Amidst a tightening cash flow, He Sheng Silicon Industry (603260.SH), one of the leading companies in the silicon sector, is looking to convert its accounts receivable into liquid assets.
This far-reaching move comes after the company announced on February 11 that it plans to issue an asset-backed security (ABS) project, enabling it to raise up to 4 billion yuanThis decision aims to broaden its financing options and expedite the turnover of funds.
Details revealed in the announcement highlighted that the underlying assets for the ABS project primarily consist of accounts receivable claims from suppliers or factoring companies against He Sheng and its subsidiaries, along with any associated rights.
However, the announcement did not include enhanced credit measures, further raising concerns among market observers regarding the company's liquidityThe ABS project will depend solely on He Sheng’s promise for credit enhancement, which could potentially exacerbate worries about its current business condition and the risks it faces.
Revenue is increasing, but profits are dwindling, and severe inventory devaluations are surfacing.
Founded in 2005, He Sheng Silicon Industry specializes in research, production, and sales of industrial silicon and organosilicon products, positioning itself as a major player in China's silicon sector, with an estimated 30% share of the national outputThe company’s products are crucial for a variety of industries, including photovoltaic, construction, electronics, and automotive.
Yet, recent operational data paint a troubling picture for the companySince 2022, He Sheng's performance has shown a clear trend of rising revenue but declining profitsThe total operating income for 2022 reached 23.657 billion yuan, reflecting a 10.62% year-on-year increase; however, net profit plummeted by 37.64% to 5.141 billion yuanIn 2023, despite an operating revenue of 26.584 billion yuan (up 12.37%), net profit further decreased by 49.05% to 2.623 billion yuan.
The trends continued into 2024, with the company reporting an operating revenue of 20.371 billion yuan in the first three quarters, a slight increase of 2.44% year-on-year, yet net profit revealed a significant decrease of 33.42%, landing at 1.422 billion yuan.
The management attributed these declines to lower selling prices for industrial silicon and organosilicon products, alongside market saturation in the photovoltaic chain leading to decreased prices
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This cyclical industry has entered a restructuring phase, leading to pronounced price contractions in recent years.
These price drops are reflected in the company's gross margin, which peaked at 52.87% in 2021 but fell sharply to 34.39% in 2022 and further decreased to 20.15% in 2023. By mid-2024, the gross margin sat at 23.3%.
Worse yet, the declining market prices forced He Sheng to record substantial inventory impairmentsBetween 2021 and 2023, the company's inventory escalated from 4.533 billion yuan to 7.648 billion yuan, then slightly dropping to 7.148 billion yuan in 2023. However, projections for the first three quarters of 2024 indicated an astonishing rise to 9.942 billion yuan, a considerable 39.09% increase since the start of the year.
The excessive inventory combined with declining prices led to soaring asset impairment lossesFrom 2021 to 2023, the company recorded asset impairment losses of 3.7662 million yuan, 9.2985 million yuan, and an alarming 60.5657 million yuan respectivelyIn the first three quarters of 2024, the asset impairment losses skyrocketed to 671 million yuan.
Having expanded rapidly in the past, the company is now facing a liquidity crisis, with substantial stakes of the controlling family pledged.
The predicament confronting He Sheng is not solely a product of the industry's cyclical nature but is significantly influenced by its aggressive expansion strategy over recent years.
The company had aspirational visions: its industrial silicon production would supply stable raw materials to its organosilicon and photovoltaic production lines while simultaneously supporting industrial silicon sales by stabilizing demand downstream, thus establishing the foundation for production scale, cost reduction, and competitive advantage.
However, the scale of He Sheng's expansion has proven too audaciousBetween 2021 and 2023, the company unveiled 11 major expansion projects with total investments exceeding 80.5 billion yuan
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To contextualize this, He Sheng’s total assets as of Q1 2024 stood at 89.8 billion yuan, equating to approximately 90% of the company’s total net worth being committed to its transformation and expansion efforts.
This aggressive strategy necessitated hefty annual capital expendituresCash spent on “construction and acquisition of fixed, intangible, and other long-term assets” ballooned to 11.484 billion yuan in 2022 and 18.657 billion yuan in 2023. In stark contrast, the cash flow generated from operational activities showed negative numbers, with -626 million yuan in 2022 and -790 million yuan in 2023.
Looking at the project scale, by the end of 2020, the company had construction in progress representing less than 4 billion yuanFast forward to September 2024, the scale of ongoing construction ballooned to a staggering 37.534 billion yuan.
The juxtaposition of declining profits against expansive production led to a cash flow crisis, necessitating added borrowingsAs of the third quarter of 2024, the firm’s short-term borrowings had reached 5.2 billion yuan, with approximately 9.8 billion yuan of non-current liabilities due within one yearThis aggregates to a staggering 15 billion yuan in short-term financial obligations while monetary funds stood at a mere 1.1 billion yuan.
The mounting repayment pressure significantly influenced the company's financial costs, which have notably surgedFinancial costs across the measured three-year span from 2022 to 2024 saw a marked increase, from 238 million yuan to 428 million yuan and again to 637 million yuan, with year-on-year growth rates of 63.21%, 79.44%, and 48.89% respectively.
In a bid to stabilize funding for its expansive investments since 2023, the controlling family of Roe Likuan has relied on numerous strategies including public offerings, guarantees, and equity pledgesRecent disclosures revealed that as of February 17, the family pledged 49.34% of its shares in He Sheng, representing 38.78% of the total shares of the company.
By the end of the third quarter of 2024, the actual guarantees provided by He Sheng and its subsidiaries reached a staggering 26.220 billion yuan
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