Breaking through the bottleneck is essential for rebirth!

The global landscape of manufacturing is at a critical juncture, with challenges emerging not only in the chip sector but also profoundly affecting the machine tool industryThis sector has found itself trapped within a bottleneck characterized by overwhelming competition in the lower-end market, while the high-end market desperately seeks breakthroughs.

Take five-axis CNC machines as an exampleThese machines, known for their advanced technological requirements, only account for about 1% of the domestic machine tool consumption, generating a mere 10 billion yuan in domestic outputThis statistic underlines the tremendous opportunities yet to be harnessed in the high-end market.

Exacerbating the situation is the intensified pressure from both domestic and international demandIn the first three quarters of 2024, the output of metalworking machine tools in China reached 510,000 units, a modest increase of 7.2% from the previous yearHowever, the number of existing orders experienced a slight decline of 0.3%, and new orders only saw a growth of 3.5% year-over-yearThis indicates a worrying trend of stagnation amidst slight growth—an unstable situation for any thriving industry.

During the same period, machine tool exports amounted to 8 billion yuan, representing a year-on-year growth of 3.7%. Remarkably, this figure was 5.9% in the first half of the year, signaling a decline in overseas demand by the third quarterSuch fluctuations pose a pressing challenge to domestic manufacturers striving for stability and growth.

The weakened demand has adversely affected the performance of machine tool enterprises, a trend reflected in the overall industry's financial healthThe cumulative revenue for the domestic machine tool sector dropped by 6.6% year-over-year in the first three quarters of 2024, while profits saw a staggering decrease of 78.8%. The profitability ratio also fell by 8.7 percentage points—a clear sign that the sector is struggling.

This scenario has undoubtedly compounded the already formidable challenges faced by domestic companies attempting to break through the existing bottlenecks

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Furthermore, the largest domestic machine tool manufacturers typically report revenues in the range of 2 to 3 billion yuan, a stark contrast to their overseas counterparts, many of which boast revenues exceeding 20 billion yuan, creating a significant disparity in scale and research prowess.

However, even amid these setbacks, several companies, such as Kede CNC, have managed to navigate towards breakthroughs in high-end machine toolsPioneering advancements in five-axis CNC technology, they have achieved a degree of autonomy in their operationsThis success has prompted other firms like Neway CNC and Haitian Precision Machinery to follow suit, with Dayfa Precision even penetrating specialized industrial domains such as aerospace.

That said, Haitian Precision Machinery finds itself in a rather precarious position of stagnationWith a sales output of roughly 5,000 machines, it pales in comparison to the likes of Genesis and Qinchuan, which both surpass sales of 10,000 unitsWhen assessed in terms of profitability, although Haitian's average sale price for high-end large machines exceeds 1.5 million yuan, it still lags behind Kede CNC, whose average price reached 1.9 million yuan per machine in 2023.

This discrepancy is further illustrated in their respective gross profit marginsIn the first three quarters of 2024, Haitian reported a gross margin of 28%, which still falls short of industry leadersWithout a significant competitive edge, the company risks becoming increasingly vulnerable as market pressures mount.

Since the onset of 2024, the company's financial performance has shown alarming signs of declineFor the first three quarters, Haitian posted a revenue of 2.49 billion yuan, a minor decrease of 0.6% compared to the previous year, and its net profit attributable to shareholders fell by 12.9% to 400 million yuanAdditionally, examining the company's contractual liabilities reveals little indication of recovery.

As of the end of the third quarter in 2024, Haitian’s contractual liabilities stood at 730 million yuan, a stark 30% reduction since 2021. Given that the installation, debugging, and acceptance period for their products typically spans approximately three months, projections indicate that revenue growth for the next year may not be immediately forthcoming.

Beyond the aforementioned industry-related factors, several critical challenges impede Haitian Precision Machinery's growth

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Firstly, the company grapples with low self-sufficiency in core components and limited technological strengthDespite increasing research and development investment in recent years, they have only partially achieved self-sufficiency in parts such as high-speed spindles and multi-axis rotary tablesHowever, their overall self-sufficiency ratio remains low, especially concerning CNC systems.

The cost of CNC systems can constitute as much as 30% of total production costsHence, companies that can attain self-sufficiency in CNC system production will wield significantly greater influence in the marketCurrently, Haitian spends over 100 million yuan annually on procuring CNC systems from external suppliers, with these purchases accounting for over 10% of its total procurement—demonstrating a considerable external dependency.

Conversely, competitors like Kede CNC have already achieved independent development of their CNC systems, resulting in a remarkable autonomy rate of 85% for their entire machine production, and 95% of their materials sourced domesticallyIf Haitian aims to enhance its foothold in the high-end market, an increase in self-production rates of critical components is imperative.

Secondly, the company faces substantial impairment risks that potentially undermine its performanceThe primary source of these risks stems from inventory backlogs leading to asset impairment losses.

From 2021 to 2023, a downturn in demand resulted in sluggish sales and increased inventory, with stock levels rising from 1.28 billion yuan to 1.57 billion yuanCorrespondingly, their impairment losses surged from 28 million yuan to 46 million yuanAs of the third quarter of 2024, the company continues to maintain 1.5 billion yuan in inventory, suggesting persistent impairment risks that could adversely impact overall performance.

Nevertheless, the company is taking steps to mitigate credit impairment risks by reducing the scale of commercial credit

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Between 2020 and 2022, the provision for buyer credit dipped from 30.28 million yuan to 13.08 million yuan, creating a more favorable outlook for mitigating performance impacts from these risks going forward.

This situation highlights that, facing challenges of low self-sufficiency and impairment risks, Haitian Precision Machinery is at a critical juncture in its development journeyWill the company be able to navigate these headwinds towards a successful turnaround?

At present, Haitian appears to be pursuing two strategic paths: the manufacturing of components for electric vehicles and expanding into overseas markets.

The surge in domestic production of electric vehicles reached 4.94 million units in the first half of 2024, marking a robust year-on-year growth of 32%. With targeted incentives like trade-in programs, the penetration of electric vehicles is poised to increase furtherCore components of electric vehicles—namely batteries, motors, and electronic controls—all necessitate metal housing, heightening the demand for machine tool applicationsIn recent years, Haitian has introduced several vertical and gantry machine tools geared towards electric vehicle components.

Additionally, in 2022, the company invested 1 billion yuan to establish a high-end CNC machine production base, aimed at producing equipment for electric vehicle core components, thus fostering the realization of its second growth curve.

In terms of international expansion, currently, the domestic market only accounts for about 30% of the global machine tool consumptionWith an estimated global market size of around 400 billion yuan, expansive growth opportunities lie beyond national bordersIn 2023, the company's overseas revenues skyrocketed to 590 million yuan, reflecting a year-on-year increase of 76.3%, now comprising 17.9% of total revenueThough most of this revenue is derived from exports to Southeast Asia and South America predominantly focusing on lower-end products, should the company achieve technological breakthroughs, their access to the high-end international markets will significantly augment revenue streams.

In conclusion, the domestic machine tool industry is currently entangled in a bottleneck, and Haitian Precision Machinery, struggling to carve out a unique competitive advantage, faces challenges related to self-sufficiency rates and impairment risks

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