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Recently, Jinlaite (002723) released its final transcript for 2016. Due to the company's "price competition" sales strategy, the company's operating performance plummeted. In addition to encountering operational difficulties in its main business, the decline in Jinlaite's performance is also related to its previous blind investment in lithium batteries. For Jinlaite, whose business performance is facing crisis, if it continues to adopt a price competition strategy, it means that the company's future development will face significant challenges.

Business performance plummeted

According to the 2016 performance report released by Jinlaite on February 20th, the company achieved a revenue of approximately 773 million yuan in 2016, an increase of 9.97% compared to the same period in 2015; For the increase in operating revenue, Jinlaite stated that the main reason was due to the company's adjustment of sales strategy, increased market promotion efforts, and an increase in orders from new and old customers during the reporting period. The corresponding net profit attributable to the owners of the listed company in the current period was approximately 6.9041 million yuan, a year-on-year decrease of 83.83%; In 2016, Jinlaite's net profit after deducting taxes also decreased by more than 60% year-on-year. Regarding the reasons for the decrease in profits, Jinlaite explained in the performance report that during the reporting period, the company strived for greater market share by adjusting product unit prices, and the gross profit of product sales decreased due to three main reasons.

In fact, since 2016, in order to gain greater market share, Jinlaite has been adopting a strategy of "low price competition". Although the company's operating revenue continues to increase, due to the continuous decline in the gross profit margin of the company's main business, the company's net profit shows a downward trend.

It is understood that Jinlaite is mainly engaged in the research and development, production, and sales of rechargeable backup lighting products and rechargeable AC/DC dual purpose fans. In the first half of 2016, Jinlaite experienced a phenomenon of increasing revenue without increasing profits. Financial data shows that the company achieved operating revenue of approximately 414 million yuan, a year-on-year increase of 6.42%, corresponding to a net profit attributable to shareholders of the listed company of 8.6815 million yuan, a decrease of 70.87% compared to the same period in 2015.

According to the main business situation table, two products, rechargeable backup lighting fixtures and rechargeable AC/DC dual purpose fans, are the most important sources of revenue for Kinlight. However, the gross profit margin of both products shows signs of decline. Among them, the gross profit margin of rechargeable backup lighting fixtures was 11.44%, a year-on-year decrease of 3.78%. In addition, the rechargeable AC/DC dual purpose fan achieved a revenue of approximately 187 million yuan in the first half of 2016, a year-on-year decrease of 6.3%; The gross profit margin of this product decreased by 1.77% year-on-year.

Layout of lithium batteries failed miserably

Jinlaite also attempted to enter the lithium battery industry and create new profit growth points, but Jinlaite's plan ultimately fell through.

On September 1, 2015, Jinlaite announced that the company and natural person Gan Feng jointly invested to establish a controlling subsidiary, Anbei New Energy Technology Co., Ltd. (hereinafter referred to as "Zhejiang Anbei"), with a registered capital of 30 million yuan. Among them, Jinlaite invested 15.3 million yuan with its own funds, accounting for 51% of the total registered capital, and is the controlling shareholder of Zhejiang Anbei.

It is understood that Zhejiang Anbei's business scope includes research and development, production, and sales of lithium batteries. However, after 9 months, Kinlight's plan to enter the lithium battery industry fell through. On June 16, 2016, Jinlaite announced that due to the inability of Zhejiang Anbei to master the core technology of lithium batteries and the lack of a core management team, the company will terminate its investment in Zhejiang Anbei.

Due to the poor performance of Zhejiang Anbei, Jinlaite announced in December last year that it plans to transfer 51% of Zhejiang Anbei's equity to natural person shareholder Gan Feng. For this equity transfer, Kinlet stated that it will reduce investment losses. Data shows that as of September 30, 2016, Zhejiang Anbei had no actual sales revenue, with a net profit of -14037900 yuan.

Jinlaite also stated in the announcement that as of the benchmark date of the audit report, the above-mentioned equity transfer caused an investment loss of 8.46 million yuan to the company. From this, it can be seen that the layout of lithium batteries did not bring substantial profit returns to Jinlaite's performance, but rather formed a certain drag on the company's performance.

It is worth mentioning that regarding the transfer of Zhejiang Anbei, the regulatory authorities quickly issued an inquiry letter requesting Jinlaite to provide explanations on relevant issues.

Future performance challenges

In addition to a sharp decline in performance, if the company continues to adopt a "low price competition" approach to expand market share, Kinlight's future operations may face significant challenges.

In fact, Kinlight's business performance in recent years is commendable. Financial data shows that from 2013 to 2015, the company achieved operating income of approximately 563 million yuan, 583 million yuan, and 703 million yuan, respectively, corresponding to net profits attributable to shareholders of the listed company of 40.4793 million yuan, 40.875 million yuan, and 42.6949 million yuan, respectively.

However, due to the strategy of "low price competition", Kinlight's net profit began to show signs of a significant decline. Financial data shows that in the first three quarters of 2016, Jinlaite achieved an operating revenue of approximately 605 million yuan, a year-on-year increase of 8.71%, corresponding to a net profit attributable to shareholders of the listed company of 5.3925 million yuan, a decrease of 86.48% compared to the same period in 2015. The net profit after deduction also decreased by more than 80% year-on-year.

In the opinion of an anonymous analyst, if the company continues to expand its market share through price wars, the gross profit margin of its products will continue to decline, and the profits of its main business will continue to be compressed, which will inevitably have a negative impact on the long-term development of Kinlight.

Famous economist Song Qinghui also stated that for Jinlaite, the idea of expanding market share through price wars should be firmly abandoned, and improving quality, brand, and service is the "king's way". Otherwise, this will have a certain negative impact on the company's development.

Regarding issues related to whether the company will continue to adopt a "low price competition" strategy to gain market share, media reporters have called the Secretary of the Board of Directors office of Jinlaite for an interview. However, the staff of the Secretary of the Board of Directors office refused the interview on the grounds of "Secretary of the Board is not available and cannot respond".

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