On August 15, Weir Group faced a significant decline, momentarily hitting its daily trading limit before closing the day down 7.8%, with shares priced at 92.16 yuan and a total market capitalization of 109 billion yuanThis dramatic drop in shares is deeply connected to the company's disappointing performance during the first half of the year.

In light of Weir Group’s recently released semi-annual report for 2023, the figures revealed a stark decline in revenue, approximating 8.858 billion yuan, marking a nearly 20% decrease from the previous yearFurthermore, its net profit attributable to shareholders plummeted to around 153 million yuan, a staggering decline of 93.25%. The company reported significant losses with a non-GAAP net income of roughly 78.96 million yuan, a sharp contrast to a profit of 1.451 billion yuan during the same period last yearSuch a downturn in profits is unprecedented for Weir Group since its initial public offering in 2017, marking the first instance of a loss in its adjusted net income history since it began publicly reporting in 2014. In stark juxtaposition, Weir Group had surpassed 4 billion yuan in net income at its peak in 2021.

What could possibly account for the distressing plunge of such a formidable player in the semiconductor industry?

Founded with the core business of semiconductor product design and distribution, Weir Group has built its repertoire around three primary sectors: image sensor solutions, touch and display solutions, and analog solutionsIts products cater to an extensive array of applications in the consumer electronics space, spanning smartphones, tablets, laptops, webcams, security monitoring devices, automotive electronics, and medical imaging.

A significant highlight in Weir Group’s trajectory occurred in 2019 when it acquired a stake of 85.53% in OmniVision Technologies, the world's third-largest image sensor chip manufacturerThis acquisition allowed Weir Group to solidify its position as a leader in CIS (CMOS Image Sensor) design in China

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As of now, the company holds 100% ownership of OmniVision, bolstering its influence in the market.

According to relevant industry reports, the global CIS market was pegged at an estimated revenue of $19 billion in 2022, reflecting a downturn of 7% year-on-yearNotably, mobile chip sales accounted for approximately 68.42% of total revenue, with major suppliers like Sony, Samsung, and OmniVision cornering the market with shares of 51.60%, 15.60%, and 9.70%, respectively.

Amidst broader industry troubles, Weir Group's financial challenges were already observable as early as the first quarter of the yearThe company reported revenue of 4.335 billion yuan, a 21.72% decrease compared to the same period the previous year, with net income crashing to just 199 million yuan — down 77.81% year-on-yearUnfortunately, the second quarter exacerbated these issues with reported losses amounting to tens of millions.

The semi-annual report further discloses that Weir Group's semiconductor design business amassed 7.39 billion yuan in revenue, encapsulating 83.69% of its core revenue but still representing an 18.84% dip from the previous yearAdditionally, the semiconductor distribution arm brought in 1.44 billion yuan, accounting for 16.31% of the company's main revenue stream — down 25.20% from the year before.

Diving deeper into the design sector shows a troubling trend, where all three segment revenues, including image sensors, touch and display solutions, and analog solutions, experienced declinesThe image sensor solutions alone generated 6.216 billion yuan, making up 70.40% of overall business income, a drop of 14.82% from last yearPerhaps more alarming is the touch and display solutions, which saw their income slip to 660 million yuan, a shocking 44.40% drop from the previous year.

Weir Group attributed the decline in performance to myriad factors, notably stating that the downstream demand remained lowThe firm experienced slight revenue contraction alongside challenges within the semiconductor industry's supply chain, chiefly from inflated inventory levels, which consequently destabilized the pricing of various products and exerted considerable pressure on profit margins.

Even though these predicaments are widespread across the semiconductor sector due to issues of inventory depletion and pricing pressure, one may question why Weir Group experienced such a drastic plunge in its stock values.

Upon examining its balance sheet, it’s noted that Weir Group grappled with high levels of accounts receivable and inventory

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By the end of the reporting period, its net accounts receivable totaled 3.016 billion yuan, constituting 15.55% of current assets — a 20.53% increase compared to the previous yearThe company's inventory, while reduced by 20.46% to 9.828 billion yuan, still represented a staggering 50.69% of current assets, staying at a high level.

Commentators argue that the current issues facing Weir Group did not arise overnight but are rather a culmination of years of underlying problemsOne significant misstep included an over-reliance on consumer electronics, causing a brittle product structureMoreover, the company's lag in technical innovation, especially amidst the rapid advancements in artificial intelligence and related technologies, has left it straggling behind competitors capitalizing on these emerging markets.

Additionally, it is crucial to note that Weir Group's actual controllor, Yu Renrong, holds a substantial 459 million shares out of the total, pledging approximately 229 million sharesThis pledge involves nearly 50% of his total shares, representing about 19.37% of the company’s stockOne year prior, the proportion of pledged shares stood at only 39.67%, indicating a 10-percentage point increase in rather short order.

As a result of Weir Group's lowered expectations and profitability setbacks, various analysts revised down predictions for net profits going forwardHuatai Securities downgraded Weir Group’s projected net profits for 2023, 2024, and 2025 by 28%, 16%, and 14% respectively, now predicting figures of 1.24 billion, 2.72 billion, and 3.34 billion yuanThis adjustment stems from ongoing issues concerning weak profit margins but anticipates that the company's continual development of new products will allow it to benefit from structural growth within the industryConsequently, they positioned a 2024 target price at 115 yuan, employing a 50-times price-to-earnings ratio — notably higher than the industry median’s 43 times for 2024.

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