Han Chuan's First Loss: Market Value Down $1.6B Post-IPO

The landscape of the automotive market in China is undergoing a significant transformation, marked by fierce competition and fluctuating economic conditions. The competition is no longer confined to traditional automotive manufacturers but extends to the electric vehicle (EV) sector, where companies that provide essential components and technology are now feeling the pressure. A glaring example of this trend is seen in the recent performance of Han Chuan Intelligent (688022.SH), a pioneering company listed on the STAR Market, which reported its first-ever loss since going public five years ago.

On August 28, Han Chuan Intelligent released its mid-year report for 2024. The figures revealed a troubling narrative: both revenue and net profit saw dramatic declines, marking a shift from profit to a staggering loss of 120 million yuan. This half-year loss is close to the total loss suffered in 2023, which amounted to 125 million yuan. The company’s struggle is indicative of broader trends affecting the EV battery sector, where competition and market saturation have intensified.

Notably, Han Chuan's lithium battery business in China has experienced a decline in gross profit margins, dropping by approximately nine percentage points year-on-year in 2023. This issue has been exacerbated by increasing competition within the new energy sector, which has entered a challenging phase of consolidation and reorganization. The company’s performance in both its new energy battery manufacturing and charging business did not meet expectations, leading to significant profit and cash flow challenges.

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Since its IPO in July 2019, Han Chuan has raised a total of 1.649 billion yuan through its initial public offering and additional financing. However, by mid-2023, the cumulative net profit was only 41.15 million yuan, with retained earnings falling to 25.7847 million yuan. On August 29, Han Chuan's stock priced at 9.34 yuan, plummeting by 9.85% as it reached an all-time low since its debut, with a total market capitalization of merely 1.6 billion yuan.

As industry pressures mount, Han Chuan's net losses in the second quarter reached unprecedented levels for the company. According to their financial statement, total revenue for the first half of the year hit 420 million yuan, down 41.03% compared to the previous year, with a net loss that surged 378.5% compared to the same period. The losses were particularly pronounced in the second quarter, where revenue fell by 71.07% on a yearly basis and by 42.37% sequentially, leading to a record net loss for the quarter of 138 million yuan.

Han Chuan's core business focuses on developing intelligent automotive equipment, which is segmented into three primary divisions: intelligent automotive equipment, charging and swapping equipment, and battery intelligent manufacturing equipment. The growth trajectories of the charging and battery manufacturing sectors are intimately linked to the pace of development in the electric vehicle market. As the industry previously experienced rapid investment and expansion, demand for equipment surged; however, the recent slowdown and excess production capacity have resulted in a decline in equipment demand.

In analyzing the reasons for its substantial performance downturn, Han Chuan identified three primary factors: first, the delivery volumes and acceptance rates of automotive equipment fell below expectations, adversely affecting revenue; second, there has been a significant demand for cost reduction in the automotive end market, leading to lower gross margins from domestic customer orders, especially in the battery and charging swap business; and third, the company recorded an asset impairment provision of 28.208 million yuan.

For the first half of 2023, Han Chuan's overall gross profit margin dwindled to a record low of 17.92% since it went public. Although the mid-year report lacked specific data segmented by industry, comparisons with past financial statements indicate that the demand for cost reduction across the domestic market began eroding profit margins as early as 2023, with some business segments experiencing substantial revenue declines. Conversely, the overseas market has proved to be a more lucrative arena, exhibiting higher profit margins.

The report highlights an interesting contrast: the gross profit margins for Han Chuan in international markets were reported at 45.2% and 47.76% for 2022 and 2023, respectively, while domestic margins plummeted from 24.17% to 13.9%, marking a year-on-year decrease of 9.27 percentage points.

Delving into specific business units, the revenue from Han Chuan's charging and swapping intelligent manufacturing gear dropped to 115 million yuan in 2023, sharply falling 60.21% from 289 million yuan in the same period the previous year, with its gross profit margin eroding by 6.16 percentage points. Meanwhile, revenue in the battery intelligent manufacturing sector surged by an impressive 114.16% to 499 million yuan, though this also came with a significant gross margin decrease of 16.01 percentage points. The automotive intelligent manufacturing segment too recorded a decline of 6.49 percentage points in gross margin.

The intensification of competition within the lithium battery sector is becoming increasingly pronounced. A seasoned expert in new energy industry commented that "within the lithium battery supply chain, apart from the Pack segment, there remains a demand for new equipment due to changes in battery size and technology paths. The other segments currently have excess capacity, and the top three manufacturers in specific sub-sectors are capable of fulfilling global demand. The phase of industry consolidation inevitably subjects enterprises to a period of performance challenges."

In light of the intensifying competition in the domestic new energy sector, Han Chuan noted that its growth in new energy battery equipment and charging and swapping gear has lagged behind expectations, significantly impacting both profits and cash flow. To mitigate losses, the company plans to channel its efforts towards project delivery and the collection of accounts receivable, ensuring that high-quality delivery of existing orders takes precedence as long as customers adhere to timely payments.

The company’s cash flow status is concerning, with net cash generated from operating activities in the first half of the year reported at -174 million yuan. Meanwhile, cash reserves have dwindled from 90.97 million yuan at the beginning of the year to approximately 63.5 million yuan, while accounts receivable stood at 630 million yuan, accounting for 27.17% of the total current assets. Additionally, the combined short-term loans and non-current liabilities due within a year reached around 900 million yuan, indicating a precarious financial situation. As of the end of June, the inventory balance was reported at 995 million yuan, representing 42.99% of total current assets, with inventory amounts increasing by nearly 30 million yuan compared to the end of the previous quarter.

To address these challenges, Han Chuan has established a business risk assessment team that evaluates new orders based on gross profit margins, net profit margins, payment terms, payment methods, as well as customers' credit status and payment capabilities, ensuring that new orders can contribute positive profit and cash flow.

The expert further emphasized that “since the beginning of 2023, the lithium battery sector continues to ramp up production, showcasing a clear structural oversupply. Prices at the consumer end have been decreasing rapidly, prompting further cost-cutting measures in the industry and increasing competitive pressures. Moreover, automotive companies have begun taking a central role in the production of power batteries, with many manufacturers shifting toward in-house battery production.” The said expert ultimately cautioned, “as the competitive landscape becomes increasingly crowded, the commercial value of equipment and material suppliers will hinge significantly on competitive pricing advantages, superior quality, and consistency—factors critical to withstanding market challenges.”