decrease of 1.44 percentage points from the previous year.

Jinghua Optics stated that the main business revenue in 2023 was 67.7462 million yuan lower than the previous year, primarily due to a decrease of 74.0314 million yuan in revenue from precision optoelectronic instruments. This decline was mainly caused by factors such as slowing consumer demand and the company appropriately increasing inventory stockpiling.

From January to March 2024, Jinghua Optics achieved a revenue of 213 million yuan and a net profit of -5.711 million yuan. For the same period in 2023, the company's revenue was 213 million yuan, with a net profit of -4.5899 million yuan. Compared to the same period in 2023, the company's revenue did not show significant growth, and the declining trend in net profit continued.

From January to June 2024, Jinghua Optics achieved a revenue of 450 million yuan, a year-on-year decrease of 1.36%; and a net profit of 144 million yuan, a year-on-year decrease of 27.44%. Jinghua Optics stated that the decline in net profit was due to external factors such as exchange rate fluctuations, with exchange gains and losses being significantly lower than the previous year.

Based on the three rounds of review inquiry letters, changes in performance and post-period decline risks have been a focus of regulatory attention.

02

High inventory levels, R&D expense ratio far weaker than peers

While revenue grew, Jinghua Optics' inventory levels also showed a significant upward trend in each period.

At the end of each reporting period, the company's inventory book value was 266 million yuan, 491 million yuan, 541 million yuan, and 542 million yuan, respectively, accounting for 39.60%, 56.32%, 55.20%, and 60.35% of current assets; inventory write-downs for each period were 12.0025 million yuan, 15.5735 million yuan, 20.3794 million yuan, and 19.6934 million yuan, respectively.

During the reporting period, the company's inventory turnover rates were 2.42, 2.25, 1.53, and 1.17, respectively, with precision optoelectronic instrument inventory turnover rates being 2.53, 2.78, 2.76, and 2.24, respectively.

As of the end of 2023 and the first half of 2024, Jinghua Optics' inventory book balance was 430 million yuan and 431 million yuan, respectively.

In the second round of review inquiry letter, Jinghua Optics responded to the reason for the continuous decline in inventory turnover rate. Jinghua Optics stated that the relatively low inventory turnover rate during the period was mainly due to the large scale and proportion of precision optoelectronic instruments, resulting in a relatively low turnover rate. As of the end of 2023, the company's precision optoelectronic instrument inventory was 355 million yuan, a year-on-year decrease of 21.44%, indicating a significant de-stocking effect.

Regarding other key performance indicators, during the reporting period, Jinghua Optics' R&D expenses were 26.8927 million yuan, 31.2896 million yuan, 38.3978 million yuan, and 13.0857 million yuan, respectively, accounting for 2.68%, 2.56%, 3.21%, and 2.87% of revenue for the corresponding periods.

During the same period, the average R&D expense ratio of Jinghua Optics' peer companies was 7.21%, 7.49%, 8.56%, and 9.21%, respectively, which were significantly higher than Jinghua Optics' R&D expense ratio for the corresponding periods.

The company explained: First, in terms of development stage, the relevant peer companies are mainly listed companies with relatively strong financial resources and relatively large R&D investments; second, in terms of business positioning, the issuer's precision optoelectronic instruments are primarily consumer-oriented, while Yongxin Optics and Motic mainly produce and sell medical and industrial microscope products, primarily used in life sciences, industrial inspection, and education, with relatively higher R&D expenditures.

From 2021 to 2023 and January-June 2024, Jinghua Optics' net cash flow generated from operating activities for each period was -54.4499 million yuan, 136 million yuan, 93.725 million yuan, and -30.2486 million yuan, respectively.

Jinghua Optics' interim report showed that the net cash flow generated from operating activities in the first half of 2024 changed by 57.68% compared to the previous period, mainly due to a decrease in cash payments for goods purchased and labor services received.

03

Having signed a valuation adjustment mechanism agreement, recently becoming an enforced subject due to labor disputes

As of the signing date of the prospectus, He Jian directly held 55.22% of the company's shares, held a 32.81% partnership share in Jingtou Investment, and served as the executive partner of Jingtou Investment, thereby controlling 1.7% of the company's voting rights through Jingtou Investment. Therefore, He Jian controls a total of 56.92% of the company's voting rights and is the company's controlling shareholder and actual controller. Hou Junhua directly holds 2.49% of the company's shares and is He Jian's brother, constituting a concerted action person.

Shortly after being listed on the New Third Board for the second time, Jinghua Optics chose to rush for a listing on the Beijing Stock Exchange. Behind this decision was a special investment agreement signed between the company's controlling shareholder and other shareholders.

The prospectus shows that from November 2020 to March 2021, He Jian signed agreements with Liu Ruichun, Feng Yusheng, Hu Ying, Xu Dongmei, Wan Qinying, Song Fei, Ancestral Bird Investment, and Wang Xiantao, stipulating equity repurchase clauses for He Jian regarding the aforementioned parties. The main content was: Jinghua Optics intended to submit an application for its initial public offering and listing in China before December 31, 2023 (hereinafter referred to as the "IPO application"). If Jinghua Optics failed to submit the IPO application within this timeframe or explicitly indicated through its actions that it would not submit the IPO application before this timeframe, the aforementioned parties had the right to require He Jian to initiate a repurchase of the Jinghua Optics shares held by them within one month after such events occurred. The repurchase price was the acquisition price, and He Jian should complete the repurchase within three years from the initiation date.

At the same time, Jinghua Optics also stated that on October 17, 2023, He Jian signed termination agreements with Liu Ruichun, Feng Yusheng, Xu Dongmei, Wan Qinying, Song Fei, Ancestral Bird Investment, and Wang Xiantao. From the date of signing the agreement, the original agreements were terminated, including but not limited to the relevant equity repurchase clauses, which were invalid from the outset, and the terminated clauses could not be reinstated.

Bai Wenxi, vice chairman of the China Enterprise Capital Alliance, pointed out to "Bay Harbor Business Observer" that valuation adjustment mechanism agreements often include equity repurchase and cash compensation clauses. If the valuation adjustment clauses are triggered, it may result in the company's actual controller or controlling shareholder repurchasing equity and providing cash compensation to investors, which is highly likely to lead to changes in the company's equity structure and a decline in the company's operating or debt repayment capabilities, thereby harming the interests of public investors.

In terms of internal control, during the reporting period, the company had receivables from related party Jingtou Investment. In 2020 and 2021, the company's other receivables from Jingtou Investment were 52,800 yuan and 58,800 yuan, respectively.

On January 3, 2020, the Xishan Branch of the Kunming Ecological Environment Bureau issued an administrative penalty decision to Kunming Jinghua, stating that Kunming Jinghua had commenced production without completing the acceptance inspection of the required environmental protection facilities, in violation of the "Regulations on the Administration of Construction Project Environmental Protection." The Xishan Branch of the Kunming Ecological Environment Bureau made the following decisions regarding Kunming Jinghua: order the completion of the "three simultaneities" completion acceptance procedures within a time limit and impose a fine of 200,000 yuan.

On August 4, 2022, the Suidong Customs issued an administrative penalty decision to Jinghe Optoelectronics, stating that the party's aforementioned actions violated customs supervision regulations, and the Suidong Customs imposed a fine of 56,000 yuan on Jinghe Optoelectronics.

On May 13, 2021, the US Internal Revenue Service imposed penalties of $10,000, $10,000, and $25,000, respectively, on JourneyNorth, Inc. for failing to file Form 5472 tax forms in accordance with Section 6038A of the Internal Revenue Code for the years 2016, 2017, and 2018.

According to Tianyancha, on November 4, 2024, Jinghua Optics was listed as an enforced subject by the Huangpu District People's Court of Guangzhou City, with an execution target amount of 118,400 yuan, and the case was related to labor disputes.

As of November 26, Jinghua Optics had a total of 11 judicial cases, including 4 labor disputes, 3 online shopping contract disputes, 1 sales contract dispute, and 1 administrative ruling. In 63.6% of the cases, the company was the defendant. (Produced by Bay Harbor Finance and Economics)