Red Weekly Research Center | Maofei
TWS (True Wireless Stereo) headphones have made great progress in recent years, allowing many companies in the industrial chain to make a fortune. Brand manufacturers such as Apple, Xiaomi, and Huawei rely on brands and channels to control the terminal market, while Luxshare Precision and Goertek also benefit a lot from OEM AirPods. Looking upstream along the industrial chain, we can find that TWS headphones have also become many parts suppliers, and Zhongke Lanxun is one of them.
Zhongke BlueXun mainly engages in wireless audio SoC chips, and its main products include TWS Bluetooth headset chips, non-TWS Bluetooth headset chips, Bluetooth speaker chips, etc. In 2021, the revenue share of the three was 44.21%, 17% and 33.49% respectively. TWS Bluetooth headphone chip is the company's core product. It not only accounts for the highest revenue share, but also has the highest growth rate. The growth rates from 2019 to 2021 reached 4197.00%, 76.14%, and 13.00%, respectively, while the corresponding total revenue growth rates are 666.36%, 43.53%, and 21.20%. 2019 was the year when the company made a leap, and the company's revenue jumped directly from less than 100 million yuan to 645 million yuan, mainly due to the outbreak of TWS Bluetooth headsets.
TWS Bluetooth headset chip is the main control chip of the headset. As the core component of the headphones, this chip directly determines the signal transmission and sound quality performance of the TWS headphones. The market concentration of TWS headphone main control chips is very high. According to the "2020 Annual Report of TWS Headphones" of Xuri Big Data, the market share of the top ten manufacturers has reached 98%. According to the different technology and market positioning, these manufacturers can be divided into three echelons: Apple, Qualcomm, Huawei HiSilicon and other manufacturers occupy the mid-to-high-end market; Hengxuan Technology, Luda Technology, Realtek, Unigroup Zhanrui and others are mid-to-low-end market participants; Zhongke Lanxun and Jieli Technology focus on the low-end market.
Zhongke Lanxun disclosed in its prospectus that the terminal manufacturers of the company's products are mainly white-label manufacturers, and the revenue contributed by more than 90%. White brand refers to non-famous brands or non-owned brands produced by some manufacturers. It is these white-brand headphones that have pushed Zhongke Lanxun to the top. According to the "TWS Headphones 2020 Annual Report" released by Xuri Big Data, based on shipments, Zhongke Bluexun's 2020 TWS Bluetooth headphone chip market share was 26%, ranking second.
Zhongke Lanxun, a strategy that emphasizes high cost performance, has helped the company grow rapidly in the short term, but also highlights many problems of the company. Compared with its competitors, Zhongke Lanxun has serious flaws such as lower gross profit margins in its main business than its peers and high inventory. At the same time, the growth rate of the TWS headphone industry has declined, so Zhongke Lanxun is naturally unable to survive, and it will even make it worse because brand manufacturers seize the market of white-label manufacturers at low prices.
Product gross profit margin is low
High inventory hidden risks
For a company, gross profit margin can not only show profitability, but also reflect the strength of competitiveness.
Table 1 Comparison of gross profit margin between Zhongke Lanxun and peer companies
Source: Annual reports and prospectus of each company
As shown in Table 1, compared with peers, Zhongke Lanxun's gross profit margin is lower, first of all, indicating that its product has lower added value and weak profitability. It also shows that the company's product quality is not as good as that of its competitors and its competitiveness in the market is weak. These three comparable companies, Zhonghengxuan Technology and Juxin Technology, mainly supply brand manufacturers, are easy to understand both high product quality and high gross profit margin. Like Zhongke Lanxun, Jieli Technology is mainly white-labor manufacturers. Why is Jieli's gross profit margin always higher than Zhongke Lanxun? It seems that Zhongke Lanxun has brought the strategy of "small profits but quick turnover" to the extreme.
Let’s look at the comparison of the sales unit prices of the two.
Table 2 Comparison of price of Bluetooth headphone chips of Zhongke Lanxun and Jieli Technology (unit: yuan/piece)
Source: Prospectus of the two companies
Comparison of the two, Jieli Technology's unit price has always been a little higher than Zhongke Lanxun. That is to say, although both customers are mainly low-end white-label manufacturers, Jieli Technology is just setting the price higher with a tough heart.Combined with a higher gross profit margin, we can basically conclude that the product quality of Jieli Technology may be higher than that of Zhongke Lanxun. Similarly, according to Hengxuan Technology's 2021 annual report, the company's products are divided into ordinary Bluetooth chips, smart Bluetooth chips and others. Through calculation, the average cost of these three types of products is 2.53 yuan/piece, 6.65 yuan/piece, and 7.71 yuan/piece, respectively. As for the specific selling price, although Hengxuan Technology has not disclosed it, combined with its gross profit margin, it can be seen that the unit sales price is definitely higher.
In addition to its lower gross profit margin and lower product unit price than its peers, showing that Zhongke Lanxun is not competitive, high inventory is another risk. In the past three years, the company's inventory has been RMB 95 million, RMB 228 million and RMB 563 million, respectively, accounting for 33.45%, 29.85% and 59.74% of current assets, and the inventory turnover rate has reached RMB 1.99, RMB 4.06, and RMB 6.79, respectively. For consumer electronics companies, rapid inventory growth is a red flag because the consumer electronics industry is iterating rapidly, and the inventory of the previous generation of technologies may be worthless. For Zhongke Bluexun, although Bluetooth headphone chips have not been replaced, technological progress and industry competition may lead to poor inventory sales, and ultimately impairment of inventory provisions, which is also a big hidden danger.
TWS headphone growth rate declines
New direction obstacles and long
The development of all companies is inseparable from the overall environment of industry development. The reason why Zhongke Lanxun can grow rapidly is mainly because of the rapid increase in penetration rate of TWS headphones. Similarly, if the industry gradually enters a mature stage and the growth rate decreases, companies in the industry will likely fall into the dilemma of growth stalling. Zhongke Lanxun is currently facing such risks.
From a global perspective, the sales growth rate of TWS headphones has declined. According to IDC data, the global sales of TWS headphones reached 310 million units in 2021, with a year-on-year growth rate of 33%. Compared with the growth of nearly 260 times in 2020, the growth rate has dropped significantly. Although 33% and 260 times seem to be incomparable due to base issues, the business logic behind it is that TWS headphones are rapidly rolling out in the short term, and the penetration rate is already very high, and the growth rate may become lower and lower in the future. According to Canalys data, global TWS headphone shipments in the first quarter of 2022 were 68.2 million units, a year-on-year increase of 17%, a significant decline from the growth rate in 2021. As market demand tends to slow down and high inventory, Apple expects to reduce AirPods production by about 10 million pairs this year, compared with last year's sales of 77 million pairs, the output reduction is quite large.
The global market growth rate declines, and the same is true for the domestic market. According to data from Beijing BGD, domestic TWS headphone shipments reached a peak of 156 million units in 2021, a year-on-year increase of 5%; it is expected that China's TWS headphone shipments will be 152 million units in 2022, a decrease of 2% from 2021, and negative growth for the first time in recent years. The main reasons for this situation are: serious homogeneity of product functions, insufficient innovation and iteration, reduced demand for consumers to replace phones, and of course the impact of the epidemic on production and consumer confidence.
In addition to the decline in industry growth, brand manufacturers are seizing the market of white-label manufacturers by reducing prices. This is also squeezed for Zhongke Lanxun, which has white-label manufacturers as its main customers.
There have always been two ways to develop TWS headphones. One is that brand manufacturers seize the sinking market by reducing prices, while Huawei, Xiaomi and other manufacturers have already done so; the other is to bet on consumption upgrades, improve product quality, and seize the mid-to-high-end market. In theory, both routes are correct, but the input-output ratio may vary greatly in reality. In the TWS headphone market, low-priced products of about 100 yuan account for nearly half of the market share, and the overall level of manufacturers is not high. If brand manufacturers enter through price cuts, the resistance they encounter is relatively small and it is easier to occupy the market. In contrast, in the mid-to-high-end market, basically brand manufacturers are all brand manufacturers. None of them are weak in strength, and it is difficult to expand their competitive advantages here. Therefore, most brand manufacturers choose to lower prices and seize the low-price market. This has caused a significant impact on the white brand TWS headphones. As early as the fourth quarter of 2020, leading manufacturers such as Huawei, Xiaomi, and Wanderer launched TWS headphones worth less than 500 yuan, and since then, they have gradually occupied the market space of white-brand TWS headphones.According to Canalys data, in the fourth quarter of 2021, the share of brand TWS headphones rose to 48%, basically equally with white brand headphones. Gone are the days when the latter leads one-sidedly.
Zhongke Lanxun's performance decline indicates that the growth stall has begun to appear. The company's revenue in the first quarter fell by 5.72% year-on-year, and its net profit excluding non-recurring items fell by 15.28% year-on-year; the revenue of the semi-annual report is expected to change -9.68% to -6.33%, and its net profit excluding non-recurring items is expected to change -17.43% to -12.89% year-on-year. In addition to the epidemic factors, the decline in industry growth and the snatch of customer markets should also be important reasons.
Faced with adverse factors, Zhongke Lanxun thought of two directions: expanding brand customers in the original business and expanding brand customers in the new business IoT chips. The original wireless audio SoC chip is still the company's focus, but it is necessary to increase the expansion of brand customers. According to the prospectus, in April 2020, the company launched the "BlueXunlong" series of high-end Bluetooth chips BT889X, and has entered the supply system of several brand manufacturers, but the shipment volume is not large. In the future, we may increase investment and expand more brand manufacturers and customers. But as the previous analysis, this route of seizing the middle and high-end is not easy to follow. In terms of the new business of
, Zhongke Lanxun and Alibaba's Pingtou Ge Semiconductor jointly developed IoT chips. Currently, some products are used in IoT products such as smart watches and smart car brackets. In this fundraising project, the company plans to invest 188 million yuan to be used for the research and development and industrialization of IoT chip products. However, the growth of IoT chips in recent years has not been as rapid as Bluetooth headphone chips, so it is not easy to make revenue quickly, and it may be difficult to contribute much growth momentum to the company in the short term.
Value Exploration
According to the business similarity, Hengxuan Technology, Juxin Technology, and Broadcom Integration are selected as comparable companies and used them as valuation references. Three relative valuation methods are selected: PE, PB and PS; the market value is selected to select the closing data on June 17, 2022, and the financial data is selected to select the annual report data for 2021.
The total share capital before this issuance was 90 million shares. It is calculated that: the
PE method found that the market value was 16.799 billion, corresponding to the stock price of 186.66 yuan/share; the
PB method found that the market value was 2.456 billion, corresponding to the stock price of 27.29 yuan/share; the
PS method found that the market value was 8.991 billion, corresponding to the stock price of 99.9 yuan/share.
Since the company's net assets before IPO were significantly less than those after listing, the valuation obtained by the PB method was eliminated.
In addition, according to the company's financing plan, the plan is to issue no more than 30 million shares, and not less than 25% of the total share capital after issuance, which means that 30 million shares must be issued, with the financing amount not less than 1.596 billion yuan. It can be calculated that the IPO price must be above 53.2 yuan per share.
Considering that the company is suffering from a growth bottleneck and growth may stall, we believe that its reasonable valuation may be between 80 yuan/share-90 yuan/share.
(The individual stocks mentioned in the article are for example analysis only, and no trading suggestions are made.)
