Analysis of Customer Concentration Risk and Prevention Recommendations for Yaokun Hydraulics

According to the prospectus and latest financial data, Yaokun Hydraulics (a company planning an IPO) faces prominent customer concentration risk. From 2022 to H1 2025, the proportion of sales revenue from the top five customers to the company’s total operating revenue was as high as 75.05%, 71.62%, 71.49%, and 70.61% respectively [1]. This ratio is far higher than the industry average. Once the operating conditions of major customers deteriorate or their procurement strategies are adjusted, the company’s performance will be significantly impacted.

Risk signals have already appeared. In 2020, Yaokun Hydraulics’ sales to Volvo reached RMB 145 million, accounting for an important proportion of the company’s revenue. However, sales have continued to decline since then, falling to RMB 45.2696 million in 2024 [1]. The decline is mainly due to two factors: first, the performance pressure of Volvo’s domestic entities; second, the decrease in procurement demand caused by the decline in sales of Shandong Lingong products. This trend deeply reveals the performance vulnerability caused by excessively high customer concentration.

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Yaokun Hydraulics’ sales revenue to Volvo has dropped by nearly 70% in just four years. This sharp fluctuation fully exposes the inherent vulnerability of single customer dependence. When the procurement volume of a major customer drops significantly, due to the company’s highly concentrated revenue structure, this gap is difficult to fill through incremental orders from other customers. From a financial perspective, assuming Volvo’s orders account for about 10% of the company’s total revenue, a RMB 70 million decline in revenue from this customer will directly erode about 10% of the company’s revenue scale.

More seriously, the construction machinery industry where Yaokun Hydraulics operates has obvious cyclical characteristics. Starting from 2022, the downstream construction machinery industry entered a downward adjustment period, and the company’s performance also turned sharply downward [1]. When the industry cycle downturn resonates with the operating deterioration of major customers, the risk will be significantly amplified. Under this dual pressure, the company’s ability to resist external shocks is severely tested.

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The company should formulate a clear new customer development plan to gradually reduce the sales proportion of the top five customers. It is recommended to actively expand secondary host manufacturers and non-construction machinery customers while maintaining stable cooperation with core customers such as Caterpillar and Volvo. Specific goals can be set as follows: reduce the sales proportion of the top five customers to below 55% within the next three to five years, and control the sales proportion of a single customer within 30%.

Make full use of existing technical and production capacity advantages, actively contact other domestic leading construction machinery manufacturers such as Sany Heavy Industry and Zoomlion Heavy Industry, as well as host manufacturers in overseas markets. At the same time, consider extending to related fields such as agricultural machinery and construction machinery to diversify downstream industry cycle risks.

On the basis of consolidating the market position of core products such as fuel tanks, hard pipes, and metal trim parts, the company should increase R&D investment to develop products suitable for emerging fields such as new energy vehicles and industrial robots. Through horizontal expansion of product lines, reduce dependence on a single application field.

Consider extending to high-value-added products such as hydraulic system assemblies and valves to enhance irreplaceability in the customer’s procurement system. At the same time, explore the cultivation of after-sales service business and build an integrated business model of “product + service”.

Given the high threshold and large time cost of entering the supporting system of host manufacturers, the company should make full use of this feature to further strengthen cooperation with major customers by continuously improving product quality, shortening delivery cycles, and enhancing technical services [2]. Once becoming a core supplier and supplying in batches, customers generally will not easily replace them due to conversion costs.

Sign long-term strategic cooperation agreements with major customers to lock in the basic order volume for the next few years. At the same time, actively participate in the new product R&D process of customers, upgrade from a supplier to a technical partner, and enhance the strategic position in the customer’s supply chain.

In response to the operating fluctuations of major customers such as Volvo, the company should establish a more prudent accounts receivable management mechanism. Dynamically adjust credit policies according to customers’ credit status and operating conditions, shorten the account period or require advance payment for high-risk customers, and reduce the risk of bad debt losses.

Given the company’s risk of overcapacity (insufficient capacity utilization of some products), an elastic capacity adjustment mechanism should be established. When the orders of a major customer decline, the idle capacity can be quickly transferred to other customers or new product development to avoid excessive fixed cost pressure.

Continuously track and monitor the operating status, industry dynamics, and competitive pattern of major customers, and establish a customer risk early warning indicator system. When customers show signals such as performance decline, equity changes, or strategic adjustments, timely launch risk response plans.

Formulate differentiated response plans for different customer loss scenarios (such as partial order cuts, complete termination of cooperation with a single major customer, etc.). Clarify the revenue impact assessment, cost control measures, and new customer development priorities under each scenario to ensure rapid response when risk events occur.

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For investors concerned about Yaokun Hydraulics, it is recommended to focus on the following indicators:

First, the trend of customer structure changes, including changes in the sales proportion of the top five customers, progress in new customer development, and changes in sales amounts of major customers;
Second, the recovery of Volvo’s orders, focusing on whether the revenue from this customer can stabilize and recover, and whether the reasons for the decline are persistent;
Third, the effectiveness of non-construction machinery business expansion, evaluating the implementation progress of the company’s business diversification strategy;
Fourth, the position of the industry cycle, and how the company’s performance elasticity performs in the recovery cycle of the construction machinery industry.

The structural problem of customer concentration exceeding 70% is difficult to fundamentally change in the short term. The operating fluctuations of major customers such as Volvo will continue to have a significant impact on the company’s performance. Investors need to closely monitor the progress of customer structure optimization and the company’s ability to respond to the industry cycle downturn.

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[1] Volvo Supplier Enters Shenzhen Stock Exchange: Yaokun Hydraulics’ Performance Declines for Three Consecutive Years, Xie Yaokun and His Son Dividend for Three Years (http://mp.cnfol.com/58008/article/1766801020-142187697.html)

[2] Jiangsu Yaokun Hydraulics Co., Ltd. Prospectus for Initial Public Offering of Shares (http://pdf.dfcfw.com/pdf/H2_AN202303241584538562_1.pdf)