Tongguan Mining construction competes with "brother" companies in the same industry, and it is risky to rely too much on competitors for business outsourcing

Red Weekly trainee reporter | borderland

There is a certain competitive relationship between the mining service business of Tongguan Mining Construction and the company under the controlling shareholder Nonferrous Holdings, which is easy to produce fairness problems in operation. In addition, the large outsourcing of the business to a domestic competitor also raises concerns about its own production capacity.

Tongguan Mine Construction Co., Ltd. (hereinafter referred to as "Tongguan Mining Construction"), a subsidiary of Tongling Nonferrous Metals Group Holdings Co., Ltd. (hereinafter referred to as "Nonferrous Metals Holdings"), submitted an application for listing on the main board of the Shanghai Stock Exchange in July 2020. Judging from the information disclosed in the prospectus, the company's revenue and performance were still flat in the case of a large number of credit sales during the reporting period, and even negative growth in some years.

In addition to the engineering construction business, the proportion of mining service business in Tongguan Mining Construction is also increasing year by year, but there is a certain competitive relationship between this business and the company under the controlling shareholder Nonferrous Holdings. In addition, Tongling Mining's mining services business has a high subcontracting rate and is heavily operationally dependent on a domestic competitor, raising concerns about its own business capabilities.

There is a possibility of competition with the controlling shareholder's company

The prospectus discloses that the two main businesses of Tongguan Mine Construction are mine engineering construction and mining operation management, the company is proficient in various large-scale mining technologies and mining methods, has exquisite process technology in mining operations, and the main business volume is also based on the amount of excavation, support and mining, so in essence, the company is a mining enterprise.

Nonferrous holding group is the controlling shareholder of the company, most of its subsidiaries also around the mine business, such as Tongling nonferrous metals and other 9 companies the scope of business covers mining activities, if from the perspective of business projects, Tongguan Mining Construction and these mining enterprises are a certain degree of competition in the same industry, but in the prospectus, the company explained that the mining operation and management business income is labor income, different from the above 9 companies income types, such as the above enterprises have mining rights and Tongguan Mining Construction does not.

From the perspective of substance over form, such an explanation is far-fetched, because Tongguan Mining Construction cannot simply determine that it does not constitute "competition in the same industry" based on the type of product sales revenue, whether there are mining rights, etc. As a mine development service enterprise, although Tongguan Mine Construction does not have mining rights, it can replace the mining enterprise customers through mining business contracting to carry out a full range of mine mining operation services, and its business involves mine development, mining accuracy, cutting, transportation, lifting, water supply and drainage, ventilation, mechanical and electrical and other multi-system operation and management, and it is necessary to organize the implementation of geological prospecting, water exploration and drainage, excavation engineering and other production processes, and the actual mining activities are the same as the independent mining process activities of mining enterprises.

It is worth mentioning that when Tongguan Mining Construction disclosed the enterprises involved in mining activities under its controlling shareholders, it also omitted two companies - China Railway Construction Tongguan Investment Co., Ltd. and Anhui Jinlei Mining Co., Ltd. Wind shows that the business scope of the former industrial and commercial information includes the "non-ferrous metal mining, smelting and processing" project, while the latter's business scope includes the open-pit mining project of limestone for cement. In terms of business scope, both companies are also involved in mining activities.

Business conduct depends on competitors

From the data disclosed in the prospectus, during the reporting period (2017 to June 30, 2020), the outsourcing rate of mining operation and management business of Tongguan Mining Construction is very high, although the company claims that "the company only subcontracts non-core links", but the reporter found that the company has subcontracted some mining operation management projects, which are only responsible for the overall planning of the project, technical process support and other preliminary links, and the core operation implementation links are completed by outsourcing suppliers, during the reporting period, The proportion of subcontracting costs for mining operations and management projects remains at around 60%.

According to the data, Tongguan Mine has built three mining operation and management projects, the largest of which is "Dahongshan Iron Ore No. 1 Copper Ore Belt 1.5 million tons per year mining filling and III. and IV. ore body filling project" (hereinafter referred to as "Dahongshan Mining"), the project revenue proportion is very large, the company subcontracted the project business to Sichuan Zhizhi and Construction Engineering Co., Ltd. (hereinafter referred to as "Zhizhihe"), the procurement contract amount during the reporting period was 137.484 million yuan, 71.3346 million yuan, 112.1304 million yuan and 51.7613 million yuan. During the reporting period, Zhizhong Zhihe has been the company's largest supplier, and the company's procurement amount has always accounted for about 80% of the subcontracting cost of mining operation management business.

The company's mining operation business has a strong dependence on the subcontracting of Zhizhong Zhihe's business, and after outsourcing the mining engineering business in Dahongshan to Zhizhongzhihe, due to the company's lack of participation in the core links of the project, its bargaining power is insufficient: from 2017 to 2019, although the revenue contribution of the company's mining operation management business accounts for 20.91%, 19.81% and 25.69% respectively, the gross profit accounts for only 12.19%, 8.59% and 5.93%, and the gross profit margin is only 7.75%, respectively. 5.96% and 3.49%, which means that the company's profit margin is declining year by year.

Zhizhihe and Tongguan Mining Construction are the same as the mine engineering construction general contracting qualification, its main business includes mining engineering, copper ore mining and dressing, lead and zinc mining and dressing, iron ore mining and dressing, phosphate ore mining and dressing and rare earth mining and dressing, etc., is an important domestic competitor of Tongguan Mining Construction, which means that once the company's mining enterprise customers bypass themselves and cooperate directly with Zhizhong Zhihe, it will not only affect the company's mining operation service capabilities, but also lead to direct competition between the company and Zhizhihe in the field of mine operation and management.

In fact, in customers such as Dahongshan Mine, Zhizhihe has begun to compete directly with the company. For example, in February 2021, Zhizhihe won the bid for the project of "1 million t/a mining and dressing project of Yuxi Dahongshan Mining Co., Ltd. In the upper section of the slope of the mining area (225m~305m section) and related flat lane boring, support and installation projects". In July 2021, Jiangxi Mechanical and Electrical Equipment Bidding Co., Ltd. held the bid opening meeting of "Tiangushan Green Building Materials Ecological Industrial Park with an annual output of 2.33 million tons of aggregate mining and processing contracting project (EPCO)", and the list of bidding candidates also included Tongguan Mine Construction and Zhizhong Zhihe. There are many similar situations, and in general, the two have become direct competitors in actual operation.

Excessive credit sales in operation increase the pressure on payment collection

Or it is the excessive dependence on competitors in business development, resulting in the revenue performance of Tongguan Mining construction has been flat. During the reporting period, the company's operating income was 1,056,996,000 yuan, 982,711,000 yuan, 1,036,010,100 yuan and 420,850,000 yuan, respectively, and the growth rates in 2018 and 2019 were -6.75% and 6.94%, respectively.

It is worth mentioning that under the flat revenue, the accounts receivable, bills receivable and receivables financing of Tongguan Mining Construction during the reporting period have increased all the way, reaching 397.7582 million yuan, 414.7126 million yuan, 540.5250 million yuan and 405.8984 million yuan respectively, with growth rates of 4.26% and 30.34% in 2018 and 2019, respectively. The growth rate of the amount of receivables is higher than the growth rate of revenue, indicating that a large part of the company's operating income in 2018 and 2019 comes from operating claims.

From the perspective of the proportion of operating claims to operating income, the reporting period reached 37.63%, 42.20%, 52.17% and 96.45% respectively, showing a rapid growth trend year by year. In addition, the accounts receivable turnover ratio also decreased from 3.31 to 1.32 during the reporting period. Overall, the continuous growth of operating claims on the company's working capital occupation is obviously not to be ignored.

From the perspective of accounts receivable customers, mainly customers of mine engineering construction business, from 2017 to January to June 2020, the proportion of business revenue to main business income was 78.23%, 79.88%, 73.63% and 68.54%, respectively, and the overall revenue proportion showed a downward trend. Considering that the construction of mining projects is the main source of the company's main business income, from the fact that the company's actual revenue is only maintained at about 1 billion yuan, a large number of credit sales to large customers have not been exchanged for the growth of the company's income, on the contrary, it also makes people suspect that the company's ability to obtain orders for this business is insufficient.

More importantly, once the repayment of large customers is not timely, or a large number of accounts receivable cannot be recovered, the generation of a large number of bad debts will inevitably have a significant impact on the company's performance. From the disclosure data of the prospectus alone, in 2017, 2018, 2019 and January to June 2020, the company's asset impairment losses reached 11.8195 million yuan, 7.2296 million yuan, 4.1117 million yuan and 00,000 yuan, respectively, which is obviously not a small amount for the Tongguan mining construction with a net profit of only 40 million yuan to 60 million yuan.

Procurement data ticks abnormally

In addition to the problem of revenue, if you further calculate the data on the procurement of Copper Crown Mine Construction, it can be found that the company also has concerns in this regard.

The prospectus discloses that the amount of purchases purchased by Tongguan Mining Construction from the top five suppliers in 2019 was 229.1741 million yuan, accounting for 37.30% of the total procurement, which deduced that the total procurement amount of Tongguan Mining Construction in the current period was about 614.4078 million yuan.

In the consolidated cash flow statement for 2019, Tongguan Mining Construction's "cash for purchasing goods and accepting payment for services" was 542.2011 million yuan, and after excluding the impact of the increase of 1.3859 million yuan in advance payments in the current year, the cash expenditure related to procurement was 540.8152 million yuan. If the company's purchase VAT situation is not considered first, and the purchase amount without tax is hooked with cash expenditure, it can be found that the tax-free purchase in 2019 is 73.5926 million yuan more than cash expenditure. Theoretically, this part should be reflected in an increase in operating debt.

In fact, the total amount of accounts payable and bills payable of Tongguan Mining Construction in 2019 reached 279.2471 million yuan, which was not only not increased compared with the total of the same projects in 2018, but also decreased by 11.4661 million yuan, a difference of 85.0587 million yuan compared with the theoretical increase, which reflects that the company's procurement amount of at least 85.0587 million yuan is not supported by corresponding data.

A similar situation existed in 2018. The prospectus discloses that the amount of tongguan mining construction procurement from the top five suppliers in 2018 was 274.7882 million yuan, accounting for 42.27% of the total procurement, which deduced that the total procurement of tongguan mining construction in the current period was about 650.0785 million yuan.

In the same period, Tongguan Mining Construction's "cash for purchasing goods and accepting payment for labor services" was 620.1809 million yuan, and after excluding the impact of the decrease of 1.9717 million yuan in advance payments in the current year, the cash expenditure related to procurement was 622.1526 million yuan. If the company's procurement VAT situation is not considered first, the purchase amount without tax is hooked with the cash expenditure, and it can be found that the tax-free purchase in 2019 is 27.9259 million yuan more than the cash expenditure. Theoretically, this part should also be reflected in an increase in operating debt.

In fact, the total accounts payable and bills payable of Tongguan Mining Construction in 2018 reached 290.7132 million yuan, which was not only no increase compared with the total data of the same project in 2017, but also decreased by 31.7973 million yuan, which was 59.7232 million yuan less than the theoretical value.

It is worth noting that the above results are still differences in the absence of VAT, and these differences will be more obvious if the impact of VAT is taken into account.

(This article was published in Red Weekly on October 30, and the reference to individual stocks is only an example analysis, and there is no trading recommendation.) ）