Summary of Key Points
Shenghong Technology (a leading company in the PCB industry) reported a situation where revenue increased, but profits did not. In the second quarter, net profit after deducting non-recurring items decreased year-over-year, and the gross margin plummeted, causing the stock price to drop by 8.15% on August 28. The main reasons behind this are the rising costs of raw materials such as copper, and the lag in cost transmission. Additionally, the transfer of equity by the actual controller to their spouse has raised concerns about a potential "disguised reduction in ownership." These factors, combined with the significant slowdown in growth due to the decline in AI-related demand last year, as well as the industry's inherent cyclical fluctuations and increasing competition, pose significant risks for the company.
1. Increased Revenue, but Not Increased Profits: Rising Raw Material Costs Erode Profit margins
Shenghong Technology sold more products (with revenue increasing by 28.77% in the first half of the year), but profits did not keep pace. The primary reason is the sharp rise in copper prices. Raw materials, such as copper balls and copper foil, account for a large portion of the company's costs. Copper prices began to soar in the fourth quarter of 2025 and reached a historical high of 114,000 yuan per ton at the beginning of this year, and they are still fluctuating around that level. Although the company raises product prices in line with rising raw material costs, downstream customers do not immediately respond to price increases (for example, due to long-term contracts), and there is a lag in cost transmission. More importantly, the accounting principle of "first-in, first-out" means that the impact of higher copper prices is not reflected in the financial results until two quarters later. As a result, the gross margin decreased by 6.73 percentage points in the second quarter.
2. A Sharp Change in Performance in the Second Quarter: Growth Slows Down
Overall, net profit continued to increase in the first half of the year (by 33.3%), but the second quarter showed a significant decline:
- Revenue continued to grow (by 29.49%), but net profit after deducting non-recurring items decreased by 5.28%, and the gross margin dropped from 38.83% in the same period last year to 32.1%.
- Compared to the "peak period" last year, when AI demand surged, revenue increased by 79.77% and net profit by 273.52%, the growth rate in the first half of this year has been halved, indicating that the benefits brought by AI may be waning, or the industry competition may be leading to a redistribution of orders.
3. Doubts about Equity Changes: Family Adjustment or Disguised Reduction in Ownership?
The company's actual controller, Chen Tao, transferred part of his equity to his spouse, Liu Chunlan, which has sparked market concerns:
- The company explained this as an "internal family adjustment" that does not change the actual controller's position. However, Liu Chunlan (a director) and other senior executives had recently sold 450 million yuan in shares in 2025, almost completing the planned reduction in their holdings.
- The China Securities Regulatory Commission has regulations prohibiting major shareholders from using divorce or family transfers to circumvent ownership reduction restrictions. Therefore, there are suspicions that this transfer may be a way to "sell shares in a different form." The instability of equity could cause investors to worry about the company's future decision-making, which is also one of the reasons for the stock price drop.
4. Industry and Future Risks: High Costs and Increased Competition
Shenghong Technology faces several additional challenges:
- High annual cost pressure: Copper, gold, and oil prices remain high due to geopolitical factors, and the lag in the "first-in, first-out" accounting principle will result in higher costs throughout the year.
- Industry cyclical risks: The PCB industry is tied to the demand from downstream sectors such as AI and consumer electronics. If demand falls short of expectations, orders will decrease.
- Intensifying competition: More manufacturers are entering the PCB market, and Shenghong may lose market share. If the company cannot keep up with customers' new requirements (such as high-end PCBs for AI chips), it could fall behind its competitors.
Conclusion
Shenghong Technology's problems are not unique. Rising raw material costs, industry cyclical fluctuations, and equity instability are common challenges faced by many manufacturing companies. For investors, when evaluating a company's performance, it is important to look at not only revenue growth but also indicators such as gross margin and net profit after deducting non-recurring items, as well as to pay attention to the signals behind any equity changes to avoid potential pitfalls.