Rockchip IPO pain point: Difficulty in sustainable profitability

As an important domestic chip manufacturer, Rockchip's timing of listing is a bit awkward. The explosive growth of tablet computers in the past few years has made Rockchip and other chip manufacturers the center of attention, and their performance has also shown explosive growth. However, with the slowdown in the growth of the tablet computer industry in recent years, Rockchip, which relies heavily on tablet computers, has suffered a heavy blow, and the company's performance has declined sharply for three consecutive years. In the cold winter of performance, Rockchip began to choose IPO, and it seemed to regard listing as its life-saving straw. But for Rockchip, whose ability to attract money is not as good as before, the gold content of its IPO has been greatly reduced. Especially in the face of the company's continuously declining performance report, investors are more worried about whether Rockchip's continued profitability in the future can be guaranteed, which is also the biggest stumbling block for Rockchip on its way to A-shares.

After the frenzy, the performance crisis is highlighted

After the frenzy, Rockchip, which was once so prosperous, is now sinking deeper and deeper into its performance quagmire.

According to the prospectus, Rockchip is mainly engaged in the design and development of integrated circuits, focusing on the research and development of system-level chips such as digital audio and video and image processing, mobile smart terminals, and mobile computing. The company's chips are mainly used in tablet computers, TV boxes, game boxes, etc. Among them, tablet computer chip products were once Rockchip's most important money-making weapon.

According to an industry insider, the tablet computer market has entered a period of explosive growth since Apple launched the first generation of tablet computer product iPad in 2010. The explosive growth of tablet computers has also led to a rapid growth in downstream market demand, among which chip manufacturers have benefited the most. Take Allwinner Technology, Rockchip's main competitor, as an example. In 2011, Allwinner Technology's operating income was only 261 million yuan. By 2012, its revenue had grown to 1.34 billion yuan, and the corresponding net profit also soared from 58.92 million yuan to 571 million yuan. Rockchip has also tasted the sweetness of the explosive growth of tablet computers.

However, the good times did not last long. With the slowdown in the growth of tablet computers and increasingly fierce competition in the industry, tablet chip manufacturers have found it increasingly difficult, and Rockchip, which had bet heavily on it, suffered a severe blow.

The financial data in the prospectus show that Rockchip's operating income and net profit have both been declining in the past three years. From 2013 to 2015, Rockchip's operating income was approximately RMB 1.449 billion, RMB 1.021 billion, and RMB 1.016 billion, respectively. In three years, Rockchip's operating income has fallen by about 29.9%. Rockchip's profitability is even more worrying for investors. Data shows that from 2013 to 2015, Rockchip's net profit plummeted to approximately RMB 168 million, RMB 55.1624 million, and RMB 25.2874 million, respectively. It can be seen that in 2015, Rockchip's net profit fell by about 54.2% compared with the net profit in 2014, and fell by as much as 84.9% compared with the net profit in 2013.

Over-reliance on a single product leads to bad consequences

In the opinion of an insider who wishes to remain anonymous, the reason why Rockchip is sinking deeper and deeper into its performance quagmire is related to its over-reliance on tablet computer chip products.

The prospectus shows that smart terminal chips are Rockchip's most important products. The company's smart terminal chips are mainly used in the consumer electronics market such as tablet computers, but the operating income generated by them has been declining in the past three years. From 2013 to 2015, the operating income achieved by Rockchip's smart terminal chips was approximately 1.426 billion yuan, 915 million yuan and 893 million yuan respectively, with a very obvious downward trend. The reason is related to the slowdown in the global tablet computer market and the intensified competition in the tablet computer market. Taking the relevant data released by IDC as an example, the global tablet computer shipments in 2014 were 235.7 million units, an increase of only 7.2%, a huge gap compared with the 52.5% increase in 2013.

"Once the market growth slows down, major manufacturers will start competing. If they want to maintain market share, price wars and other problems will inevitably arise." In the opinion of an insider at a domestic chip manufacturing company, after the explosive growth in the tablet computer market in the past few years, it has entered a plateau period, which will inevitably be accompanied by a reshuffle. At a certain stage, those with weaker competitiveness will be forced to withdraw.

The slowdown in industry growth and fierce competition from other manufacturers have had a huge impact on Rockchip's products. The prospectus shows that the gross profit margin of Rockchip's most important product, smart terminal chips, was as high as 39.36% in 2013, but in 2014, its gross profit margin dropped to 28.5%. Although it rebounded to 33.32% in 2015, it is still far from the previous high gross profit margin era.

At the same time, the average sales price of Rockchip's smart terminal chips has also declined for three consecutive years. In 2013, the average unit price of Rockchip's smart terminal chips was 30.65 yuan. In 2014, its unit price dropped to 22.36 yuan. In 2015, the company's average sales price of smart terminal chips has dropped to 21.97 yuan. Although Rockchip has continuously lowered the sales price of its products, it still failed to save the continuous decline in sales of smart terminal chips. Data shows that from 2013 to 2015, Rockchip's sales of smart terminal chips were 46.5076 million, 40.927 million, and 40.6336 million, respectively.

"During the explosive growth of tablet computer chips, the company failed to enrich its product range in a timely manner. When the profitability of tablet computer-related products became increasingly worse, the company's other profit points could not make up for it in a timely manner, which ultimately led to a cliff-like plunge in the company's performance." said the above-mentioned insider.

Sustainable profitability is in doubt

With revenue and net profit declining, Rockchip's future profitability has also made market participants quite worried. "The regulators are currently most concerned about the company's continued profitability. The company's performance has been declining sharply before its listing, which will inevitably make the market worried about its continued profitability. This will indeed make it more difficult for the company to pass the IPO." said a private equity person in Beijing.

Beijing Business Daily reporters also found that Rockchip, which has had poor performance in recent years, has shown signs of increasingly relying on government subsidies to survive. Data shows that from 2013 to 2015, Rockchip's net profit after deducting non-recurring items was approximately 163 million yuan, 40.5789 million yuan and 10.4882 million yuan respectively. The company's non-recurring gains and losses in the past three years totaled 5.3373 million yuan, 14.5836 million yuan and 14.7992 million yuan respectively, accounting for 2.86%, 26.44% and 58.52% of the net profit attributable to the parent company's owners in the current period. Specifically, in the non-recurring gains and losses, the government subsidies obtained by Rockchip accounted for the majority, which were 5.2343 million yuan, 13.663 million yuan and 14.5312 million yuan in the past three years.

At the same time, the continuous decline in Rockchip's sales to some major customers has also made the market worried about the company's future development. The prospectus shows that Jianfa has been Rockchip's largest customer for the past three years. However, Rockchip's sales to Jianfa have been declining. From 2013 to 2015, Rockchip's sales to Jianfa were approximately RMB 910 million, RMB 285 million, and RMB 254 million, respectively. Rockchip's sales to another major corporate customer, Huashanglong, also declined in 2015. In 2014, Rockchip's sales to Huashanglong were approximately RMB 265 million. In 2015, Rockchip's sales to Huashanglong had dropped to approximately RMB 170 million.

In addition, it is worth noting that the gap between Rockchip and its competitors has gradually widened, which has also brought great pressure to the company's future business development. Data shows that although Allwinner Technology, Rockchip's main competitor, has also experienced a decline in revenue in the past three years, its net profit has stopped falling and rebounded in 2015. In 2015, Allwinner Technology's net profit was about 128 million yuan, an increase of about 15.99% over 2014. Also affected by the industry reshuffle, Allwinner Technology's net profit has begun to show signs of recovery, but Rockchip's net profit is still declining sharply, which inevitably makes investors question the profitability of Rockchip in the future.

In response to the above questions, the Beijing Business Daily reporter called Rockchip for an interview, but the call was not connected. Later, the reporter sent an interview letter to Rockchip via email, but as of press time, the other party had not responded.

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.