In a significant move within the electronics sector, Gonghong Technology has announced plans to acquire two automotive electronics assets, the AC Company and the TIS Factory, which are associated with Aerospace Science and TechnologyThe combined transfer price for these entities exceeds 730 million yuan (approximately 100 million USD). Both the AC Company and TIS Factory reported losses in the first half of the year, reflecting the challenges they have faced, especially in a competitive market.
On November 25, Gonghong Technology made a formal announcement regarding its acquisition strategy through a cash purchase at the Beijing Property ExchangeThe plan includes the acquisition of 100% equity in the AC Company and a minor stake of 0.003% in TIS FactoryPost-transaction, both the AC Company and TIS Factory will be under Gonghong Technology's complete control as subsidiaries.
To facilitate the acquisition, Gonghong Technology has also initiated a fundraising campaign aiming to raise approximately 1.033 billion yuan (about 145 million USD). The base transfer price for AC Company is set at 733 million yuan while TIS Factory reportedly has a nominal transfer price of just 1 yuan, indicating a strategic move from a financially struggling parent company, Aerospace Science and Technology, which has seen its operational performance decline in recent years.
Over the past few years, Aerospace Science and Technology has faced operational difficulties
The AC Company and TIS Factory, both entrenched in the automotive electronics sector, experienced substantial losses amounting to tens of millions during the first half of 2024. Notably, at the end of October this year, Aerospace had decided to offload these assets, signaling their lack of interest in maintaining underperforming entities.
Gonghong Technology's bold acquisition reflects the company's overarching ambition, spearheaded by its controlling figure, Tang Jianxing, to solidify its position in the automotive electronics marketHistorically, under Tang's leadership, Gonghong Technology transitioned from a modest OEM (Original Equipment Manufacturer) to one of China's leading EMS (Electronic Manufacturing Services) firmsSince 2017, the company has relied on multiple rounds of fundraising to expand its production capabilities and explore overseas markets while also eyeing the automotive electronics sector as a vital growth segment.
That said, the pursuit of expansion can often prove to be a double-edged sword
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Gonghong Technology, in its eagerness to scale, has modified its traditional business modelThis shift has led to a decline in profit margins over recent years, prompting concerns over the "increase in revenue without accompanying profit" phenomenon.
The company currently finds itself in a pivotal phase; joint efforts to capitalize on the acquisition of the distressed assets signify its intent to exert its influence within the automotive electronics spaceThe fundamental operation of AC Company revolves around manufacturing automotive electronic control modules and offering assembly services for electronic products primarily targeting markets in Europe and the Americas.
Despite being a participant in the burgeoning automotive electronics landscape, both the AC Company and TIS Factory have groaned under financial burdensIn the first half of 2024 alone, AC Company registered revenue of 1.627 billion yuan but reported a net loss of approximately 18.81 million yuan, while TIS Factory's revenue was a mere 199 million yuan with a net loss of around 6.95 million yuan
As of mid-2024, TIS Factory's net asset value reported was negative, totaling -25.04 million yuan, highlighting severe financial distress.
In a broader context, Aerospace Science and Technology also faced challenges reflected in its financial performance, with net losses of 145.7 million yuan in 2023 and a further drop in profit by 108.2 million yuan in the first three quarters of 2024 compared to previous yearsThese adverse outcomes must have spurred the company to entertain thoughts about shedding non-competitive unrealized assets in the automotive sector.
This strategic maneuver by Gonghong Technology illustrates the broader ambition to establish a foothold not only in China but also overseas, particularly in regions such as Europe and North AmericaTang Jianxing’s overarching vision aims to drastically increase the proportion of automotive electronics within the company’s business model, possibly raising it to a target of 40-50% in the next five years, reflecting the acknowledged opportunity within a rising sector.
In 1998, Tang Jianxing joined Gonghong Technology, which was then a fledgling entity with few clients, primarily reliant on semi-finished and finished product assembly and processing
Over the years, he progressed from being an employee to the company's helm, successfully integrating the company into the supply chains of major players like ZTE, Huawei, and OPPO, evolving Gonghong into a comprehensive EMS firm.
Presently, Gonghong Technology operates its EMS business on two fronts: directly providing EMS to downstream brands, and through collaborations with leading ODM companies to outsource servicesThe sectors covered range broadly from consumer electronics to automotive electronics, underlining the necessity of diversified business operations to shield against volatility in specific markets.
The consumer electronics segment, long considered the foundation of Gonghong’s operations, has witnessed substantial revenue growth, aided by high-profile clients like HuaweiHowever, the overall market conditions have begun to shift; global smartphone shipments peaked in 2016 and have since declined sharply, inhibiting demand predictably within the consumer electronics sector.
In anticipation of shifting trends, Tang vocalized his intent back in 2017 to pivot toward increasing the automotive electronics revenue stream, aspiring to lift this segment’s contribution to 30% within a span of two to three years
Subsequent developments saw Gonghong penetrate the Valeo and Continental supplier linkages, providing electronic components to renowned automotive manufacturers such as BMW, Audi, and Nissan.
Despite the advancements made, Gonghong's automotive electronics revenue remains markedly below initial projectionsContinuous monitoring reveals a rise from just over 1% of total revenue in prior years to nearly 21.41% in the first half of 2024, yet this falls shy of the ambitious targets set by Tang Jianxing.
The debates surrounding the risks associated with rapid expansion loom largeThe growth strategies employed by Gonghong must be examined in light of falling profit margins across all segmentsRecent financial reports indicate that the company's gross profit margins have consistently declined, raising eyebrows regarding the sustainability of such an aggressive growth strategy.
The third-quarter report revealed considerable revenue growth at 51.68 billion yuan, marking a year-on-year increase of nearly 50%, yet gross profit margins plummeted to an unsettling 11.94%. This is a stark contrast to earlier years, such as 2018 when gross profit margins peaked at 31.91%, indicating that the current trajectory may necessitate a reevaluation of business practices.
The underlying factors for the observable phenomenon can be traced to the transformation in business models as Gonghong pursues aggressive growth
The operational approach has evolved from a material-processing model to a more complex “turnkey” approach, placing an additional financial burden on procurement for materials that were previously covered predominantly by clients.
Under the turnkey model, Gonghong faces increased costs and carries pricing risks, which have contributed directly to diminishing gross marginsPreviously, the company enjoyed a competitive edge due to low raw material costs, but as this shift occurs, previous advantages are eroded, and performance metrics reflect that declineThe transitional approach simultaneously caused a perceived loss of edge against competitors that maintained traditional operational models.
Going forward, it is essential for Tang Jianxing and Gonghong Technology to critically assess both the benefits and the hazards of rapid expansion