Behind the drastic fluctuations in Geer Software’s net profit: Is there a financial cleansing?
2024-08-20
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It is worth mentioning that the "leading advantage in the industry" listed as the first core competitiveness in Geer Software's 2021 annual report has deleted the relevant description in subsequent annual reports; the 2023 annual report's introduction to the main business and products has blurred the PKI label.
Geer Software (full name "Geer Software Co., Ltd.", stock code 603232.SH) is mainly engaged in the research and development, production, sales and service of products related to digital trust and data security. Its main products include three categories: PKI infrastructure products, PKI security application products and general security products.
PKI, or Public Key Infrastructure, is used to establish, manage and distribute public keys, and provide secure and reliable communication and data transmission. In layman's terms, Geer Software's PKI infrastructure products mainly solve the problem of "who are you" in the network world, and PKI security application products mainly solve the problems of "what you can do" and "what have you done" for network users in a specific network environment.
Geer Software was listed on the Shanghai Stock Exchange Main Board in April 2017. From 2017 to 2022, its revenue scale increased year by year, from 272 million yuan to 660 million yuan, and declined for the first time in 2023. The net profit performance in the same period is as follows:
As shown in the above figure, Geer Software's net profit was relatively stable in the first few years after its listing, but it has fluctuated sharply in recent years. After a big rise in 2021, it fell sharply to a loss in 2022 and rebounded again in 2023.
After analyzing the financial statements and related public information of Geer Software from 2021 to 2023, Xinkan Finance found that some financial data may be distorted.
Cash flow and profit diverge greatly
Geer Software achieved a net profit of 79.8114 million yuan in 2021, while the net cash flow from its operating activities was -12.6176 million yuan that year, indicating that there was not enough cash in the profit and there may be inflated profits. The deficit of its net cash flow from operating activities continued to expand in 2022 and 2023, reaching -33.6134 million yuan and -61.1274 million yuan respectively.
Even if the accounting period is extended to 11 years, the net cash flow from operating activities of Geer Software from 2013 to 2023 totaled 287.8414 million yuan, and the net profit totaled 562.4329 million yuan. The net cash flow ratio (i.e. net cash flow from operating activities/net profit) was 0.51, which means that 1 yuan of net profit actually flowed into 0.51 yuan of cash, and the "gold content" of the profit was relatively low.
The industry generally believes that if the ten-year cycle is used, net profit and net cash flow from operating activities should be roughly the same. If there is still a large difference, there is a high possibility of financial fraud.
The following assets of Geer Software, which grew abnormally at the end of 2021 compared with the previous period, may be the place to digest the inflated profits:Notes receivable increased by 105.15%, while the growth rate of operating income in the same period was only 37.38%. This item was not included in the "Asset and Liability Analysis" in the annual report of Geer Software, but it should be noted that the balance of notes receivable of 28.4111 million yuan at the end of 2021 was the highest in eleven years, and the balance of commercial bills was as high as 21.4324 million yuan. The acceptor of commercial bills is an enterprise. Compared with bank bills with strong credit backgrounds and strict internal audit mechanisms, the credit risk is relatively high and it is relatively easy to forge.
The inventory balance soared 229.36% to 340 million yuan, accounting for 17.84% of total assets. From 2014 to 2020, the highest value of the inventory balance at the end of each period was 7.81%, and the average was 5.37%. Geer Software simply explained that "it was mainly due to the increase in inventory purchases for new projects." In fact, the raw materials only increased by 37 million yuan, but the shipment of goods increased by 200 million yuan!
Is there a financial cleansing?
Geer Software's net profit in 2022 was -9.154 million yuan, the first loss since its listing, and then turned losses into profits in 2023. The gross profits in the two years were 263 million yuan and 267 million yuan respectively, with little difference, but the final net profit was sunny and rainy. The main reason is that many items on the income statement showed different performance from previous years. It is not ruled out that the management has deliberately scaled expenses and made impairment provisions to carry out financial whitewashing.
1. Abnormal fluctuations in management expenses
Generally speaking, administrative expenses should maintain a growth rate equal to or less than the growth of operating income. However, Geer Software's revenue increased by 7.93% in 2022, and administrative expenses increased by 31.01% from the previous period to 147 million yuan. The annual report shows that the increase in administrative expenses is due to the increase in the company's personnel and related expenses. In fact, the increase in employee salaries alone accounts for 97.96% of the total increase.
Contradictory to this, at the end of 2022, the total number of employees at Geer Software only increased by 4 compared with the end of 2021, of which the number of technical personnel increased by 18, while the number of administrative staff decreased by 9 (see the figure below for details).
Given that the labor costs of R&D expenses in 2022 have decreased compared with the previous period and the prospectus before listing shows that labor and expenses account for only about 5% of operating costs, we can assume that Geer Software includes most of the salaries of technical personnel in the administrative expense accounting.
But the anomalies still exist: at the end of 2021, its technical, financial and administrative staff increased by 160 people in total compared with the end of 2020, and employee salaries in management expenses doubled that year, increasing by nearly 40 million yuan. However, at the end of 2022, the three categories of personnel only increased by 10 people, and employee salaries still increased significantly by 34.1258 million yuan compared with 2021.
By 2023, the total number of Geer Software's technical, financial and administrative personnel will have decreased by 132, while employee salaries in administrative expenses will have been significantly reduced by 50.4543 million yuan.
2. Provision for large impairment losses
2.1 The first provision for inventory impairment in the past nine years
Geer Software mainly adopts two production modes: MTS (Make To Stock) and ATO (Assemble To Order). In simple terms, the MTS production mode means that the company produces a certain number of standardized products according to market demand and reserves inventory; the ATO production mode refers to customized production based on standardized products to meet customer needs in response to specific customization requirements of customers for some parameters or certain functional items of products. Such products are usually not reserved in inventory.
Therefore, more than 90% of Geer Software's operating costs are purchased materials and services, namely, hardware equipment, software, and technical development, implementation, and maintenance services purchased to fulfill sales contracts. The wages and salaries of its own project management department personnel and travel expenses incurred in project implementation account for a relatively low proportion.
Geer Software's inventory mainly consists of shipped goods (items shipped in the year but not yet accepted) and raw materials. Except for the sudden and substantial increase in inventory balance at the end of 2021, the proportion of inventory in total assets in previous years was relatively low, and no inventory impairment provision has ever been made.
At the end of 2022, the inventory composition of Geer Software is shown in the following figure:
Since 2014, Geer Software has made an inventory impairment provision for the first time in nine years, and it is for raw materials. What is puzzling is that according to the production process disclosed in its prospectus, raw materials become finished products after being used to burn CDs or fill products. In addition, with contract liabilities of more than 100 million yuan in recent years and a high gross profit margin of more than 50%, will the net realizable value of raw materials be lower than the cost? Moreover, about 37 million yuan of it was added in 2021. Will it be impaired one year later?
2.2 Full provision for credit impairment losses on accounts receivable from many small customers
In addition to the "fresh" asset impairment loss of 5.3097 million yuan in Geer Software's 2022 income statement, the credit impairment loss of 20.9529 million yuan is also very eye-catching, including an impairment loss of 21.1769 million yuan on accounts receivable.
Unlike previous years when bad debt losses were provided for accounts receivable by age of combination, Geer Software added "bad debt provision by individual item" in 2022. The annual report shows that Geer Software has made a full provision for bad debts of RMB 12.5753 million, as the accounts receivable from some customers are expected to be uncollectible, with the details as follows:
The first four customers listed in the figure are still in existence. Among them, Beijing Huixun Times Enterprise Technology Co., Ltd. won the bid for the "Inner Mongolia Electric Power (Group) Co., Ltd. 2024 Management Information System Operation and Maintenance Project" in early June this year, with a transaction amount of 497 yuan/day; Xinjiang Ngoguan Huizhi Information Technology Co., Ltd. won the bid for the "Changji Prefecture Media Integration Center Service Market Project" a few days ago, with a contract price of 350,000 yuan.
The customer was still actively "alive", so why was he sentenced to "death" by Gel Software?
It should also be noted that for other customers whose names are not even worthy of being disclosed, the proportion of bad debt provision for the total balance of accounts receivable is 46.84%. It seems that they have made an appointment and have chosen to "give up" on Geer Software in 2022.
In 2022, Geer Software's non-operating expenses amounted to 4.8562 million yuan, which was 10.3 times the average of non-operating expenses in other periods from 2013 to 2023. The annual report shows that in 2022, Geer Software disposed of a batch of software with a total original value of 38.6912 million yuan, resulting in a loss of 4.1246 million yuan in intangible asset disposal.
The book value of this batch of software is still 4.8495 million yuan, which is not as good as the batch of software that was disposed of in 2020 and the original price has been amortized. The amount of "income from disposal of non-current assets" in the 2020 annual report is -243,900 yuan. Although the detailed composition is not disclosed, the amount is relatively small.
In a nutshell, in 2022, when the gross profit margin of Geer Software "fell below" 40%, the growth rate of management expenses was abnormal, the inventory impairment provision was made for the first time, the bad debt provision of accounts receivable was made in full for the first time, and even the disposal of software was a "loss sale". When there are too many coincidences, it may no longer be a coincidence, but more like a premeditated "financial bath". After all, the public health incident that year can be used as a shield for the decline in performance or even the first loss.
Is the gross profit margin inflated?
According to a research report by Southwest Securities, in my country's PKI product market, Geer Software, Changchun Jida Zhengyuan Information Technology Co., Ltd., China Electronics Technology Group Corporation Network Security Technology Co., Ltd. and Beijing Digital Certification Co., Ltd. constitute the dominant companies in this segment.
From 2021 to 2023, the comparison between Geer Software's comprehensive gross profit margin and the above-mentioned companies is as follows:
As can be seen from the above table, the gross profit margin level of Geer Software is at an upper-middle level among its peers, which shows that Geer Software has core competitiveness that others do not have.
If it is in 2019 and previous years, this statement is somewhat convincing. Because from 2012 to 2019, the revenue of PKI security application products of Geer Software accounted for more than 50% of the total revenue in each period. This type of product is based on the digital certificates issued by PKI infrastructure products and PKI cryptographic technology, and the gross profit margin is in the range of 64% to 79%.
However, starting from 2020, general security products have become the main source of revenue for Geer Software, while PKI security application products have gradually become a supporting role:
According to the 2022 annual report of Geer Software, the company is mainly engaged in the research, development, production, sales and services of commercial cryptographic software products with PKI public key infrastructure as the core. General security products are information security products based on non-cryptographic technology. They are a supplement to PKI-related security products. They mainly provide users with more complete security solutions, mainly including network audit systems and other system integration products.
The relevant description in the previous prospectus of Geer Software is the same. Obviously, general security products are not the core products that Geer Software originally intended to promote, and the technical content of such products is not as good as PKI. So, why can Geer Software maintain a high gross profit margin among its peers with "ordinary" general security products?
It is worth mentioning that the "leading advantage in the industry" listed as the first core competitiveness in Geer Software's 2021 annual report has deleted the relevant description in subsequent annual reports; the 2023 annual report's introduction to the main business and products has blurred the PKI label.
In addition, a company's high gross profit margin generally means that it has a strong voice in the industry chain, which is specifically reflected in the fact that it will try to occupy the supplier's funds and not give customers a long credit period. Therefore, the cash conversion cycle (the number of days required for a company to purchase raw materials for production, sell products, and finally collect cash) is generally small or even negative. However, Geer Software's cash conversion cycle is much longer than that of comparable companies (see the table below, unit: day).
1. Gross profit margin continues to decline
After Geer Software stunned the market with its gross profit margin of 60.07% in the year of its listing, it has been declining for five consecutive years since then (since there are no transportation costs in the sales expenses, the comparison caliber is consistent within the period). This is the inevitable result of the gradual increase in the proportion of its own general security product revenue, whose gross profit margin is less than 30%.
In the past two years, the core competitiveness that Geer Software ranked first was "technical R&D advantages and continuous innovation capabilities", but the R&D expenses have been declining continuously. This may be the reason why the core position of PKI security application products with higher gross profit margins has been lost.
2. Profits are supported by non-recurring gains and losses
In 2023, Geer Software's net profit turned from loss to profit. On the surface, its business showed a trend of recovery. In fact, the net profit attributable to the parent company after deducting non-recurring items in 2022 and 2023 was -54.3403 million yuan and -11.7606 million yuan respectively. From 2017 to 2021, the net profit attributable to the parent company after deducting non-recurring items continued to decline, especially in 2021 when the net profit increased by 40.22% to a peak. The net profit attributable to the parent company after deducting non-recurring items was only 33.2585 million yuan, a year-on-year decrease of 27.73%.
The non-recurring gains and losses of Geer Software are mainly composed of government subsidies and investment income from financial products. In particular, the operation of using large amounts of idle funds for financial management is puzzling.
At the end of 2016, its monetary fund balance was 115.7114 million yuan, accounting for 32.79% of total assets. Usually, if this ratio exceeds 25%, it can reflect that the company has sufficient funds and high deposits.
After the listing of Geer Software in 2017, the net amount of funds raised after deducting issuance expenses was 212.7717 million yuan, and as of the end of 2019, 43 million yuan was still used to purchase financial products. With a balance of 237 million yuan in bank financial products (trading financial assets) at the end of 2019, Geer Software raised another net amount of 636 million yuan through a private placement of shares in August 2020, one of which was a fundraising project of 180 million yuan for "supplementing working capital."
At the end of 2022, 385 million yuan of the 636 million yuan of funds raised were used to purchase wealth management products. At the end of 2022, the cash and cash equivalents were 170 million yuan, the balance of bank wealth management products (trading financial assets) was 323 million yuan, and the balance of "brokerage fixed income products" in other current assets was 403 million yuan. Geer Software disclosed the "Feasibility Analysis Report on the Use of Funds Raised from Issuing A-Shares to Specific Objects in 2023", and plans to raise 800 million yuan, of which 240 million yuan will be used to supplement working capital.
At the end of 2023, 240 million yuan of the 636 million yuan raised will be used to purchase financial products, namely structured deposits, with a balance of 223 million yuan in monetary funds, 195 million yuan in bank financial products (trading financial assets), and 357 million yuan in "brokerage fixed income products" in other current assets. In April 2024, Geer Software announced that it would terminate the issuance of A-shares to specific objects in 2023.
If it is not terminated, it will really cause public outrage. It is obvious that there is sufficient funds in the account but it continues to raise funds, unless the monetary deposits other than the raised funds are false. The fair value change income and investment income in 2023 will be 1.2 times the total profit for the current period!
The announcement reflects that the company is negligent in improving its core competitiveness
If investors browse the announcements released by Geer Software from its listing to the present, they will find that in addition to the regular shareholders' meetings and board of directors announcements, almost half of them are about the management of idle funds, half are about shareholders and senior executives reducing their holdings, and the deputy general manager has resigned and been appointed several times.
In short, investors should be cautious of companies that do not cherish financing opportunities, do not spend money wisely, and neglect to improve their core competitiveness.
Xinkan Finance sent a letter to Geer Software regarding the above questions, but no response was received as of press time.
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