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Information on the Shenzhen Stock Exchange’s official website shows that on July 22, Shenzhen Yilian Technology Co., Ltd. (hereinafter referred to as “Yilian Technology”) submitted its registration for IPO on the Growth Enterprise Market.

Public information shows that Yilian Technology has been engaged in the research and development, design, production, sales and service of electrical connection components, and its business layout continues to expand into emerging application fields. The company has high-quality customer resources, including CATL, Xpeng Motors, Volkswagen, Geely Auto, etc.

Lanfu Finance found that Yilian Technology is overly dependent on its largest customer, CATL, and the company's long-term development may be "constrained"; the company's main product revenue growth rate has declined, and the overall gross profit margin has continued to decline. In addition, whether the changes in overseas new energy policies will bring major changes to the company's development still needs to be observed.

Being heavily dependent on CATL, is this a blessing or a curse?

It is understood that Yilian Technology has been deeply engaged in the field of electrical connection components for a long time. After years of technical accumulation and industry experience, it has achieved the expansion of products from traditional application fields such as industrial equipment and consumer electronics to emerging application fields such as new energy vehicles and energy storage.

At the same time, benefiting from years of accumulation, Yilian Technology has established cooperative relationships with well-known companies in various fields at home and abroad, including CATL, Xpeng Motors, Volvo, Volkswagen, Nissan, Geely Auto, Leapmotor, Changan Automobile, VMware, Xinwoda, Hibostron, Canadian Solar, JinkoSolar, Trina Solar, Nidec, Dometic, Mindray Medical, etc.

However, Yilian Technology has the risk of high customer concentration and is suspected of being heavily dependent on large customers. From 2021 to 2023, the company's operating income from the top five customers will be 1.106 billion yuan, 2.299 billion yuan, and 2.694 billion yuan, respectively, accounting for 77.12%, 83.37%, and 87.61% of the operating income, respectively.

Further analysis revealed that the operating income from the top five customers of Yilian Technology accounted for a relatively high proportion of its revenue in each period. If the business of these customers is affected by many factors in the future, such as the international political situation, changes in the market environment, downstream market demand, import and export policies, etc., their purchase orders to the company may be reduced, which will deal a heavy blow to Yilian Technology's business operations and financial condition.

In addition, Yilian Technology is overly dependent on its largest customer, CATL, which may also pose a hidden danger to the company's long-term development. From 2021 to 2023, Yilian Technology's sales revenue to CATL accounted for 64.72%, 67.98% and 71.13% of its operating income respectively.

Yilian Technology pointed out in its prospectus that the market concentration of the new energy power battery industry, the downstream field of the company's products, is relatively high. The concentration of the downstream market has also been transmitted to the upstream new energy supporting companies, making the electrical connection component industry in which the company is located relatively concentrated in terms of customer selection and supply.

According to a report released by SNE Research, a research organization, CATL will rank first in the global installed capacity of power batteries in 2023 with an installed capacity of 259.70GWh, and a market share of 36.80%. With the continuous expansion of CATL's business, the purchasing demand for Yilian Technology has also increased further. Last year, the company's sales revenue to CATL increased by 16.65%.

Yilian Technology admitted that it expects that the cooperation between the company and CATL will remain stable in the future, and that the company's sales revenue from CATL will still account for a relatively high proportion. If the expansion of new customers in the future is not as expected, or there are major changes in CATL's operations and procurement, or the company's cooperation with CATL is replaced by other suppliers, it may lead to a decline in the company's product sales, and the company's business development and operating performance will be adversely affected by excessive reliance on CATL for sales revenue.

The overall gross profit margin continues to decline

According to the official website, Yilian Technology's main products include various electrical connection components such as battery cell connection components, power transmission components, and low-voltage signal transmission components.

In the past three years, although Yilian Technology's operating income has maintained a growth trend, the growth rate has slowed down. This phenomenon is even more obvious when it comes to products. From 2021 to 2023, Yilian Technology's sales of battery cell connection components will be 10.2232 million, 19.3971 million, and 19.9877 million, respectively, with revenues of 645 million yuan, 1.422 billion yuan, and 1.81 billion yuan, respectively.

The sales volume of low-voltage signal transmission components and power transmission components both showed a downward trend in 2023, and the operating income of the low-voltage signal transmission components business also declined, while the revenue of power transmission components only increased slightly year-on-year.

It should be noted that from 2021 to 2023, Yilian Technology's comprehensive gross profit margin was 21.69%, 19.54% and 18.94% respectively, and the company's overall profitability continued to decline. In this regard, Yilian Technology itself has to admit that with the cyclical fluctuations of the industry and the upgrading of products in the future, the company's products will face pressure to negotiate price cuts.

If Yilian Technology cannot continue to strengthen technological research and development, consolidate and expand customer resources, maintain and enhance its own competitive advantages, the company may not be able to effectively cope with market competition under the influence of many factors such as intensifying industry competition, rising raw material procurement prices, and price reduction pressure in the terminal market, and the company's gross profit margin will be at risk of continuing to decline.

Competition in the new energy industry is intensifying, and there may be uncertainties in the future

It is worth noting that Biden's withdrawal from the election has had a strong impact on the global market, especially on the upstream and downstream of China's new energy vehicle industry chain. Industry insiders pointed out that during the Biden administration, it was committed to promoting clean energy and reducing carbon emissions, and proposed many supporting bills for the new energy vehicle industry, while Trump's proposition was the opposite.

Last Thursday, Trump said he would overturn a series of auto policies previously implemented by Biden and impose tariffs on foreign cars, including those from China, in order to "revitalize the U.S. auto manufacturing industry." Against this backdrop, the development of new energy vehicles in my country may be affected to a certain extent.

From 2021 to 2023, the sales revenue of new energy products of Yilian Technology will be RMB 1.148 billion, RMB 2.438 billion and RMB 2.833 billion respectively, accounting for 80.06%, 88.42% and 92.14% of the operating income respectively. It can be seen that the new energy business occupies a large proportion. Whether the relevant overseas policies will have an adverse impact on the operation of Yilian Technology remains to be seen.

At the same time, Yilian Technology further pointed out in its prospectus that with the rapid development of the new energy vehicle industry in recent years, traditional automobile companies and emerging car manufacturers have joined the competition, the number of companies in the industry has continued to increase, and the competitive landscape has continued to change. If the company cannot continue to expand new customers or its existing customer share is taken away, there may be a risk of slow sales growth or even decline.

In addition, new energy vehicle manufacturers or first-tier supporting manufacturers and upstream customers have increasing requirements for new products, new technologies and new processes. If Yilian Technology cannot keep up with the technological development of the new energy industry and conduct continuous research and development, the company will be at risk of losing its market share to other new suppliers.

Lanfu Finance noted that Yilian Technology's technical research and development capabilities are significantly lower than the industry average. The prospectus shows that as of May 25, 2023, Yilian Technology and its subsidiaries have only obtained 9 invention patents, while the average number of invention patents of 7 comparable companies in the same industry is 14.

Of the 9 invention patents it has obtained, 5 were acquired through assignment, 2 were acquired through the acquisition of Ningde Yilian Electronics Co., Ltd., and the other 2 were independently developed by Yilian Technology. Since 2020, Yilian Technology has not obtained any new invention patents for more than 4 years.

There are many potential risks that Yilian Technology needs to properly resolve before going public, otherwise the company's long-term development may be uncertain. What are the future development prospects? Lanfu Finance will continue to follow up and observe.