IPO Observation | Unprecedented Profit Rate! How Can Kun Wei Electronics Maintain its High Profits Amidst a Fluctuating Market?

As precise current sensors and fuses, they play a crucial role in various industries such as lithium-ion battery, smart phone, notebook computer, power supply manufacturing, and home appliances.

Kun Wei Electronics, an IPO applicant, is one of the companies that develops, produces, and sells precise current sensors and fuses.

According to the prospectus, Kun Wei Electronics ranked fourth globally in the precise current sensor market in 2022, with a market share of 7.72%. However, its market share in the fuse market was only 1.05%, ranking relatively low.

The company's revenue from the precise current sensor and fuse business was ¥3.25 billion and ¥1.35 billion respectively in 2022. Based on these figures, we can infer that the global market size for precise current sensors is approximately ¥42.10 billion, while the fuse market is around ¥128.57 billion, dominated by overseas companies.

From this, we can see that Kun Wei Electronics is facing extremely intense competition in its industry. However, despite this intense competition, the company has consistently maintained a higher profit rate than the industry average....

I. Unprecedented Profit Rate, Pre-IPO Performance!

In 2020-2022 and the first half of 2023, Kun Wei Electronics' overall profit rate was 47.74%, 48.86%, 47.36%, and 42.09% respectively, significantly higher than its peers. In the second round of questioning, Kun Wei Electronics selected three peer companies with average profit rates of 33%, 33.24%, 25.40%, and 21.96%.

Kun Wei Electronics' high profit rate is attributed to its precise current sensors, which have a significantly higher profit rate than the industry average. According to data, Kun Wei Electronics' precise current sensor profit rate ranges from 55% to 63%, while its peer company's slice-type resistor profit rate is between 30% and 45%.

In response to concerns about high profit rates, Kun Wei Electronics emphasized that the main products are hybrid resistors, which have a higher profit rate by nature. The company further explained that the high profit rate of its resistance products is mainly due to the strong support from core customers.

In summary, Kun Wei Electronics' high profit rate is primarily due to product features and the strong purchasing power of core customers.

Notably, after excluding core customers, Kun Wei Electronics' profit rate shows a normal industry range. According to publicly available prospectuses, these core customers primarily include A company, Samsung, Gree, and Xiaomi, which have strict control over their supply chains, resulting in low costs due to intense competition among suppliers. However, Kun Wei Electronics has higher procurement prices than normal, which is unusual.

Despite the high profit rate, Kun Wei Electronics' revenue has been declining since the second half of 2023. In the first quarter of 2023, its revenue decreased by 32.05% year-on-year, and its net profit after deducting non-operating items decreased by 84.84%. In the first half of 2023, Kun Wei Electronics achieved revenue of ¥24.42 billion, down 11.54% year-on-year; its net profit after deducting non-operating items was ¥2.79 billion, down 38.92% year-on-year.

In response to declining performance, Kun Wei Electronics began using "predictions" to boost confidence. According to the earnings prediction report, Kun Wei Electronics predicted that its revenue in 2023 would be ¥53.99 billion, down 1.07% year-on-year; and its net profit after deducting non-operating items would be ¥8.00 billion, down 5.92%. Additionally, Kun Wei Electronics publicly disclosed that it had received orders and purchase plans from customers totaling ¥2.58 billion as of the end of October 2023, which is expected to generate revenue of approximately ¥1.69 billion by the end of 2023.

II. Distributors Make a "Storage" Move to Boost Performance!

Aside from high profit rates, Kun Wei Electronics' distributors have been particularly aggressive in their sales efforts during the revenue decline period. In the first half of 2023, the distributors' revenue share increased compared to 2022, while the direct sales revenue share decreased.

Data shows that during the reporting period, Kun Wei Electronics achieved revenue of ¥10.17 billion, ¥17.36 billion, ¥14.41 billion, and ¥7.83 billion respectively, with the distributor's revenue share accounting for 25.08%, 31.05%, 26.57%, and 32.35% respectively. The top five distributors accounted for 48.97%, 45.02%, 44.97%, and 37.49% of the total revenue.

Notably, the first-ranked distributor, Anmin Electronics, has been storing up inventory since 2022. As of the end of October 2023, its inventory accounted for 86.77% of the sales revenue.