Mired in patent litigation.
Author | Yu Wan
Editor丨Li Baiyu
Source | Mustang Finance
Many of the electronic products we usually use are not all independently developed and produced by brands, such as Lenovo, which adopts its own manufacturing and ODM models.
ODM is the abbreviation of Original Design Manufacturer, which literally translates to "Original Design Manufacturer", commonly known as "OEM".
From the perspective of mobile phone brands, data from Huatai Securities shows that Xiaomi's external commissioned design accounted for 74% as early as 2020, corresponding to shipments of 114 million units, the largest in the industry.
As an ODM foundry, Huaqin Technology has undertaken the design and production of many brands, such as Redmi 9, Xiaomi Mi Band 7Pro, OPPO A32, Samsung Galaxy A03s are all OEM products of Huaqin Technology.
In 2021, Huaqin Technology submitted a form on the Science and Technology Innovation Board and planned to go public to raise 7.5 billion yuan, but due to insufficient scientific and technological innovation attributes and other reasons, after three rounds of inquiries, it withdrew its listing application and transferred it to the main board of the Shanghai market.
In this IPO, the funds to be raised by Huaqin Technology shrank by a full 2 billion yuan, in addition, the purpose of the fundraising was increased by 600 million yuan to supplement cash flow. In the context of the downturn of the smartphone industry, the foundry Huaqin Technology began to go public to find a way out?
The annual revenue of the foundry business is 83.8 billion
ODM manufacturers refer to the development of corresponding products for brand manufacturers according to a series of needs such as product concepts and specifications, which can cover all processes such as product design and development.
In various industries, there is ODM foundry mode, Huaqin Technology is mainly engaged in the R & D, design and manufacturing of intelligent hardware products, and the product line covers smart hardware products such as smart phones, laptops, tablet computers, smart wearables, etc.
Huaqin technology has a large number of customers, including Samsung, Lenovo, Xiaomi, OPPO, Huawei and many other well-known brands. Taking smart phones as an example, because ODM manufacturers can produce quickly, in large quantities and at low cost, some brand manufacturers prefer to hand over low-end models to foundries for R&D, design and manufacturing.
Source: Huaqin Technology Prospectus
According to Counterpoint data, Huaqin Technology's shipments of three major pieces of smart hardware (smartphones, tablets, and laptops) exceeded 200 million units in 2021, ranking first in the global smart hardware ODM industry. But most of the company's revenue comes from mobile phone products, and in 2021, its smartphones, laptops and tablets accounted for 47%, 26% and 21% of its revenue, respectively.
With OEM R&D, design and production, Huaqin Technology's operating income in 2019-2021 and the first half of 2022 (hereinafter referred to as the "Reporting Period") was 35.3 billion yuan, 59.866 billion yuan, 83.759 billion yuan and 50.108 billion yuan, respectively, and the net profit was 503 million yuan, 2.191 billion yuan, 1.875 billion yuan and 1.023 billion yuan, respectively.
It can be seen that in the face of huge revenue, the gross profit margin of Huaqin Technology is not high, which was 7.87%, 9.9%, 7.75% and 8.36% during the reporting period. According to Oriental Wealth, in the science and technology innovation board previously submitted by the company, only 2 companies had lower gross profit margins than Huaqin Technology in 2020.
Low gross profit margin is a common problem faced by the ODM industry, because there is no brand premium, manufacturers can only continue to compress their profit margins in the face of industry downturn and peer competition.
Wingtech Technology, which also does intelligent hardware ODM, also has a dilemma in this regard. However, the latter's acquisition of Nexperia after the backdoor listing of A-shares has become a global power semiconductor company giant, achieving a gorgeous turnaround.
The founders of Huaqin Technology and Wingtech Technology are all Qiu Wensheng and Zhang Xuezheng are old employees from ZTE. Among them, Zhang Xuezheng was a semiconductor engineer and later served as the assistant to the general manager of ZTE, while Qiu Wensheng was deeply engaged in mobile phone communication.
Some industry insiders pointed out that the biggest difference between ODM and being a brand is that whether you are making things for others or for yourself, the ownership is very clear, and the mentality of doing things for yourself is different. Each company has developed to a certain extent, and the ability to create its own brand design is the soul of the company's continued development.
From the perspective of Huaqin Technology's fundraising use, the company still intends to focus on the intelligent hardware industry and try to get involved in the new automotive electronics field. According to the prospectus, Huaqin Technology intends to raise 5.5 billion yuan, of which 1.5 billion yuan will be used for the Shanghai emerging technology R&D center project, 1.4 billion yuan for Ruiqin Technology consumer electronics intelligent terminal manufacturing project, and the remaining funds include Nanchang notebook intelligent production line reconstruction and expansion project, Huaqin Silk Road headquarters project, Huaqin Technology Wuxi R&D center phase II and supplementary working capital.
Suppliers overlap with customers
In the business process of Huaqin Technology, the cost of raw materials accounts for more than 90% of the main business costs, and the main raw materials purchased by the company include electronic components, structural devices and packaging materials.
During the reporting period, Huaqin Technology had a large number of overlapping suppliers and customers.
For example, Lenovo, Samsung, Asus Computer Co., Ltd., and Acer Co., Ltd. have all been among the top five suppliers of Huaqin Technology, while Samsung, Lenovo, Asus, and Acer are also the top five customers of Huaqin Technology during the reporting period.
This is mainly caused by the Buy & Sell model of Huaqin Technology. The Buy & Sell model is common in OEM foundries, which means that the brand owner owns the intellectual property rights of the product, and the manufacturer is only responsible for production. Under the Buy & Sell model, the brand company directly buys raw materials from suppliers, and then resells the raw materials (without any processing) directly to the OEM, and the OEM assembles the raw materials into finished products and sells them to the brand company.
Since Huaqin Technology is an ODM company independently developed, designed and produced, the SSE inquired whether the company had designated a supplier in this round of IPO.
Huaqin Technology said that the company defined major Buy & Sell customers as customers whose total purchases accounted for more than 35% of Buy & Sell's total revenue during the reporting period. The customer-designated supplier model is one of the company's raw material self-procurement mode, in which the customer designates the supplier, and Huaqin Technology directly places orders and purchases payment to the supplier according to its own procurement system and process, and the customers who cooperate with the company using the designated supplier model mainly include Samsung, China Post Communications, Amazon, etc.
Industry insiders pointed out that the most direct benefit of the Buy & Sell model for foundries is that it increases turnover. It used to be a replacement fee, but now you need to trade materials with brand owners. Turnover has been greatly improved.
The disadvantages of this model are also obvious, because of the difference in account period, more working capital needs to be invested. In addition, enterprises need to recruit a large number of personnel, so labor costs will increase, and order "runs" are prone to occur.
According to the prospectus, at the end of each period of the reporting period, the carrying value of Huaqin Technology's accounts receivable was 7.599 billion yuan, 14.297 billion yuan, 18.385 billion yuan and 19.212 billion yuan, accounting for 41.61%, 53.68%, 53.16% and 53.60% of current assets respectively, showing a growth trend with the increase of operating scale. In addition, the company also warned about labor shortages and rising labor costs.
In addition to the Buy & Sell model, Huaqin Technology also has many situations that are both suppliers and customers, such as Lianchuang Electronics, Tongxingda, Holitech, Guoxian and other companies, the purchased products are mainly screens, cameras, etc., and the sales products are mainly functional ICs, connectors, etc.
Huaqin Technology said that in addition to the Buy & Sell model, other enterprises that are both company suppliers and customers are mainly the company's suppliers, and the company sells certain materials to some suppliers to form the company's customers, and their sales account for less than 15% of the procurement.
A person close to the CSRC told Observer.com that for IPO companies with overlapping customers and suppliers, regulators usually pay attention to: 1. Whether the reasonableness and necessity of both customers and suppliers are in line with the characteristics of the industry; 2. Whether the sales and procurement of both parties belong to independent purchase and sales business or entrusted processing business, and the accounting treatment is confirmed by the total amount method or the net method in terms of accounting; 3. Whether the sales and purchase transactions are fair, whether there is a relationship or other special relationship between the two parties, and whether there is a benefit transmission.
Mired in patent litigation
Different from ordinary foundries, as an ODM manufacturer, Huaqin Technology needs to independently design and develop products, and the company also invests a lot in research and development every year, and the R&D expense rates during the reporting period are 4.35%, 4.06%, 4.32%, 4.9%, higher than the industry average.
However, Huaqin Technology, which is actively engaged in research and development, is deeply involved in patent litigation.
In June 2012, Nokia sued Huaqin Technology for infringing its invention patent, and the court conducted a division case, in which the first instance held that the technical solution of a certain model of mobile phone manufactured and sold by Huaqin Technology fell within the scope of protection of Nokia's relevant invention patent claims, and the Shanghai Higher People's Court made a second-instance judgment on the division in December 2021 and upheld the original judgment.
However, the prospectus shows that in the history of Huaqin Technology, there have been 8 litigation cases between the company and Nokia over patents, of which 7 courts have ruled to dismiss Nokia's claims or allow Nokia to withdraw the lawsuit.
Unfortunately, after ten years of entanglement with Nokia's lawsuit, Huaqin Technology finally successfully got out and restarted the IPO from the main board of Shanghai, and the patent lawsuit struck again.
On August 25, 2022, Bell Northern Research, LLC ("BNR") sued Huaqin Technology and 15 other companies for infringement of 13 of its patents. As of the signing date of the Prospectus, the case has yet to be formally served on the Company in the U.S. District Court for the Southern District of Florida.
Zhang Huijin, a lawyer at Guangdong Guangxin Junda Law Firm, pointed out that major litigation will have an adverse impact on the company's listing. The law stipulates that listed companies must disclose their financial status, operation and major litigation in accordance with laws and administrative regulations, and publish financial and accounting reports once a half year in each fiscal year.
However, Wang Zhibin, a partner at a Shanghai firm, said that the key to whether the litigation will affect the IPO depends on how the issuance review agency judges the impact of the litigation outcome on the company's stable operation. Factors to be considered include the amount of litigation, whether the patented product involved in the case is the company's main product, and so on.
Huaqin Technology believes that the patents involved in the BNR litigation are not the company's core patented technologies, and patent litigation will not lead to ownership disputes over the issuer's core technologies and existing patents.
However, Huaqin Technology also suggests that with the development of business and the improvement of market position, the company may also face the risk of litigation initiated by other competitors or enterprises in the process of operation. Therefore, the Company cannot completely rule out the possibility of future competitors or third parties adopting litigation strategies that hinder the Company's market expansion and business development.
Are you optimistic about the IPO journey of Xiaomi foundry? Can Huaqin Technology enter the capital market smoothly? Let's talk in the comments section.