OEM for Meta head-mounted display, Zhishang Technology hits A-shares with the concept of “Metaverse”

A shares are about to usher in “Metaverse” concept stocks!

Recently, Shenzhen Zhishang Technology Co., Ltd. (hereinafter referred to as “Zhishang Technology”) successfully attended the meeting and will soon be listed on the Growth Enterprise Market. Zhishang Technology focuses on the R&D and manufacturing of precision electronic components, and its products are mainly used in game consoles, VR/AR equipment, etc.

VR and AR equipment has always been regarded as the key to the Metaverse, providing precision electronic components for VR and AR products, which has become the reason why Zhishang Technology is on the cusp of the Metaverse.

According to the prospectus, Zhishang Technology is currently working as an OEM for Goertek, the world’s largest VR equipment manufacturer , and its end user is Meta (formerly Facebook). In 2020, Zhishang Technology passed the Facebook certification, and its products were used in the controller of Facebook’s Oculus brand VR/AR products, and began to be available in batches in December of that year.

In the domestic market, according to data, Zhishang Technology has recently received an order from PICO, a subsidiary of ByteDance, the most well-known VR equipment manufacturer in China.

It can be said that the popularity of VR and AR and the explosion of the concept of the Metaverse have driven this upstream manufacturer.From 2019 to 2021, Zhishang Technology’s revenue was 462 million yuan, 499 million yuan and 615 million yuan respectively, with a compound growth rate of 15.34%; net profit was 34.6473 million yuan, 62.5826 million yuan and 91.9027 million yuan, respectively, with a compound growth rate The rate was 62.87%.

OEM for Meta head-mounted display, Zhishang Technology hits A-shares with the concept of "Metaverse"

Source: Screenshot of prospectus

If you look at the business history of this thirteen-year-old company, it is not difficult to find that although Zhishang Technology is an upstream supplier that is not very sensitive to the market, it can always seize the trend of the times. The main application scenarios of its products have changed from mobile phones to electronic cigarettes to today’s game consoles and AR and VR devices.

Although it can take off by seizing the wind, the corresponding foundation is unstable, and the transformation of the main business will inevitably bring about a period of pain at the customer level. The above two points have been reflected in Zhishang Technology.

Chasing the wind makes the income structure volatile

Zhishang Technology is an upstream supplier that can keenly capture changes in the downstream industry. It can timely adjust its main business according to market preferences. Such timely changes can ensure the long-term development of Zhishang Technology, but it is also destined to usher in the pain of transformation.

Looking at the growth history of Zhishang Technology, it can be found that since its establishment in 2009, it has mainly provided precision machining and sales of supporting products for Foxconn and related businesses in its supply chain. However, at this time, Zhishang Technology did not disclose to the outside world which product line of Foxconn was the OEM.

Until 2014, Zhishang Technology ushered in its first outlet.

At that time, the rise and explosive growth of the smartphone industry made Zhishang Technology see the future development direction, so Zhishang Technology turned and cut into the supply chain of Foxconn’s smartphone products, and its end customer was Apple. It has successively provided metal processing and volume keys for iPad mini, iPad, iPhone 5C, iPhone6, iPhone6 ​​plus and other products.

Becoming a secondary supplier of Apple naturally laid the foundation for Zhishang Technology and provided an endorsement. But Zhishang Technology did not stop there. In 2017, it turned to the second outlet. In January of that year, Nintendo released a new generation of game console Nintendo Switch. Once released, the console revolutionized the gaming industry and is currently one of the best-selling consoles. So Zhishang Technology captured market changes in a timely manner, entered Nintendo’s supply chain through the acquisition of Chunsheng Electronics, and began to actively deploy the game console parts business.

Since 2017, Zhishang Technology has developed a variety of precision parts products such as slide rails, Tact Switch, card slots, and precise positioning controllers. With the popularity of the downstream game machine industry, the business of Zhishang Technology’s game machine segment has also grown rapidly and has become the main source of operating income.

One year after laying out the game business, Zhishang Technology turned to embrace the third outlet – electronic cigarettes.

In 2018, the electronic cigarette industry reached the highest point and showed an intensifying trend. Naturally, Zhishang Technology did not miss this opportunity and began to OEM for electronic cigarette brands. The performance trend at this time can be seen in the prospectus. In 2018, the sales of electronic atomization equipment contributed 20.08% of the total sales of Zhishang Technology. In 2019, Zhishang Technology sold Jin Zhiyuan, you and me online. Electronic atomization equipment revenue accounted for 34.45% of the company’s current operating income, and gross profit accounted for 13.75% of the current total gross profit.

However, the sales of this business in 2020 will directly return to 0. In just one year, the revenue has dropped from 160 million to 0 directly, which shows that the income brought by the chasing outlet is unstable.

OEM for Meta head-mounted display, Zhishang Technology hits A-shares with the concept of "Metaverse"

Source: Screenshot of prospectus

The return of sales to 0 is mainly due to the supervision of the e-cigarette industry. In this regard, Zhishang Technology stated that it stopped the e-cigarette business at the end of 2019. Instead, the fourth outlet – VR and AR industries. In 2021, Goertek, which produces VR and AR equipment for Facebook and Sony, has become the third largest customer of Zhishang Technology, contributing 20 million operating income, accounting for 3.73% of the year’s total operating income. With the booming of the VR and AR industries in the future, it is certain that Zhishang Technology will increase its revenue accordingly.

Zhishang Technology, which has been established for 13 years, has caught up with four outlets.

From the perspective of overall turnover, chasing the wind has indeed helped Zhishang Technology embark on the path of increasing profitability. From 2019 to 2021, Zhishang Technology achieved operating income of 460 million yuan, 490 million yuan and 610 million yuan respectively; net profit in the same period was 35 million, 65 million and 91 million respectively.

However, from the perspective of income structure, due to the suspension of production of electronic atomization equipment and the contraction of other businesses, the income of precision manufacturing and other businesses decreased from 225 million yuan to 18 million yuan, and the proportion of revenue also decreased from 49.45% in 2019. 3.01% by 2021. In 2021, the revenue from game console parts will increase from 146 million yuan to 413 million yuan, and the proportion will increase from 32.11% to 67.71%.

The turbulence in the revenue structure, to a certain extent, is laying the ground for the future development of the company. Blindly chasing the wind will also make it difficult to balance the company’s revenue structure, resulting in a situation where there are both gains and losses.

Over-reliance on Foxconn and its own unstable foundation

From the prospectus, over 60% of Zhishang Technology’s revenue comes from Foxconn. Compared with the revenue level, Zhishang Technology and Foxconn are more bound by Chen Chaoxian, the founder of Zhishang Technology. He once worked for Foxconn, and there are Foxconn behind the two entrepreneurial experiences.

In 2002, after graduating from Northeastern University, Chen Chao could have entered the public security system or worked in a local bank to get an “iron rice bowl”. But for Chen Chaoxian, a stable job is not his ultimate direction. After all, he had been exploring the entrepreneurial project of a student apartment during his college days, and he has always had a dream about starting a business. So he chose to go south to Shenzhen.

However, when he first arrived in Shenzhen, Chen Chaoxian did not start a business blindly. He chose to enter a large platform to accumulate experience. Finally, he went to Foxconn Technology Group, which ranked first in the manufacturing industry at that time, and became a member of the new cadre class in 2002, which is now the management trainee.

After leaving Foxconn, in February 2008, Chen Chaoxian and his partners jointly established Hongfuhan Technology, and its main revenue came from Foxconn. According to the prospectus submitted by Hongfuhan Technology in 2020, the sales revenue of the largest customer Foxconn Group was 89.2655 million yuan, 137 million yuan, 163 million yuan and 83.2952 million yuan respectively, accounting for 37.10% of the current operating income. %, 39.63%, 36.65% and 39.84%.

However, Chen Chaoxian did not always work in Hongfuhan Technology. A year later, he left Hongfuhan Technology and founded Zhishang Technology. The biggest feature of Zhishang Technology is the same as that of Hongfuhan Technology, that is, over-reliance on Foxconn.

OEM for Meta head-mounted display, Zhishang Technology hits A-shares with the concept of "Metaverse"

Source: Screenshot of prospectus

According to the prospectus, from 2019 to 2021, the total sales of Zhishang Technology’s top five customers accounted for 82.00%, 78.38% and 82.48% of operating income respectively, of which Foxconn’s sales revenue accounted for 42.18% of operating income. , 67.52% and 64.40%.

In other words, at the moment of reaching the A-share market, Zhishang Technology still has 60% of its revenue from Foxconn. From a more profound perspective, since the main products sold by Zhishang Technology to Foxconn are game machine parts, with the development of the game machine parts business, its dependence on Foxconn is also increasing.

Putting aside the reliance on Foxconn, and substituting Zhishang Technology’s own capabilities into the industry, it will be found that Zhishang Technology is small in size among its peers, and its own foundation is unstable.

Compared with other companies in the same industry, Zhishang Technology has a smaller revenue scale and is naturally lower than its peers in terms of R&D investment. However, it belongs to the consumer electronics industry characterized by rapid technological innovation and frequent product iterative upgrades. Therefore, scientific research capabilities are the focus of laying a solid foundation in the industry.

From 2019 to 2021, Zhishang Technology’s R&D investment was 20.062 million yuan, 22.4652 million yuan and 27.8443 million yuan respectively, and the R&D expense rates were 4.34%, 4.51% and 4.53% respectively. Lower than comparable companies of the same kind, Zhishang Technology said, “Because the company’s current business scale is in the stage of rapid development, and the existing R&D personnel, funds, equipment and site resources are limited, the company’s R&D expenses are slightly lower than the average level of comparable companies in the same industry. .”

From the perspective of the team, Zhishang Technology has 145 R&D personnel, accounting for 14.15% of the company’s total.However, there are only 2 people with a master’s degree or above, and only 64 people with a bachelor’s degree or above. Zhishang Technology has only 5 invention patents. According to the 2021 annual report of Shenglan, a comparable company of the same kind, it has 28 invention patents. From this point of view, Zhishang Technology is very weak at the research and development level, and it is difficult to compete with its peers.

In addition to the unstable foundation caused by the research and development level, Zhishang Technology, as a factory, also entrusts outsourced factories for processing.

According to the prospectus, during the reporting period, due to business development and cost considerations, the company’s production processes such as electroplating, assembly, and machining of precision structural parts were entrusted to outsourced manufacturers for processing. In addition, the precision assembly and other processing services provided by Zhishang Technology for Foxconn, in addition to providing services independently, will also be carried out through outsourced manufacturers.

From 2019 to 2021, Zhishang Technology entrusted outsourcing manufacturers and OEM manufacturers to process and produce 110 million yuan, 180 million yuan and 90 million yuan respectively, accounting for 42.97%, 60.23% and 26.23% of the current purchase amount, respectively. . It is worth noting that in the year before the impact on the market, Zhishang Technology still has 60% of its orders for outbound processing in 2020. Although the proportion has declined in 2021, it has also exceeded a quarter.

This is very worthy of scrutiny. Foxconn has always been strict with its supply chain. As Foxconn’s supply chain system, its main income depends on Foxconn. It is not known whether Zhishang Technology meets Foxconn’s requirements through outsourcing production of products.

As an upstream supplier, at the R&D level, it is not as good as its peers’ production level and it relies on outsourced manufacturers. The foundation of Zhishang Technology is unstable. For long-term development in the future, Zhishang Technology seems to need to give up the footsteps of chasing the wind to build its own manufacturing moat.

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