Suffering from subsidy dependence, is Changhong’s downfall caused by diversification?

Sichuan Changhong (600839.SH, hereinafter referred to as "Changhong") may have faded out of the sight of many consumers now, but more than ten years ago, many Chinese families had a Changhong color TV. Sichuan Changhong was once a giant in the home appliance industry that was on par with Qingdao Haier. But now, Changhong is gradually widening the gap with the latter. In its third quarter report of 2017, the company lost 75.76 million yuan after deducting non-operating expenses, and its current market value is only 17 billion yuan. In the same period, Qingdao Haier still made a profit of 4.7 billion yuan after deducting non-operating expenses, and its market value reached 102.9 billion yuan.

What is the reason for the gap between the two giants today? One notable phenomenon is that Changhong, whose performance and market value are inferior to Haier, has a much wider business scope than the former. Changhong mainly made color TVs when it was first listed, and later got involved in mobile phones and IT products, and even in recent years, it has entered industries with low relevance to home appliances such as real estate and transportation. However, Haier has always focused on producing home appliances and has rarely expanded into other fields.

Why did Sichuan Changhong have a poor profit situation in the first three quarters of this year? How does the company plan to control costs in the future to reverse its performance? Is it worried that diversified development will weaken its core competitiveness? How does the company view its current valuation? Regarding the above-mentioned issues, the reporter called and wrote to Changhong. Xu Mingfa, an employee of the company's planning department, only sent two promotional materials and did not make a specific response to the above questions.

Relying on subsidies

Judging from the financial data released by Changhong, the company's momentum of turning losses around last year has not continued this year. In the first three quarters of this year, although the company's operating income increased by 12% year-on-year to 54.4 billion yuan, its net profit fell by 68% to 160 million yuan. The profit data after deducting non-operating items was even worse, with a loss of 75.76 million yuan.

Changhong did not clearly explain in its third-quarter report why its net profit dropped significantly, but it had revealed in its semi-annual report that the reasons for the decline in profits included the rapid rise in prices of bulk materials such as copper, steel, and panels, which squeezed the profit margins of related industries to a certain extent, and the profit of the refrigerator (freezer) business decreased year-on-year; affected by the settlement timing of commercial projects, the profit of the real estate business decreased by 200 million yuan year-on-year; changes in the Indian market environment led to a decrease in the scale of set-top box shipments.

Why did Changhong suffer a loss after deducting non-recurring items in the first three quarters of this year? Where did the company's "extra money" come from? The reporter checked the non-recurring gains and losses in Sichuan Changhong's third quarter report and found that the company received 130 million yuan and 140 million yuan respectively by disposing of non-current assets and receiving government subsidies. Putting aside these two huge amounts of money, it is understandable that Changhong would turn from profit to loss after deducting non-recurring items.

The reporter checked the company's announcement and found that from the beginning of this year to now, Changhong has sold the equity of four subsidiaries, namely Sichuan Ailian Technology, Changhong Education, Changhong Intelligent Manufacturing, and Changhong Gerun, with assessed values ​​of 53.74 million yuan, 38.49 million yuan, 40.04 million yuan, and 100 million yuan respectively.

As mentioned above, Changhong did not continue its good momentum this year. In 2016, Changhong's net profit increased by 128% year-on-year. Even after deducting non-recurring profit and loss items such as subsidies, it still made a profit of 230 million yuan. 2016 was Changhong's best year in the past four years. In 2015 and 2014, the company lost 1.68 billion yuan and 480 million yuan respectively after deducting non-recurring items. In these two years, it received subsidies of 260 million yuan and 240 million yuan respectively.

From this, we can see that Changhong has been losing money for two consecutive years in 2014 and 2015. The reason why the profit data on the books looks better is also due to government subsidies. If the company's own hematopoietic capacity declines, relying on government subsidies to increase profit figures is ultimately an unsustainable approach.

Going Diversified

Changhong's performance has declined now, but it was once a long-established giant in the domestic home appliance industry. As early as 1958, Changhong's predecessor, "Changhong Machinery Factory", was established and was the only airborne fire control radar production base in China at that time.

After 1970, Changhong began to gradually shift its focus to TV production, transforming in the direction of "maintaining military and turning to civilian". Since then, TV has become Changhong's main long-term development business, and color TV production has always been Changhong's key business until the first four years after its listing in 1994.

Since then, Changhong has successively entered the production of batteries and air conditioners, and the company even entered the mobile phone and IT product industries in 2005. After 2008, it also entered the real estate industry, which has almost nothing to do with its original business.

Changhong's horizontal development is still continuing. The company publicly stated in its 2017 semi-annual report that it has launched smart home application solutions, achieved breakthroughs in five business directions, including smart control, security, big media, energy, and health, and achieved large-scale market sales. However, Changhong has previously made few arrangements in the field of energy and health. I wonder how it can make achievements in the future?

Wind data shows that in the first half of this year, Changhong's operating income from intermediate products, IT products, white appliances, and black appliances was 8.48 billion yuan, 8.41 billion yuan, 7.8 billion yuan, and 6.4 billion yuan, respectively. Among them, in black appliances, the operating income of batteries, set-top boxes, and communication products was 530 million yuan, 440 million yuan, and 100 million yuan, respectively. In addition, transportation and processing industries and real estate contributed 480 million yuan and 300 million yuan in operating income to the company, respectively. From the above data, it can be seen that although Changhong currently has a large business, it lacks core products and core businesses.

The combined revenue and profit data of these businesses only account for a very small proportion of the company's overall performance, so naturally they cannot contribute much profit to the company.

Become a passerby

The capital market seemed to be not optimistic about Changhong's gradual diversification. Changhong gradually went from being a blue chip stock to a passerby in the capital market.

In March 1994, when Changhong was listed on the Shanghai Stock Exchange, its total market value was only 3.9 billion yuan. Soon, Changhong broke the record of the A-share market with a profit of 1.2 yuan per share and gradually gained market popularity. In the first five years of entering the capital market, Changhong experienced rapid capital expansion and performance growth, and its total market value increased from the initial 3.9 billion yuan to 30.7 billion yuan.

However, since June 2015, Changhong's share price has fallen from 14.92 yuan to the current 3.54 yuan, with its market value hitting new lows. In contrast, Haier, which has always focused on the development of home appliances, had its share price reach a high of 14.04 yuan in June 2015. Even after experiencing a stock market crash, its share price has gradually recovered since March 2016 after a continuous decline. Haier's share price has now reached 16.98 yuan, exceeding the high before the 2015 stock market crash.

After expanding its business layout, Changhong's performance and stock price have been difficult to recover from the trough. Perhaps instead of casting a wider net, Changhong should think more about how to strengthen its core competitiveness.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.