Preview of US stock IPOs | Yusheng Electronics facing liquidity crisis: sharp drop in net profit, high asset-liability ratio

In recent years, with the global economic recovery, strong growth in emerging industries such as new energy vehicles, Internet of Things, and 5G communication, as well as the recovery of the consumer electronics market such as smartphones and smart home appliances, the global electronic components industry market continues to expand. According to data, the global electronic components industry market size is estimated to be approximately $689.81 billion in 2022, with a year-on-year growth of 2.6%. Against the backdrop of increasing demand for electronic components in China, electronic component provider Yuk Shing Electronics from Hong Kong is striving to list on NASDAQ with the stock code EIL. The company plans to raise $10 million in funding. Approximately 20% of the funds raised will be used to expand Yuk Shing Electronics' research and development; about 20% will be used to enhance Yuk Shing Electronics' industry position and strengthen business development, about 25% will be used to strengthen Yuk Shing Electronics' project and engineering team to expand the scale and scope of engineering and project development, about 25% will be used to improve Yuk Shing Electronics' pre-sales and after-sales support through the expansion of Yuk Shing Electronics' engineering support center (office) and enhancing Yuk Shing Electronics' technical expertise, with the remaining funds mainly used for general administrative and operating expenses. Revenue growth is not apparent Net profit is on a downward trend Looking at the company's development history, since 1992, Yuk Shing Electronics has been focusing on identifying, procuring, selling, and distributing high-quality electronic components from suppliers in Japan, Korea, Europe, the United States, and Asia. In the early 2000s, due to the rapid growth potential of the sensor market and the experience and technical capabilities accumulated over the past decade, the company expanded its product offerings and entered the sensor market, acquiring four key sensor product lines starting in the early 2000s. Revenue from sensor product lines increased from 10% in 2003 to 66% in 2023. As of now, the company has established a business layout to provide high-quality electronic components, sensors, and one-stop engineering solutions to global customers. From passive to active, from capacitors to power ICs, to various precision sensors, Yuk Shing Electronics' product line acts like a precise gear, driving many industries - from automotive manufacturing to industrial automation, from computing and communication to household appliances, and even healthcare and power management systems. However, it should be noted that despite the long history and rich product line of Yuk Shing Electronics, the company also faces development risks such as slow revenue growth and high debt-to-asset ratio. In 2022 and 2023, the company achieved revenues of approximately HK$662 million and HK$664 million respectively, a year-on-year growth of 0.3%; extending the timeline, the company's revenue was HK$660 million in 2021, also a 0.3% year-on-year growth over two years. Compared to the lack of apparent revenue growth, Yuk Shing Electronics' net profit is on a downward trend. In 2022 and 2023, the company's net profit was approximately HK$19.88 million and HK$2.35 million respectively, a year-on-year decrease of 88.16%. In terms of business segments, revenue from electronic components in the past two years was approximately HK$238 million and HK$228 million, accounting for approximately 35.97% and 34.32% of total revenue respectively; sensor revenue was approximately HK$424 million and HK$435 million, accounting for approximately 64.03% and 65.53% of total revenue respectively. Both major business segments are showing a growth trend. The company's revenue primarily comes from industries specializing in automotive and industrial/automation operations. During the same period, the company's applications in the automotive sector accounted for approximately 53.48% and 50.91% respectively; industrial/automation applications accounted for approximately 29.11% and 28.33% of total revenue. In terms of regions, revenue from Hong Kong was approximately HK$354 million and HK$377 million during the same period, accounting for approximately 53.56% and 56.81% of total revenue respectively; from mainland China, revenue was approximately HK$307 million and HK$287 million, accounting for approximately 46.44% and 43.19% of total revenue respectively. Revenue growth from Hong Kong, while revenue from mainland China shows a declining trend. While net profit is sharply declining, the company's liquidity is also showing severe strain. From 2022 to 2023, the company's net cash provided by operating activities was negative, approximately HK$-31.64 million and HK$-6.25 million respectively, while cash and cash equivalents during the same period were HK$54.08 million and HK$55.72 million. The reason for negative operating cash flow is mainly due to the continuous increase in accounts receivable, with the total accounts receivable for 2023 reaching approximately HK$17.67 million, a year-on-year growth of 11.92%. In addition to the ongoing concern about operating cash flow, Yuk Shing Electronics also faces a high level of debt, with the company's debt-to-asset ratio remaining high, approximately 80.2% and 76.0%, posing a certain debt repayment pressure. Industry expansion continues, competition remains strong Looking at the market space for electronic components and sensors, Yuk Shing Electronics' "survival environment" is not as easy as it seems. In terms of the sensor market, in recent years, favorable national policies have helped expand the market. According to PrecedenceResearch, the global sensor market is estimated to be approximately $204.8 billion in 2022 and is expected to reach around $508.64 billion by 2032, with a compound annual growth rate of about 8.4%. In this market, the Asia-Pacific region accounts for approximately 40% of the global sensor market share. The Asia-Pacific region is experiencing the fastest growth and is expected to account for approximately 42% of the global sensor market by 2032. Compared to developed countries, the Asia-Pacific region's sensor applications are still developing and expanding, with China and Japan being the main sensor markets in the Asia-Pacific region. Taking the automotive sensor market as an example, due to stricter government regulations on harmful gas emissions, the increasing use of pressure sensors in the automotive sector, and the growing demand for custom-designed electronic devices in vehicles, the demand for sensors in the automotive industry is significantly increasing - it is reported that the global automotive sensor market was $40.39 billion in 2022 and is expected to reach around $67.2 billion by 2030, with a high compound annual growth rate of 6.57%. In terms of electronic components, the market demand for electronic components continues to increase due to the growth of new energy vehicles, Internet of Things, and 5G communication, driving the market expansion of the electronic components industry. Overall, despite facing challenges such as slow revenue growth, declining net profit, and high debt levels, Yuk Shing Electronics is striving to enhance its position in the market and expand its business to seize opportunities in the growing electronic components and sensor market. As the industry continues to evolve and expand, competition remains strong, highlighting the need for the company to address its financial and operational challenges to ensure sustainable growth and success in the future.According to Mordor Intelligence, the compound annual growth rate of the active and passive electronic components market is expected to be approximately 8.79% from 2023 to 2028, with the Asia-Pacific region projected to be the fastest-growing market.Therefore, it can be seen that the sensors and electronic components race track in which Yusheng Electronics is located is in a state of continuous expansion. However, in fact, Yusheng Electronics faces undiminished competitive pressure. On one hand, operating in a fiercely competitive market may lead the company to sacrifice profits in order to increase market share. Yusheng Electronics stated in its prospectus that although the company has established long-lasting relationships with major customers, it cannot guarantee that some of its competitors may have more financial and human resources, more competitive pricing strategies, or closer relationships with electronic component manufacturers. If the company's competitors offer cheaper alternatives, adopt aggressive pricing to increase their market share, or are able to provide products with superior performance, functionality or efficiency, the company may lose customers, which could adversely affect its business, financial condition, and operating performance. On the other hand, over 90% of the company's revenue comes from existing customers, indicating a lack of strength in developing new customers. Yusheng Electronics has openly stated that competition in the electronic components industry is very fierce, and the company's ability to obtain purchase orders is a key factor for success. The company's success requires maintaining good relationships with existing customers and developing new relationships with potential customers. However, if the company fails to successfully obtain orders from existing customers and secure a sufficient number of regular and/or new purchase orders, Yusheng Electronics' operating performance may also be adversely affected. In summary, despite optimistic growth prospects for Yusheng Electronics' business in the race track it operates in, the company's fundamentals, such as weak revenue growth, declining net profits, and high asset-liability ratio, all constrain the company's steady development.