US Stock IPO Preview | Yusheng Electronics' Liquidity Crisis: Sharp Decline in Net Profit, High Debt-to-Asset Ratio

With the global economy picking up in recent years, the strong growth of emerging industries such as new energy vehicles, Internet of Things, 5G communication, as well as the recovery of the consumer electronics market including smartphones and smart home appliances, the global electronic components industry market continues to expand. According to data, the global electronic components industry market size in 2022 is approximately $689.881 billion, a year-on-year increase of 2.6%.

Against the backdrop of increasing demand for electronic components in China, electronic component provider Yusheng Electronics from Hong Kong is sprinting to list on the NASDAQ with the stock code EIL.

It is reported that the company plans to raise up to $10 million. Of this, approximately 20% of the funds raised will be used to expand Yusheng Electronics' research and development; about 20% will be used to enhance Yusheng Electronics' industry position and strengthen business development; about 25% will be used to strengthen Yusheng Electronics' project and engineering team to expand the scale and scope of engineering and project development; about 25% will be used to improve Yusheng Electronics' pre-sales and after-sales support by expanding Yusheng Electronics' engineering support center (office) and enhancing Yusheng Electronics' technical expertise, with the remaining funds mainly used for general administrative and operating expenses.

Revenue growth momentum not evident, net profit in a downward trend

Looking at its development history, since 1992, Yusheng Electronics has been focusing on identifying, purchasing, selling, and distributing high-quality electronic components from suppliers in Japan, South Korea, Europe, the United States, and Asia. In the early 2000s, given the rapid growth and huge potential of the sensor market, as well as the experience and technical capabilities accumulated over the past decade, the company expanded its product supply and entered the sensor market, obtaining four key sensor product lines since the early 2000s. Revenue from the sensor product line increased from 10% in 2003 to 66% in 2023.

Thus, the company has formed a business layout to provide high-quality electronic components, sensors, and one-stop engineering solutions to global customers. From passive to active, from capacitors to power ICs, to various precision sensors, Yusheng Electronics' product line is like a precise gear driving many industries - from automotive manufacturing to industrial automation, from computing and communication to household appliances, and even healthcare, medical, and power management systems.

However, it is worth noting that despite Yusheng Electronics' long establishment history and relatively rich product line, the company also faces development risks such as lack of evident revenue growth momentum and high asset-liability ratio.

In 2022 and 2023, the company achieved revenues of approximately HKD 662 million and HKD 664 million respectively, a year-on-year growth of 0.3%; looking further back, the company's revenue was HKD 660 million in 2021, also with a 0.3% year-on-year growth, indicating insignificant growth momentum over the two years.

In comparison to the lack of evident revenue growth momentum, Yusheng Electronics' net profit is in a downward trend. In 2022 and 2023, the company's net profits were approximately HKD 19.878 million and HKD 2.3531 million respectively, a year-on-year decrease of 88.16%.

In terms of business segments, in the past two years, revenue from electronic components was approximately HKD 238 million and HKD 228 million, accounting for approximately 35.97% and 34.32% of total revenue respectively; while revenue from sensors was approximately HKD 424 million and HKD 435 million, accounting for approximately 64.03% and 65.53% of total revenue respectively Both business segments are showing growth trends.

The company's revenue from selling products is mainly concentrated in industries specializing in automotive and industrial/automation businesses. During the same period, the revenue from automotive applications accounted for approximately 53.48% and 50.91% respectively; while industrial/automation applications accounted for 29.11% and 28.33% of the total revenue.

In terms of regions, the revenue from Hong Kong during the same period was approximately 354 million yuan and 377 million yuan, accounting for approximately 53.56% and 56.81% of total revenue respectively; while from mainland China, it was approximately 307 million yuan and 287 million yuan, accounting for approximately 46.44% and 43.19% of total revenue respectively. Revenue from Hong Kong has increased, while revenue from mainland China shows a declining trend.

While net profit sharply declined, the company's liquidity also appears to be severe.

From 2022 to 2023, the net cash provided by operating activities of the company was negative, approximately -31.642 million yuan and -6.255 million yuan respectively; while the cash and cash equivalents during the same period were 54.081 million yuan and 55.727 million yuan. The reason for the negative operating cash flow is mainly due to the continuous increase in the company's accounts receivable, with the total accounts receivable of the company in 2023 being approximately 17.67 million yuan, a year-on-year increase of 11.92%.

While the worrisome trend of operating cash flow continues, Yusheng Electronics' debt level is also relatively high. During the period, the company's asset-liability ratio remained high, at approximately 80.2% and 76.0% respectively, indicating a certain debt repayment pressure.

Industry Continues to Expand, Competition Pressure Persists

Looking at the market space of electronic components and sensors, Yusheng Electronics' "survival environment" is not as easy as it seems.

In terms of the sensor market, in recent years, national policies have been favorable, boosting market expansion. According to PrecedenceResearch data, the global sensor market was approximately 204.8 billion USD in 2022, and is expected to reach around 508.64 billion USD by 2032, with a compound annual growth rate of approximately 8.4%.

Among them, the Asia-Pacific region accounts for about 40% of the global sensor market share. The Asia-Pacific region has the fastest growth rate and is expected to account for approximately 42% of the global sensor market by 2032. Compared to developed countries, due to the development trends of smart devices and industries, the application of sensors in the Asia-Pacific region is still expanding. The main sensor markets in the Asia-Pacific region are countries like mainland China and Japan.

Taking the automotive sensor market as an example, due to stricter government regulations on harmful gas emissions and the increasing application of pressure sensors in the automotive field, as well as the continuous growth of custom-designed electronic devices used in vehicles, the demand for sensors in the automotive industry is significantly increasing. It is reported that the global automotive sensor market is expected to reach around $40.39 billion in 2022 and is projected to reach approximately $67.2 billion by 2030, with a high compound annual growth rate of 6.57%.

In terms of electronic components, according to Mordor Intelligence, the active and passive electronic components market is expected to have a compound annual growth rate of about 8.79% from 2023 to 2028, with the Asia-Pacific region expected to be the fastest-growing market.

Therefore, it can be seen that Yusheng Electronics is in a continuously expanding track in both the sensor and electronic component sectors. However, the competitive pressure on Yusheng Electronics remains unabated.

On the one hand, operating in a fiercely competitive market may lead the company to sacrifice profits to gain market share. Yusheng Electronics stated in its prospectus that although the company has established long-term relationships with major customers, it cannot guarantee that some of its competitors may have more financial and human resources, more competitive pricing strategies, or closer relationships with electronic component manufacturers than Yusheng Electronics. If the company's competitors offer cheaper alternatives, adopt aggressive pricing to increase their market share, or have the ability to provide products with superior performance, functionality, or efficiency, the company may lose customers, which could adversely affect its business, financial condition, and operating performance.

On the other hand, over 90% of the company's revenue comes from existing customers, showing a lack of strength in developing new customers. Yusheng Electronics openly stated that competition in the electronic component industry is fierce, and the company's ability to obtain purchase orders is a key factor for success. The company's success requires maintaining good relationships with existing customers and developing new relationships with potential customers. However, if the company fails to successfully obtain orders from existing customers and secure a sufficient number of recurring and/or new purchase orders, Yusheng Electronics' operating performance may also be adversely affected.

In conclusion, despite the optimistic growth prospects of Yusheng Electronics' business track, the company's weak revenue growth, declining net profit, and high debt-to-asset ratio are constraints on its stable development