On the evening of January 19th, 2024, Chengchang Technology (stock code: 001270.SZ) announced that it anticipates a significant net loss for the current fiscal yearThis expected downturn has raised concerns among investors and analysts following the company, as financial forecasts suggest total revenue could drop below 300 million RMB.

The company's stock is under scrutiny, as the Shenzhen Stock Exchange has stated it might implement delisting risk warnings immediately after the release of the 2024 annual report due to these projected lossesA pivotal takeaway for stakeholders is how Chengchang Technology plans to navigate this challenging financial landscape.

Diving into the reasons behind this disappointing outlook, company representatives have cited three primary factorsFirst, there has been a substantial delay in industry demands, severely impacting the company's revenue

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Secondly, there has been a marked increase in the allowance for doubtful accounts, which has adversely affected net profitsLastly, the company's aggressive investment in research and development (R&D) has significantly increased its operational costs.

Following the announcement, on January 20th, 2024, the company’s shares plummeted sharply to a closing price of 32.28 RMB per share, hitting the daily limit downAttempts by media outlets, including the Times Weekly, to reach out for further clarification on the financial predictions and the response strategies of Chengchang Technology went unanswered at the time of report.

The ambition to enhance R&D while facing escalated losses raises critical questions about the sustainability of the company's operational modelEstablished in November 2010, Chengchang Technology specializes in the development, production, sales, and technical services of microwave and millimeter-wave phased array T/R chips

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It is among a select few Chinese firms capable of providing comprehensive solutions in this intricate technical sphere.

The technical intricacies and high barriers to entry have led the company to prioritize talent cultivation, recognizing people as the foremost resource in driving development and innovationReports indicate that in 2022, 2023, and the first half of 2024, Chengchang had 75, 99, and 104 R&D personnel respectively, making up approximately 42.61%, 47.60%, and 47.49% of its entire workforceFurthermore, many of these engineers hail from prestigious institutions such as Zhejiang University and Fudan University, underscoring the firm’s commitment to fostering a knowledgeable workforce.

Moreover, the investments in R&D have shown exponential growth over recent yearsJust after going public in June 2022, Chengchang Technology's R&D expenses reached 43.3 million RMB, reflecting a year-on-year increase of 45.29%. By 2023, this expenditure surged to 68.03 million RMB, hitting a staggering 77.93% improvement in its year-on-year R&D investments during the first three quarters of 2024.

However, amidst rising R&D costs, the company's profitability has taken a grave hit

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In its first full year post-IPO, while the revenue increased by a modest 3.44% to 287 million RMB, net profits plummeted by nearly 40% to 80 million RMBThe pattern continued in the first three quarters of 2024, where not only did the net profit shift from positive to negative, but the revenue also saw significant contractions.

Chengchang has consistently pointed to its expanded R&D as a principal factor influencing its financial outcomeIn their most recent performance forecast, the company's revenue is expected to fall within the range of 18 million to 23 million RMB for 2024, while losses could hover between 21.7 million to 38.7 million RMB, translating to substantial declines in profitability on multiple levels, with basic loss per share estimated between 0.0934 and 0.1769 RMB.

The situation has also drawn attention to the alarming rise in accounts receivable, which has been steeply increasing over the years and affecting the company's liquidity and asset turnover ratios

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Data from Wind reveals that accounts receivable rose from 260 million RMB in 2022 to over 460 million RMB by the end of the first nine months in 2024, accounting for a staggering 44.02% of current assets.

The combination of declining sales and escalating accounts receivable has led to a significant slowdown in turnover ratesThe number of days it takes to recover receivables has leapt from approximately 292 days in 2022 to nearly 1170 days in early 2024, showcasing a trend that could be detrimental if it continues unabated.

This prolonged collection period can largely be attributed to the company's customer base, which mainly consists of research institutions and their affiliates — clients characterized by a long payment cycle due to their funding structures and procurement processesAlthough Chengchang emphasizes that its main customers are financially stable, which minimizes default risks, as the business scales, the potential for overdue payments cannot be overlooked.

Furthermore, the age of receivables has compelled the company to recognize increasing amounts of credit impairment losses