Reliance on the risk of blind expansion of Dongfeng Motor Huachangda

Hubei Huachangda Intelligent Equipment Co., Ltd. will join the GEM this week. The prospectus shows that Huachangda is a supplier of intelligent automated equipment system integration, and has achieved brilliant results in the past three years. However, the reporter found out that the investment prospectus found that Huachangda’s revenue during the reporting period mainly relied on Dongfeng Motor’s gross profit margin. It is obviously higher than the industry leading Tianqi shares. In addition, the price changes of the three varieties of the company's products are disorderly, and there is a risk of blind expansion of production capacity.

According to the prospectus of the Dongfeng Department of Natural Resources, the company's low-cost shares are listed in the company. In 2008, 2009, 2010, and January-June 2011, Huachangda was the contractor or end user of the contracted project or end-user. The project's sales revenue was 30,224,800 yuan, 45,823,400 yuan, 69,202,800 yuan, and 37,022,400 yuan, accounting for 73.60%, 50.18%, 38.26%, and 24.47% of the main business revenue for each period.

The data shows that Hua Changda's performance in the past three years is basically derived from Dongfeng Motor. So why did Huachangda get such a large number of orders from Dongfeng Motor because of Huachang Da's technical strength? The reporter found out that the prospectus found that the answer was not the case.

In fact, in the industry of Huachangda, foreign-funded enterprises basically control and monopolize the high-end market of China's automation equipment by virtue of advanced technology, rich project experience, and strong capital strength. The share of high-end automation equipment market is about 70%. The remaining 30% share is occupied by domestic companies, and the degree of competition can be imagined.

The most important thing is that the prospectus shows that Dongfeng Motor indirectly holds Huachangda through Shanghai Jiahua, and the actual control of Huachangda, Yan Hua and Luo Hui, were once employees of Dongfeng Motor. Not only that, in the latest capital increase of Huachang Da, including Xu Zenan, Xiang Shaochun, Liu Zirao and many other natural individuals from Dongfeng Motor or related companies, and the share price is only 3.98 yuan! While other venture capital firms such as Guangzhou Cornerstone Venture Capital Partnership (Limited Partnership) have reached a stock price of 7.99 yuan/share for the same period, the price difference is 1x!

Some industry insiders questioned: It is because of the inextricable link between Huachangda and Dongfeng Automobile that Huachangda can gain the favor of Dongfeng Motor. In the past three years, Huachangda has achieved brilliant performance and achieved qualification for listing.

In addition, the sales data of the downstream automotive industry owned by Huachangda in the first half of this year was sluggish, and the business climate declined. From January to June this year, Huachangda gained only 24.47% of its revenue from Dongfeng Motors. According to Huachang Da, the dependence on Dongfeng Motors is gradually decreasing, and it is in the context of the declining boom of the downstream auto industry. It is also doubtful that Hua Changda’s performance can still maintain high growth.

Capacity Expansion and Embezzlement Performance Risk In solving the horizontal competition, Huachangda disclosed the acquisition of Dazhi equipment. The reporter noted that in addition to net profit of 254,900 in 2010, Dazhi’s net profit for the three-and-a-half years was negative in January-June, 2009, and 2008. In this regard, some industry insiders doubt that Hua Changda’s net profit has surged in the past three and a half years. Why does Huachang Da repeatedly emphasize the company’s production capacity as a supplement to Dazhi’s equipment in the prospectus, but its performance is far behind that of Huachangda. Without sharing the industry's growth profit? Does this mean that Huachangda's production capacity is sufficient and there are no redundant projects to supply Dazhi equipment as a production capacity?

Huachangda has raised a total of 20.06 million yuan this time, all invested in the construction of automated equipment production line project, it is expected that the project will reach the production capacity of 18 new automatic production lines, including the assembly of automated production line 7, welding automation production line 6 and 5 automatic coating production lines. The construction period of the project is 1.5 years, and the average annual increase of operating income is 342.16 million yuan after reaching production, and the average annual net profit is 54.22 million yuan.

However, if the average sales price of the three production lines disclosed in the first half of 2011 is 7,434,400 yuan/article, 5,964,400 yuan/article, and 6,596,800 yuan/article, the operating revenue from 18 new production capacity is only 120,897,200 yuan. Yuan, which is far behind the company's estimated 34,216 million yuan! Therefore, the risk of Huachang Da’s blind expansion of production capacity is obvious, and the risk that the resulting performance will not keep up with inflated production capacity is also worth worrying about.

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