Regulatory Alert! The crisis and opportunity behind the M&A growth of Joyson Electronics

"Investor's Network" Wang Jianfan

At a time when the global market is changing, China's automotive industry is standing at a new historical starting point. In 2023, China's auto exports surpassed Japan's in one fell swoop and became the world's largest auto exporter.

In this macro context, Joyson Electronics, as the leader of the domestic auto parts industry, has undoubtedly become an important participant and beneficiary of this change.

In 2023, Joyson Electronics will achieve revenue of 55.728 billion yuan, an increase of 11.92% over the previous year; The net profit attributable to the parent company reached 1.083 billion yuan, a year-on-year surge of 174.79%. Entering 2024, the company's development remained stable, with a net profit attributable to the parent company of 307 million yuan in the first quarter, a year-on-year increase of 53.11%.

However, it is confusing that despite the company's continued positive performance, Joyson Electronics' performance in the secondary market has always been unsatisfactory. Since 2020, its share price has fallen from a high of 32 yuan per share to the current range of about 15 yuan per share.

Behind the apparent prosperity, the sluggish share price may reveal deep concerns about its future prospects and potential risks.

The regulator took action, and the stock price fluctuated

On the evening of June 21, Joyson Electronics announced that it had received a warning letter from the Ningbo Supervision Bureau of the China Securities Regulatory Commission.

The Ningbo Supervision Bureau took administrative supervision measures of issuing warning letters to Joyson Electronics, Wang Jianfeng, then chairman of the company, Li Junyu, then vice president and chief financial officer, and Yu Zhaohui, then secretary of the board of directors, and recorded them in the integrity file of the securities and futures market.

On the same night, the Shanghai Stock Exchange also issued a regulatory work letter to Joyson Electronics, involving listed companies and their intermediaries and relevant personnel, emphasizing the need for serious self-examination and requiring sponsors to earnestly perform their duties.

According to the announcement of the regulator, Joyson Electronics' violation of this time is related to the previous private placement matters, involving several obvious violations in the use of raised funds.

These violations not only exposed the company's internal control deficiencies, but also reflected significant omissions in the use of funds by management. Affected by this news, on June 24, the company's stock price fluctuated after the opening, and once fell by more than 9% in the intraday. As of July 4, the company's closing stock price was 14.51 yuan per share.

"Buy, buy, buy" creates the pinnacle

This breach is undoubtedly a wake-up call for investors, reflecting the rapid development of Joyson Electronics since its establishment in 2004 and the potential risks behind it. The company's rapid rise is inseparable from an aggressive M&A strategy.

Since 2009, Joyson Electronics has significantly expanded its business scope and market influence through a series of mergers and acquisitions. For example, the acquisition of Shanghai Huade Plastic Products Factory has quickly established the company as a major player in the auto parts industry. Since then, Joyson Electronics has continued to acquire companies such as Preh, IMA and Quin, which have outstanding performance in the fields of human-computer interaction systems, intelligent vehicle connection technology, new energy systems and high-end automotive interior functions.

By 2016, Joyson Electronics had strengthened its market position in the automotive information and security business and industrial automation systems through further acquisitions of TS Dawn in Germany, KSS and EVANA in the United States. In particular, the acquisition of part of Takata's business in Japan, which has been plagued by safety issues in 2018, and the acquisition of some assets of Yanfeng Bailide in 2019, Joyson Electronics' position in the field of automotive safety systems has also been further strengthened.

Through a series of mergers and acquisitions, it has not only diversified the business, but also significantly increased the company's order book and revenue. In 2016, Joyson Electronics' revenue exceeded the 10 billion mark, reaching 18.552 billion yuan, and reached a peak of 61.699 billion yuan in 2019.

Although Joyson Electronics has achieved a certain competitive advantage in the market through its M&A strategy, frequent capital operations have also exposed the company's weaknesses in financial and operational management.

Acquisition of a "double-edged sword", weak earnings and high goodwill

While the scale of revenue is expanding rapidly, the company's profitability is not impressive.

Since 2015, the company's gross margin has continued to decline, from 21.65% to 11.96% in 2022, and although it has recovered to 15.09 in 2023, the overall trend is still weak. This pressure on profitability is particularly pronounced in the company's automotive safety business, which accounts for about 70% of the company's revenue, and the decline in its gross margin has directly affected the company's overall earnings performance.

On further analysis, it is not difficult to see that the "double-edged sword" characteristic of the company's large-scale acquisitions has always existed.

The profitability woes in the automotive safety business stemmed in part from the acquisitions of KSS and Takata. Although the early acquisitions were intended to expand market share and build core technologies, the addition of KSS and Takata did not immediately translate into profitability. On the contrary, due to high integration costs, its gross profit margin fell from 11.2% in 2020 to a dismal 8.49% in 2021, and although it has improved to 12.77% in 2023, it still does not meet the expected profitability level.

These acquisitions not only failed to immediately increase profitability, but also accumulated a significant goodwill burden on the company. The acquisitions of KSS in 2016 and Takata in 2018 significantly increased the company's goodwill, bringing in nearly $6 billion and more than $8 billion, respectively. These high levels of goodwill not only increase the risk of goodwill impairment, but also raise concerns about the stability of the company's earnings in the market.

In 2021, the poor performance of KSS's business led to a goodwill impairment loss of 2.02 billion yuan, which directly led to a huge loss for the company that year. At present, as of the first quarter of 2024, the company's book goodwill is 5.535 billion yuan, although it is lower than in previous years, but it is undoubtedly still a risk factor for Joyson Electronics.

In addition, the company's high debt-to-asset ratio also exposed its financial vulnerability. Ongoing mergers and acquisitions have led to high financial costs, and the company's debt-to-asset ratio has remained as high as 60% in recent years and remains as high as 66.34% in the first quarter of 2024.

Can you break the game?

In general, since its establishment, Joyson Electronics has transformed from a simple automotive plastic parts manufacturer to a leading enterprise in R&D, manufacturing and services covering multiple fields such as intelligent cockpit, intelligent networking, intelligent driving, new energy management and automotive safety systems through a series of strategic mergers and acquisitions.

In this process, the continuous expansion of the company's business scope has helped its revenue scale expand rapidly, achieving a wide range of coverage in the fields of traditional automobiles, new energy vehicles and smart vehicles.

However, behind the rapid expansion of Joyson Electronics, frequent mergers and acquisitions have also accumulated huge management expenses, financial expenses and goodwill impairment pressure, forming a series of financial and management challenges. These historical issues have also led to the market's reservations about the sustainability and stability of its earnings, exacerbating the divergence between the company's market capitalization and revenue scale.

Looking ahead, the automotive electronics industry presents broad investment opportunities as the global automotive industry transforms to electrification, intelligence, and connectivity. As an industry leader with in-depth layout in a number of key technology fields, Joyson Electronics' future development is full of uncertainties but also opportunities in the face of the rapid evolution of the industry and the complex challenges of internal integration. (Produced by Thinking Finance)■