The Illusion of Prosperity at Shangneng Electric: Strong Profits Masking Long-Term Cash Flow Problems

Shangneng Electric’s “False Prosperity”: Attractive Book Profits but Long-Term Cash Flow Deficits

On the stage of the photovoltaic industry, Shangneng Electric (300827) once emerged as a dark horse: in 2023, it ranked fourth globally in photovoltaic inverter shipments and maintained a top two position in domestic energy storage PCS shipments for four consecutive years. From a financial perspective, its net profit data appears impressive: in 2024, the company’s revenue saw a slight decline of 3%, while net profit surged by 46%. In the first quarter of this year, revenue and net profit attributable to shareholders grew by 16.78% and 71.56% year-on-year, respectively. However, a deeper investigation reveals that the company may be experiencing a form of “false prosperity,” with a stark contrast between its long-term cash flow deficits and reported profits.

1. Profit Growth Amid Revenue Challenges

Headquartered in Wuxi, Shangneng Electric was established in 2012 and went public on the A-share market in 2020. The company is controlled by the father-son duo of Wu Qiang and Wu Chao, with Wu Qiang serving as chairman and legal representative. Its business encompasses various fields, including photovoltaic inverters, energy storage converters and systems, power quality management, and power station development. Generally, a company’s profit growth is accompanied by rising revenue, with both elements complementing each other. However, Shangneng Electric exhibits an unusual trend of profit growth alongside declining revenue. In 2024, the company achieved a net profit attributable to shareholders of 419 million yuan, marking a year-on-year increase of 46.49%. In contrast, revenue during the same period was 4.773 billion yuan, down 3.23% year-on-year.

So, why has Shangneng Electric’s revenue declined? What accounts for the surge in profit margins? The company’s main business is split into two main segments: “photovoltaic inverters” and “energy storage bi-directional converters and system integration products,” making up 57.62% and 40.40% of its revenue, respectively. Last year, revenue from energy storage products reached 1.928 billion yuan, showing a slight increase of 0.08%, while revenue from photovoltaic inverters dropped by 4.45% to 2.750 billion yuan, resulting in a 1.29 billion yuan decline, which is the largest contributing factor to the revenue decrease. The stagnation in energy storage revenue and the decline in photovoltaic inverter sales have made it difficult for the company to grow its overall revenue.

Regarding the revenue decline, Shangneng Electric stated in its 2024 annual report that it was primarily due to a reduction in domestic energy storage system integration business. In previous years, the company soared to success largely due to its photovoltaic inverter and energy storage integration businesses, with revenue from photovoltaic inverters skyrocketing from less than 800 million yuan to over 2.8 billion yuan in just four years, and energy storage revenues climbing from several million to nearly 2 billion yuan. However, entering 2024, the high profits attracted numerous capital investments, leading to signs of saturation in these sectors, with even the leading photovoltaic inverter company, Sungrow Power, experiencing significant growth declines into single digits last year.

Despite the sales challenges for its two main products, how can profit margins still rise? Shangneng Electric’s annual report indicates that this is largely attributed to rapid growth in overseas solar-storage business. Data shows that 75.62% of revenue came from mainland China, which achieved 3.610 billion yuan, a 14.93% decrease year-on-year. In contrast, international revenue skyrocketed by 68.74% to 1.164 billion yuan, with gross margin rising by 8.36 percentage points to 32.74%. This suggests that the higher profit margins from overseas operations have contributed to an overall increase in gross margin, even as total revenue declined, which appears reasonable at first glance.

2. Rising Operating Expenses and Deteriorating Debt Repayment Capacity

Deepwater Financial Agency has observed that although Shangneng Electric’s book profits look appealing, the company has been operating at a long-term cash flow deficit. This can be analyzed through the company’s expense expenditures and debt repayment capabilities. In 2024, Shangneng Electric’s operating expenses amounted to 605 million yuan, reflecting a year-on-year increase of 21.94%. The main expense categories—sales, administrative, financial, and research and development—grew by 45.18%, 15.38%, 239.54%, and 7.96%, respectively. The substantial rise in financial expenses typically indicates a sharp increase in financing costs. Shangneng Electric’s 2024 annual report acknowledged that rising financial expenses were primarily due to increased financing costs, with interest expenses reaching 40.88 million yuan, up 45.79% year-on-year.

This concerning trend has continued into 2025: in the first quarter, financial and interest expenses were 6.45 million yuan and 14.49 million yuan, respectively, reflecting increases of 277.05% and 164.35% year-on-year. Observations show that high interest expenses primarily stem from accounts receivable financing. As of the end of 2024, accounts receivable financing stood at 113 million yuan, nearly doubling year-on-year; by the end of March this year, it surged to 174 million yuan, increasing by over 50% in just three months, indicating that the company is struggling to recover funds after product sales.

How much in accounts receivable does Shangneng Electric have? As of the end of 2024, accounts receivable amounted to 2.242 billion yuan, a year-on-year increase of 7.22%; by the end of March this year, it rose to 2.322 billion yuan, a 3.55% increase since the beginning of the year. The significant volume of accounts receivable poses evident risks. In 2024, Shangneng Electric recognized various credit impairment losses and asset impairment losses totaling 53.5889 million yuan, with bad debt losses from accounts receivable and notes receivable accounting for 35.4198 million yuan.

On the other hand, the company’s inventory has also been steadily increasing. The financial report indicates that by the end of 2024, Shangneng Electric’s inventory reached 1.458 billion yuan, up 9.4% year-on-year; by the end of March this year, inventory further increased to 1.699 billion yuan, marking a 16.5% rise since the start of the year. Examining the company’s debt repayment capacity, cash flow is critical for a business, akin to blood for the human body. Shangneng Electric’s operating cash flow resembles a “roller coaster.” In 2023, the net operating cash flow was -36.2 million yuan; it recovered to 122 million yuan in 2024. However, this cash inflow is insufficient compared to the 419 million yuan in net profit.

Unfortunately, this positive trend was short-lived, and within three months, it quickly turned negative again. As of the end of March this year, the net cash flow from operating activities was -708 million yuan, down 35.35% year-on-year, with a significant portion of cash outflow likely stemming from inventory and accounts receivable. Delays in cash recovery from sales severely impact the company’s debt repayment capacity. By the end of the first quarter of 2025, short-term borrowings reached 1.753 billion yuan, with accounts payable at 1.689 billion yuan and accounts receivable at 2.153 billion yuan, while current liabilities amounted to 5.945 billion yuan, a year-on-year increase of over 40%. Meanwhile, the company’s monetary funds were just over 2 billion yuan. Some argue that the company’s current assets of 7 billion yuan can easily cover current liabilities; however, it is crucial to understand that liabilities are fixed, meaning that the amount owed is unyielding. In contrast, only monetary funds among current assets are reliable, while other items like inventory and accounts receivable may require significant discounts if liquidated, especially inventory, which may incur even larger markdowns. Therefore, if the ratio of current assets to current liabilities remains below two and operating cash flow is exceedingly low, the risk of debt repayment becomes substantial. Of course, the company could continue to refinance its debts, but this would only exacerbate its debt obligations and postpone the problem.

Shangneng Electric’s high debt-to-asset ratio not only significantly exceeds the industry average but has also surpassed the general warning line of 70% for over three years. As of the end of March this year, the company’s liabilities exceeded 6 billion yuan for the first time, reaching 6.075 billion yuan, with a debt-to-asset ratio of 72.93%. This raises serious questions about the company’s operational stability. This is particularly concerning for capital-intensive companies; if debt continues to rise while the ability to generate cash flow remains weak, caution is warranted.

3. Executives Exiting, Retail Investors Left Holding the Bag

Examining the stock price trajectory of Shangneng Electric reveals a scenario resembling a “guide to harvesting retail investors”: executives are reducing their holdings, institutions are fleeing, and retail investors are left to pick up the pieces. As of May 23, the company’s stock price closed at 27.70 yuan per share, with a total market capitalization falling below 10 billion yuan, representing a year-to-date decline of 36.90%, and a cumulative drop of over 60% in more than three years. The stock price decline has been accompanied by significant insider selling. From January to April, executive Li Jianfei sold a total of 1.7 million shares, cashing out over 51 million yuan. Li Jianfei has an impressive background, having previously worked as a development engineer at Huawei Technologies and currently holding multiple positions at Shangneng Electric. As an insider, he likely understands the company’s true operational condition better than most.

According to WIND data, as of the end of March this year, the proportion of institutional holdings in Shangneng Electric plummeted from 48.79% to 16.05%, with the number of shares held dropping from 129 million to 42.32 million. Fund holdings fell from 35.09% to 1.29%, indicating that institutional investors have nearly entirely exited the company. Simultaneously, the number of shareholders has surged dramatically, reaching 49,300 by the end of March, an increase of 118% since the beginning of the year. Clearly, the major shareholders have successfully transferred their stakes to retail investors, filling their own pockets with retail funds.

Due to the company’s insufficient cash flow, dividend capacity has also been significantly affected, with payout ratios of only 10.28% and 12.52% for 2023 and 2024, respectively. Shangneng Electric’s “false prosperity” serves as a warning to investors. When examining company financial reports, one should not be misled by superficially appealing profit data; instead, it is crucial to look beyond the surface, analyzing various factors such as revenue, expenses, and cash flow to accurately assess the company’s real operational status, thus enabling informed investment decisions.