As Quanfeng Auto (603982.SH) navigates its transition to new energy ventures, it has reported losses for three consecutive years and remains mired in financial red ink this year. Despite experiencing revenue and net profit growth in the first three quarters, factors such as intensified industry competition, pressure on product gross margins, and substantial prior capital investments have led to a net profit attributable to shareholders deficit of 230 million yuan. Cumulative losses in recent years have wiped out all profits accumulated since its initial public offering.

Securities Star observed that while the Ma'anshan and Hungary production bases, which have received significant investment to support the transformation, have gradually started contributing incremental revenue, both projects have encountered delays. Additionally, these massive investments have resulted in a high asset-liability ratio and immense short-term debt repayment pressure for Quanfeng Auto. By the end of the third quarter this year, the company's short-term debt funding gap exceeded 1.9 billion yuan. The recent completion of a 200 million yuan private placement fails to fundamentally alleviate the financial strain. How to effectively unleash new production capacity and achieve a profitable turnaround has become a critical challenge for Quanfeng Auto.

01. Mired in Losses for 14 Consecutive Quarters

According to available information, Quanfeng Auto primarily engages in the research and development, production, and sales of key automotive components. Its main products include aluminum alloy precision die-castings, such as housings for the three electric systems (motor, electric control, battery) of new energy vehicles, housings for intelligent driving systems, as well as transmission components, engine components, heat exchange components, steering, and braking components for fuel vehicles.

The third-quarter report indicates that Quanfeng Auto achieved revenue of 1.93 billion yuan in the first three quarters of this year, marking a year-on-year increase of 22.99%. This revenue growth was driven by the strong market performance of some clients and the rapid ramp-up of certain projects.

Profit performance, however, has been mixed. During the same period, the company's net profit attributable to shareholders showed a deficit of 230 million yuan, representing a year-on-year increase of 39.46%; net profit after deducting non-recurring items showed a deficit of 239 million yuan, a year-on-year increase of 34.4%. Despite significant improvements in profit levels, the company has yet to escape the quagmire of losses.

In recent years, Quanfeng Auto has continued to advance its strategic transformation towards new energy vehicle components, adding investments in two major production bases in Ma'anshan and Hungary. Revenue from new energy businesses has grown rapidly, with revenue from new energy vehicle components accounting for a stable 60% or more of the company's total revenue.

Quanfeng Auto stated in its third-quarter report that due to intensifying market competition in China's new energy vehicle industry, prices of new energy-related component products have come under pressure, dragging down the gross margin of the company's new energy vehicle component products. Coupled with substantial prior capital investments and other factors, the company remains in a loss-making position. Although the third-quarter report did not disclose detailed information on new energy vehicle components, in 2023 and 2024, the gross margins of the company's new energy vehicle components were only -3.73% and -6.2%, respectively.

Quanfeng Auto attributes the reduction in losses to two main factors. Firstly, benefiting from sales growth and improvements in product production efficiency and yield, unit fixed costs and variable costs have decreased compared to the same period last year, with the gross margin recovering to 5.4% in the first three quarters. However, the company's net profit margin remains negative at -11.93%.

Secondly, due to the continuous implementation of cost reduction and efficiency enhancement measures, the proportion of management and research and development expenses in revenue has continued to decrease, and financial expenses have declined due to increased exchange gains and convertible bond conversions. In the first three quarters of this year, management, research and development, and financial expenses decreased by 11.59%, 10.85%, and 24.06% year-on-year, respectively. Although selling expenses surged by 122.82% year-on-year, the amount of 15.8727 million yuan is relatively small compared to other individual expense items approaching 100 million yuan.

It is understood that 2022 marked a critical period for Quanfeng Auto's strategic transformation, shifting from traditional automotive components to new energy vehicle components and from small and medium-sized components to medium and large-sized components, while accelerating business penetration into complete vehicle factories.

Securities Star noted that the advancement of strategic transformation has been accompanied by significant performance pressure. Quanfeng Auto has reported losses for three consecutive years from 2022 to 2024, with cumulative net profit attributable to shareholders deficits exceeding 1.2 billion yuan. From its listing in 2019 to 2021, Quanfeng Auto recorded a net profit attributable to shareholders of 329 million yuan. This means that in just these three years, the company has completely erased the profits earned in the earlier period. Breaking it down by quarter, Quanfeng Auto has reported net profit attributable to shareholders deficits for 14 consecutive quarters since the second quarter of 2022.

02. Immense Short-Term Debt Repayment Pressure

Since 2020, Quanfeng Auto has successively invested in the construction of production bases in Ma'anshan and Hungary. To ensure the smooth progress of the projects, in 2022, Quanfeng Auto raised a net amount of 1.18 billion yuan through a private placement, with part of the funds used to invest in the Intelligent Manufacturing Project for High-End Automotive Components (Phase II) (hereinafter referred to as the "Ma'anshan Phase II Project") and the Intelligent Manufacturing European Production Base Project for Automotive Components (hereinafter referred to as the "European Project"), which were expected to reach their intended usable states in July and November of this year, respectively.

As of the end of June this year, the investment scales for the Ma'anshan and Hungary production bases have reached 2.029 billion yuan and 139 million euros, respectively. Currently, the Ma'anshan production base has started contributing revenue, achieving nearly 900 million yuan in revenue in the first three quarters of this year, a year-on-year increase of over 50%; in addition to bulk supply to North American clients, the Hungary production base is also actively engaged in pre-batch production preparations such as preliminary development and sample production for new projects.

However, at the end of July this year, Quanfeng Auto announced that the dates for the Ma'anshan Phase II Project and the European Project to reach their intended usable states have been postponed to July 2026 and November 2026, respectively. The postponement is attributed to numerous changes in macro-environmental conditions and market demand during the actual project implementation, especially the impact of overseas uncertainties such as the Russia-Ukraine situation and the European energy crisis on the European Project. The postponement aims to better balance market demand and achieve optimal allocation of the company's resources.

As of the end of 2024, the progress of fund utilization for the aforementioned projects funded by the private placement has reached 100%. It is noteworthy that while project construction and operation have progressed, Quanfeng Auto's asset-liability ratio has continued to climb, and debt repayment pressure has gradually emerged. The asset-liability ratio was 47.47% in 2021 and soared to 72.35% in 2024. As of the end of the third quarter this year, the asset-liability ratio stood at 69.09%, still at a historically high level.

Specifically, as of the end of the third quarter this year, Quanfeng Auto had 713 million yuan in monetary funds on hand, a 35.47% increase from 526 million yuan in the same period last year. However, short-term borrowings reached as high as 1.29 billion yuan, and non-current liabilities due within one year amounted to 637 million yuan, resulting in a total short-term interest-bearing debt exceeding 1.9 billion yuan, creating a significant funding gap and exerting pressure on short-term debt repayment.

To alleviate financial pressures, Quanfeng Auto has once again initiated a private placement. The company issued 25.5754 million shares to Derun Holdings Limited, controlled by its actual controller Pan Longquan, raising 200 million yuan in funds, all of which will be used to supplement working capital and repay bank loans. Currently, this private placement has completed listing at the end of October. Although the arrival of the 200 million yuan private placement funds and the delisting of the company's convertible bonds through mandatory redemption have led to a decrease in the asset-liability ratio, it remains insufficient compared to the enormous debt scale. How to emerge from the loss-making predicament through means such as base production capacity release and cost control remains a daunting challenge for Quanfeng Auto.

While focusing on its main business transformation and financial improvement, Quanfeng Auto has also begun to venture into new sectors. Recently, Jiangsu Dinghui Embodied Intelligent Robot Innovation Center Co., Ltd. was established, with Quanfeng Auto participating with a 4.1667% stake. The company publicly stated that it will leverage its technological characteristics and capabilities to participate in the development of the embodied intelligent robot industry. However, no further details have been disclosed at present. (This article is first published on Securities Star, Author | Lu Wenyan)

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