Bay Harbor Business Observer, Shi Zifu, Wang Lu

On March 29, Guangzhou Jinghua Precision Optics Co., Ltd. (hereinafter referred to as Jinghua Optics) received the second round of review inquiry letter from the Beijing Stock Exchange.

The second round of review inquiry letter involves five issues, including whether there is a risk of continuous performance decline, further explaining the control over overseas subsidiaries, the authenticity of inventory and the adequacy of inventory depreciation provisions, insufficient innovative disclosure by the issuer, and the necessity and rationality of further demonstrating and analyzing the fundraising investment projects.

Obviously, these issues of Jinghua Optics have received high attention from regulators and the outside world.

01

Revenue and net profit decline, significant drop in R&D expenses

According to the filing documents and inquiry responses, (1) Jinghua Optics' product sales structure changed in 2022, with a decline in overseas revenue from precision optoelectronic instruments and an increase in revenue from automotive intelligent sensing systems. The audited operating revenue for 2023 was 1.113 billion yuan, a year-on-year decline of 6.81%; net profit attributable to shareholders was 64.1263 million yuan, a year-on-year decline of 28.89%; and R&D expenses for 2023 were 26.1255 million yuan, a year-on-year decrease of 32%.

(2) During the reporting period, the issuer's revenue from precision optoelectronic instruments from platform customers continued to decline, while revenue from supermarket and retailer customers first increased and then decreased, mainly due to supply disruptions of the Pulsar brand and some customers reducing their purchases of sports cameras.

(3) The issuer's overseas offline customers for precision optoelectronic instruments mainly place purchase orders with the company through email or EDI systems. There are seasonal fluctuations in the sales of precision optoelectronic instruments.

The review inquiry letter requested the issuer to explain: (1) Analyze the reasons for the decline in revenue and net profit in 2023 by combining different business income structures and gross profit margins, gross profit changes, sales to major customers of different businesses and year-on-year changes, the impact of exchange rate fluctuations on performance, and changes in expenses, etc. Whether the factors leading to the performance decline are sustainable, and whether there is a risk of a significant decline in the issuer's post-period performance. (2) Explain the reasons and rationality for the significant decline in R&D expenses in 2023 by combining the progress of R&D projects and detailed composition in 2023, and whether there is a situation of adjusting performance by reducing expenses. (3) Explain whether the calculation of exchange gains and losses is accurate based on the issuer's foreign currency monetary funds, foreign currency receivables and payables, etc.; conduct sensitivity analysis on exchange rate fluctuations, and simulate and calculate the impact of exchange rate fluctuations on the issuer's gross profit margin, exchange gains and losses, and net profit. (4) Further analyze the rationality of the continuous decline in revenue from platform customers and the first increase and then decrease in revenue from supermarket and retailer customers for the issuer's precision optoelectronic instruments by combining the income changes and reasons of major customers in different sales channels; explain the specific situation of supply disruptions for the Pulsar brand based on the location of Pulsar brand supplier Yukon, and the reason for still being able to purchase from Yukon. (5) The issuer's seasonal fluctuation characteristics of operating performance for precision optoelectronic instruments, cooperation mode with overseas offline customers, sales return and exchange policies and accounting treatment of overseas entities, and whether there are significant differences and reasons compared with companies with similar sales models and customer groups. Please request the sponsor institution and the reporting accountant to verify the above matters and issue clear opinions, explaining the verification process, methods, and conclusions.

Jinghua Optics submitted its prospectus on December 28, 2023, with financial data ending in June 2023. From 2020 to 2022 and the first half of 2023 (reporting period), the company achieved revenues of 1.003 billion yuan, 1.221 billion yuan, 1.195 billion yuan, and 456 million yuan, respectively; net profits attributable to shareholders were 138 million yuan, 63.366 million yuan, 91.5613 million yuan, and 18.0343 million yuan, respectively; gross profit margins were 32.64%, 27.69%, 31.48%, and 28.17%, respectively.

Obviously, from a longer-term perspective, the company's revenue has stagnated, net profit has declined year after year, and gross profit margin has fluctuated.

At the end of each reporting period, Jinghua Optics' inventory book value was 266 million yuan, 491 million yuan, 541 million yuan, and 542 million yuan, respectively, accounting for 39.60%, 56.32%, 55.20%, and 60.35% of current assets, respectively. The inventory scale is relatively high. During the reporting period, the company's inventory depreciation was 12.0025 million yuan, 15.5735 million yuan, 20.3794 million yuan, and 19.6934 million yuan, respectively.

The review inquiry letter raised questions about the reasons and rationality for some goods not having a sales price in 2023 and not making provisions for inventory depreciation; further analyzing whether the issuer has inventory unsold or significant impairment risks based on the above situation and the significant decline in revenue for sports optics products in 2022, and whether it may have a significant adverse impact on the issuer's ability to continue operating. Explain the reasons and rationality for the continuous decline in inventory turnover rates of different businesses and being lower than the average of comparable companies.

According to the prospectus, during the reporting period, Jinghua Optics' inventory turnover rates were 2.42, 2.25, 1.53, and 1.17, which decreased overall. The company stated that this was mainly due to the large stockpiling of precision optoelectronic instruments in 2021 and 2022.

02

R&D expense ratio far below peers, doubts about rationality of fundraising

Jinghua Optics is mainly engaged in the research, design, manufacturing, and sales of precision optoelectronic instruments, automotive intelligent sensing systems, and precision optical components.

As mentioned earlier, Jinghua Optics' R&D expenses declined by 32% year-on-year in 2023, highlighting the company's "contraction" in R&D investment. During the reporting period, the company's R&D investment amounts were 26.8927 million yuan, 31.2896 million yuan, 38.3978 million yuan, and 13.0857 million yuan, respectively; the R&D expense ratios were 2.68%, 2.56%, 3.21%, and 2.87%, respectively, while the average R&D expense ratios of comparable companies during the same period were 7.21%, 7.49%, 8.56%, and 9.21%, respectively.

In other words, Jinghua Optics' R&D expense ratio is more than five to six percentage points lower than the industry average.

The review inquiry letter pointed out that 1) supplementary explanations should be provided on the specific basis for the company's relatively mature technology and processes for precision optoelectronic instruments, as well as its mastery of core technologies and production processes for related products. 2) The company has participated in drafting two national standards and one group standard during the reporting period, but the income from innovative achievements during the reporting period accounted for a relatively low proportion. Supplementary explanations should be provided on the specific reasons; supplementary explanations should be provided on the specific manifestations of the company's early-stage R&D investment in intellectual property acquisition, technology improvement, product quality improvement, etc. Combining the specific differences in product structure, technology accumulation, and R&D needs between the company and comparable companies in the same industry, explain the rationality of the company's precision optoelectronic instruments R&D investment ratio being far below that of comparable companies. 3) The company's astronomical telescope products have a high market share. Supplementary explanations should be provided on the matching situation between the company's obtained invention patents, core technology investment, etc., and the market share, as well as whether the comparable products selected by the company from the same industry are comparable. 4) During the reporting period, the company's revenue from precision optical instruments showed a downward trend, while revenue from automotive intelligent sensing systems showed an upward trend; combined with gross profit margin and gross profit contribution, supplementary explanations should be provided on whether the growth in revenue from automotive intelligent sensing systems, as the company's new business, can effectively offset the decline in revenue from traditional precision optical instrument business; supplementary disclosure should be made on the specific manifestations of the company's competitiveness and innovation in the field of automotive intelligent sensing system products, as well as specific measures and results in maintaining existing important customers and exploring new customers.

In particular, it is worth noting that the rationality of Jinghua Optics' fundraising has also been emphasized in the inquiry. The company plans to raise 747 million yuan, of which 233 million yuan will be used for precision optics expansion projects, 342 million yuan for intelligent sensing system expansion projects, 72.2141 million yuan for R&D center upgrade construction projects, and 100 million yuan for supplementary working capital.

According to the application documents and inquiry responses, 1) the company's precision optics expansion project is mainly aimed at improving the self-production capacity of microscope products and the self-supporting capacity of vehicle-mounted lenses. During the reporting period, the self-production income of the company's microscope business accounted for less than 10%, and the vehicle-mounted lenses used in the production of vehicle-mounted cameras sold by the company's automotive intelligent sensing business were sourced from third-party procurement; 2) the company has accumulated rich technical reserves in the field of intelligent sensing systems and has conducted cooperation negotiations with large automakers such as SAIC-GM, XPeng Motors, and Geely Automobile.

The review inquiry letter raised the following questions: 1) Further analyze and explain the accuracy and rationality of information disclosure related to the issuance price, as well as subsequent arrangements related to pricing, by combining the valuation levels of comparable companies in the same industry, the company's current capital level, and business planning; quantify the personnel, equipment, assets, etc., corresponding to specific projects invested in by the company's fundraising, and further analyze the rationality and necessity of fundraising. 2) Further supplement and analyze the correspondence between the company's fundraising to supplement working capital and the company's R&D and innovation needs, optimizing the asset-liability structure and liquidity ratio, and paying personnel salaries in full and on time after the fundraising projects are completed. Whether the use of fundraising to supplement working capital is necessary and reasonable. 3) The company's main customers for intelligent sensing system business are currently Guangzhou Automobile Group. Supplementary explanations should be provided on the specific situation of cooperation negotiations with large automakers such as SAIC-GM, XPeng Motors, and Geely Automobile, as well as the company's planned use of fundraising in the field of intelligent sensing systems, and make significant event reminders or risk disclosures based on possible risks as appropriate.

Looking at the intended use of the funds raised, 233 million yuan for precision optics expansion is for the microscope business that accounts for no more than 10%, while 342 million yuan for intelligent sensing system expansion sales of vehicle-mounted cameras, and the vehicle-mounted lenses required for production are sourced from third-party procurement. The apparent emphasis on R&D with 72.2141 million yuan usage shows a significant gap in the R&D expense ratio compared to peers, and there was a significant decline in 2023.

In other words, among the four major uses of Jinghua Optics' fundraising, three seem to lack necessity and rationality, leaving only 100 million yuan to supplement working capital.

How Jinghua Optics will respond to the second round of review inquiry letter from the Beijing Stock Exchange will make these issues clearer to investors. The outside world may as well wait for a while. (Produced by Bay Harbor Finance)