How big is the impact of being kicked out of Apple’s industry chain? Take a look at the fate of this company

Apple suppliers often need to use customized production lines, and Ovation’s performance also confirms one thing: once kicked out of the “fruit chain”, the equipment can only be invalidated after cooperation stops, and even if you want to transfer it, you can only sell it at a “tearful liquidation price”.

The impact of Ovation being kicked out of the Apple industry chain is still ongoing.

On June 9, Ovation released a response letter to the SZSE’s inquiry about its 2020 annual report. The document focused on explaining the impact on the company caused by the cessation of cooperation with a specific overseas customer (Apple).

According to the document, the company recorded asset impairment loss of RMB 2.771 billion in 2020, 93.04% of which was caused by the termination of the purchasing relationship between the specific overseas customer and the company and its subsidiaries.

In other words, the impact of Ovation being kicked out of the “fruit chain”, asset impairment losses of about 2.5 billion yuan.

The asset impairment loss of about 2.5 billion yuan mainly includes the impairment loss of fixed assets, intangible assets and construction in progress. A large portion of this amount came from machinery and equipment, for which an impairment loss of RMB2.35 billion was recorded. In addition, impairment losses on two intangible assets, patent rights and software, amounted to nearly RMB 100 million, and impairment losses on construction in progress amounted to RMB 120 million.

How big is the impact of being kicked out of Apple's industry chain? Take a look at the fate of this company

According to interface news, Apple suppliers often need to use custom production lines, Ovation’s performance also confirms a point: once kicked out of the “fruit chain”, the equipment can only be invalidated after the cessation of cooperation, even if you want to transfer, can only be sold at a “tearful clearance price”.

These machines and equipment are worth a lot of money. Ovation documents indicate three projects, the first book value of 2.4 billion yuan, after the termination of cooperation directly to a discount, the value of 1.28 billion yuan. Another equipment with a book value of 800 million yuan was almost directly scrapped, with an impairment rate of 99%.

How big is the impact of being kicked out of Apple's industry chain? Take a look at the fate of this company

Not only that, Ovation’s performance thunderstorm last month, the company will be the original performance forecast revised downward, net profit adjusted from a profit of 900 million yuan to a loss of 1.945 billion yuan, performance from profit to loss.

In order to reduce the huge losses brought by Apple’s abandonment, Ovation can only seek asset sales. In May this year, Ovation’s two companies, Delta Imaging and Crystal Run Optics, which were originally used to supply Apple, have completed the transfer with Wintel Technology. These two subsidiaries previously produced camera modules for Apple. The transaction price of 2.42 billion yuan, may help Ovation “back to blood”.

In addition, Ovation also listed in the document other response measures and effectiveness, said the future will continue to seek to transfer the assets of Apple-related business. Specific measures include.

First, the assets related to the overseas specific customer business, the company recognized asset impairment loss in FY2020 based on the assessment and impairment test results, and the risk of related assets was effectively released.

Second, the sale of assets related to overseas specific customer business: the company signed an agreement with Wintel Technology in the early stage to transfer 100% of the equity of Delta Imaging and the operating assets of Crystal Run Optical related to overseas specific customer business to Wintel Technology. As of the date of response to this inquiry letter, the Equity Purchase Agreement and the Asset Purchase Agreement signed by both parties have been fulfilled and the relevant payments have been fully recovered.

Thirdly, for other assets related to the business of specific overseas customers, the Company continues to seek external transfer and internal comprehensive utilization measures to reduce actual losses.

Fourth, the company will adhere to the development strategy of focusing on the core business of optical imaging and vigorously developing the microelectronics business platform, improve the level of technology research and development, consolidate its core competitiveness, maintain and improve business cooperation with other major customers, increase business development of new technologies, new products and new customers, and expand the share of non-mobile phone business.

The document shows that although Apple’s business brings Ovation huge revenue in 2018-2020, 8.33 billion yuan, 11.72 billion yuan and 14.51 billion yuan respectively, the overall gross margin is only about 8%, which is significantly lower than the company’s overall gross margin of about 10%. This also proves that Apple has adopted price suppression tactics for its suppliers.

It is worth mentioning that the document discloses for the first time the actions of a subsidiary of Ovation since it was included in the U.S. “Entity List” in July last year.

According to the company, on July 21, 2020, the Bureau of Industry and Security of the U.S. Department of Commerce placed its subsidiary Nanchang Ovation Technology Co. Since then, the management of the Company has been highly concerned about the development trend of the trade dispute between the U.S. and China and whether the above “entity list” will be upgraded and expanded.

However, considering that Apple is one of the Company’s major customers, an impairment test has been conducted on the entire assets related to the business of the specific overseas customer as of December 31, 2020.

It was not until March 12, 2021, when the foreign specific customer notified that it planned to terminate its business relationship with Ovation and there was conclusive evidence of a material change in the going concern premise of Ovation’s related assets, that the company re-tested the related assets for impairment, which led to a corresponding adjustment to the 2020 financial statements.

At the same time, Ovation’s share price is also “falling”, from a high of 20 yuan last year, down to about 8 yuan recently, the market value has evaporated nearly 30 billion yuan. As of today’s press release, Ovation reported 8.83 yuan per share, with a total market value of 23.79 billion yuan.

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