After three consecutive losses from 2020 to 2022, East China Heavy Machinery (002685. SZ) has yet to deliver satisfactory answers to investors in 2023. A few days ago, Huadong Heavy Machinery disclosed its 2023 annual report, during which revenue, attributable net profit, and net profit after deducting non-profits all fell sharply, of which the attributable net profit loss exceeded 800 million yuan. In terms of a single quarter, only Q1 was profitable last year.
Under the pressure of operation, last year, Huadong Heavy Machinery promoted the divestment of loss-making CNC machine tool business, while promoting the transformation and upgrading in the photovoltaic business. However, Huadong Heavy Machinery's "chasing light" has not achieved good results, and the cell business sold at a loss last year, with a gross profit margin of -63.74%. This year, photovoltaic is still the key business of East China Heavy Machinery. However, under the situation of overcapacity, the photovoltaic industry has accelerated its reshuffle, and this year may face more brutal challenges.
Credit and goodwill impairment eat up profits
According to the financial data, in 2023, the operating income of Huadong Heavy Machinery will be about 671 million yuan, a year-on-year decrease of 54.53%, the corresponding attributable net profit loss will be about 811 million yuan, a year-on-year decrease of 354.13%, and the net profit loss after deducting non-profits will be 824 million yuan, a year-on-year decrease of 340.2%.
It is understood that during the reporting period, Huadong Heavy Machinery was mainly engaged in high-end equipment manufacturing business based on "container handling equipment" and "CNC machine tools"; at the same time, the company expanded the photovoltaic cell module business and promoted the transformation and upgrading of the business structure.
Behind the decline in revenue, several major product lines of East China Heavy Machinery have declined to varying degrees. According to the product structure, Huadong Heavy Machinery's revenue mainly comes from container handling equipment, CNC machine tools, CNC equipment materials, battery cells and others. Among them, container handling equipment is the largest source of revenue, and the revenue of this product will account for 55.25% of the total revenue in 2023, achieving a revenue of about 371 million yuan, a year-on-year decrease of 62.95%.
CNC machine tools, as the second largest product in terms of revenue, fell 52.89% year-on-year to 209 million yuan last year. CNC equipment and materials accounted for only 2.11% of the revenue last year, and the revenue of this product was "halved" year-on-year, contributing only 14.1354 million yuan of revenue.
As a new product line, the revenue of East China Heavy Machinery's photovoltaic business last year was 77.2025 million yuan, accounting for 11.5% of the overall revenue, which is difficult to form a pull on the overall performance.
Container handling equipment and CNC machine tools, as the main products of East China Heavy Machinery's revenue, saw varying degrees of decline in sales and production last year. Among them, the sales volume and production volume of container handling equipment decreased by 53.23% over the same period of last year, which was caused by the impact of unfinished orders in hand during the reporting period, and the sales volume and production volume of CNC machine tools decreased by 47.91% and 45.67% respectively compared with the same period last year, which was caused by the decline in demand in the consumer electronics industry and the decline in the business of Runxing Technology during the reporting period.
Titanium media APP noticed that credit impairment and asset impairment have become the "culprits" that devoured the profits of East China Heavy Machinery.
In 2017, Huadong Heavy Machinery purchased all the shares of Runxing Technology at a price of 2.95 billion yuan from Zhou Wenyuan and others, and transformed into a CNC machine tool. From 2017 to 2019, Runxing Technology completed the performance VAM agreement as promised and became the most profitable subsidiary of East China Heavy Machinery. Since 2020, Runxing Technology has suffered serious losses and led to the impairment of goodwill in East China Heavy Machinery.
In 2023, Huadong Heavy Machinery will make a total of 772.9315 million yuan of credit impairment provisions and asset impairment provisions, of which the asset impairment loss will be about 488 million yuan. Among the asset impairment losses, a provision for goodwill impairment was RMB366 million.
In a single quarter, Huadong Heavy Machinery only achieved profitability in Q1 last year, with continuous losses in Q2, Q3 and Q4, and the attributable net profit loss showed an upward trend. According to the data, the attributable net profit of East China Heavy Machinery in Q2, Q3 and Q4 last year was 70.644 million yuan, 76.2752 million yuan and 689 million yuan respectively.
It is estimated that from 2020 to 2023, the cumulative loss of attributable net profit in 4 years will exceed 3.4 billion yuan. Not only that, the shareholders of Huadong Heavy Machinery have not been able to enjoy the benefits of cash dividends in the past four years.
In the first quarter of this year, the revenue of East China Heavy Machinery was 152 million yuan, down 43.81% year-on-year, and the attributable net profit was 20.8748 million yuan, down 16.93% year-on-year.
The sale of loss-making assets was not completed, and the receiver relied on selling shares to raise money
In the absence of a significant improvement trend in the CNC machine tool business, Huadong Heavy Machinery launched a plan to sell Runxing Technology last year. After three unsuccessful public listings and transfers, Zhou Wenyuan, the original actual controller of the target, wanted to take over the offer at a price of 700 million yuan through its actual control company, Guangdong Yuanyuan Technology Co., Ltd. (hereinafter referred to as "Guangdong Yuanyuan"). The deal was finalized in December 2023.
According to the latest announcement, the sale of assets is still being implemented. Behind this, the financial strength of the receiver has been controversial.
According to the "Equity Transfer Agreement" signed by Huadong Heavy Machinery and Zhou Wenyuan and Guangdong Yuanyuan, Guangdong Yuanyuan will pay the above transaction consideration in cash, and within 10 days after the signing of the "Equity Transfer Agreement", Guangdong Yuanyuan shall pay a deposit of 20 million yuan to Huadong Heavy Machinery, and then pay the equity transfer money in three installments. That is, Guangdong Yuanyuan shall pay 20% (140 million yuan) of the total equity transfer price within 10 working days after the effective date of the Equity Transfer Agreement, 31% (217 million yuan) of the total equity transfer price within 30 working days after the effective date, and the remaining 49% (343 million yuan) shall be paid within 12 months after the asset delivery date.
In February this year, Huadong Heavy Machinery mentioned in the announcement that Guangdong Yuanyuan had paid 20 million yuan for equity transfer, and the progress of Guangdong Yuanyuan's fundraising was delayed. On February 20, 2024, the company received a notification letter from Zhou Wenyuan and Guangdong Yuanyuan, stating that it would abide by the relevant agreements, actively raise funds through various methods such as reducing shareholdings, personal and financial institution financing, and planned to continue to pay 120 million yuan for equity transfer before March 20, 2024.
In order to "repurchase" the loss-making assets of East China Heavy Machinery, Zhou Wenyuan has twice "reduced his holdings" to raise funds.
According to the third quarter report of 2023, Zhou Wenyuan is the largest shareholder of East China Heavy Machinery, with a shareholding ratio of 13.26% at that time. Following Zhou Wenyuan's reduction of 5% of the shares of Huadong Heavy Machinery through agreement transfer in December last year, on the evening of March 14 this year, Huadong Heavy Machinery issued an announcement that Zhou Wenyuan continued to transfer 50,384,500 shares of Huadong Heavy Machinery to the Tianchen Jinzhou No. 1 Private Securities Investment Fund managed by Suzhou Tianchen Investment Management Co., Ltd., accounting for 5% of the company's total share capital. The transaction price of the share transfer was 3.6 yuan, and the total transaction amount was 181 million yuan.
After the completion of this round of transfer, the number of shares held by Zhou Wenyuan decreased to 32,864,191 shares, and the proportion dropped to 3.26%. If roughly calculated based on the latest stock price of 2.77 yuan, the market value of Zhou Wenyuan's shareholding is 91 million yuan. At present, even if the follow-up continues to sell, it is still difficult to support the subsequent payment of consideration.
The PV business is difficult to do, and the gross profit margin of cells is -63.74%
While selling assets, Huadong Heavy Machinery is trying to find new profit growth points by betting on photovoltaics.
Since March 2023, Huadong Heavy Machinery has expanded its photovoltaic cell module business and promoted the transformation and upgrading of its business structure. Since the official announcement of "chasing light", the company has disclosed two photovoltaic projects: one is the investment and construction of a "10GW high-efficiency solar cell production base project" in Peixian Economic Development Zone. The total investment in fixed assets of the project is planned to be 2 billion yuan, mainly producing "3.5+6.5GW182/210mm" large-size TOPCON and HJT cells. The other is located in Bozhou City, Anhui Province, to invest in the construction of "10GW N-type high-efficiency solar cell production base project", the project plans to invest a total of about 6 billion yuan to build new N-type high-efficiency solar cells.
According to the 2023 annual report, Huadong Heavy Machinery invested in the construction of the first high-efficiency N-type solar cell production base in Pei County, Xuzhou, and completed the first batch of production lines and the first photovoltaic cell production line in a record time, and the first phase of production capacity increased from 3.5GW to 4GW beyond expectations.
However, in 2023, Huadong Heavy Machinery's photovoltaic business is mainly in the stage of new base construction and capacity ramp-up, and in the fourth quarter of 2023, the overall price of the photovoltaic industry chain has declined seriously, and the price of cells has fallen rapidly. Last year, the gross profit margin of Huadong Heavy Machinery's cell business was -63.74%.
In the 2024 business plan, photovoltaic is still the focus of East China Heavy Machinery. For capacity planning, Huadong Heavy Machinery has mentioned that it plans to build 30GW N-type high-efficiency photovoltaic cell production capacity by 2024 and 50GW N-type high-efficiency photovoltaic cell production capacity by 2025.
Photovoltaic is a capital-intensive industry, and a large amount of capital investment is required in the early stage to achieve the planned production capacity. As of the end of the first quarter of this year, the monetary funds of Huadong Heavy Machinery were 353 million yuan. Due to the new photovoltaic business, the net cash flow generated by operating activities in Q1 2024 will be -59.9661 million yuan.
Huadong Heavy Machinery also mentioned that the sale of Runxing Technology assets can further thicken the company's capital reserves, which will help to invest in new business sectors such as photovoltaic cell module production and manufacturing. But these funds are obviously a drop in the bucket for billions of investments.
An industry source said that in the past two years, driven by the large-scale expansion of enterprises, the photovoltaic industry is in a stage of "oversupply" situation.
At the beginning of last year, cell prices were RMB 1.2/W. According to the latest quotations, cell prices continued to show a slow downward trend, with only G12PERC cell prices rising slightly to RMB 0.36/W to RMB 0.37/W due to the impact of end projects.
Some analysts predict that PV installation growth in 2024 is at a time when module prices remain at record lows, and some manufacturers will sell at a loss this year, especially polysilicon, wafer, cell and module manufacturers will struggle to maintain profitability. (This article was first published in Titanium Media APP, author|Liu Fengru)