Zhongyu Technology is mainly exported, but the export revenue and gross profit margin may be questionable

Zhongyu Hose Technology Co., Ltd. (stock abbreviation: Zhongyu Technology; Stock Code: 871694. NQ) is a new third board listed company with the research and development, production and sales of fluid transmission polymer material hoses as its main business. At present, the company is sprinting to list on the Beijing Stock Exchange.

According to the prospectus, up to now, Zhongyu Technology has obtained a number of overseas certifications such as U.S. FM, UL, BSI and EU MED, and the company's products are mainly sold overseas. From 2019 to the first half of 2022 (the reporting period), the company's export revenue was 266 million yuan, 174 million yuan, 244 million yuan and 213 million yuan, accounting for 80.30%, 65.78%, 68.45% and 78.68% of the current revenue, respectively.

However, in the first half of 2022, there were obvious contradictions in the export revenue disclosed in the company's declaration materials, and the changes in its export gross profit margin were also relatively abnormal. In addition, the Company did not include the transferred patents as intangible assets, nor did it include rental housing in investment real estate, or did not comply with accounting standards.

Source: Photogram

Export revenue and gross margin are in doubt

According to the prospectus in the "Sales of the Top Five Export Customers in the Company's Reporting Period", in the first half of 2022, Pronghorn LLC in the United States was the third largest export customer of Zhongyu Technology, and the company's sales of high-pressure and high-flow conveying hoses to Pronghorn LLC were 4.7491 million yuan, and the sales of accessories were 226,300 yuan, with a total sales of 4.9754 million yuan.

According to the response to the first round of audit inquiry letters, in the first half of 2022, Zhongyu Technology's sales to Pronghorn LLC were 4.885 million yuan.

In comparison, the sales amount disclosed in the prospectus (4,975,400 yuan) was 90,400 yuan higher than the sales amount disclosed in the reply to the first round of audit inquiry letters (4,885,000 yuan).

In addition to the contradiction in the export revenue disclosed in the first half of 2022 disclosed in the filing materials, the gross profit margin of export sales in the current period is also somewhat unusual.

According to the prospectus in the "Gross Profit Margin of Main Business by Sales Region", from 2019 to 2021, the gross profit margin of Zhongyu Technology's overseas sales was 44.15%, 42.16% and 40.61%, respectively, showing a continuous downward trend. During the same period, the gross profit margin of the company's domestic sales was 58.55%, 47.16% and 42.33% respectively, which was always higher than the gross profit margin of overseas sales, and also showed a continuous downward trend. In addition, the prospectus shows in the "comparative analysis of the gross profit margin of comparable companies" that the average gross profit margin of the five comparable companies in the first three years was 32.81%, 32.24% and 26.65%, respectively, which also showed a downward trend. The above-mentioned gross profit margin continues to decline or is a common phenomenon in the company's industry.

In the first half of 2022, the average gross profit margin of comparable companies was 26.26%, down 0.39 percentage points from the gross profit margin of 2021 (26.65%), continuing the downward trend; the gross profit margin of Zhongyu Technology's domestic sales was 27.86%, which was 14.47 percentage points lower than that of domestic sales in 2021 (42.33%), consistent with the trend of average gross profit margin of comparable companies in the industry.

However, in the first half of 2022, Zhongyu Technology's export gross profit margin was 50.90%, which was a 10.29 percentage point increase against the trend compared with the export gross profit margin (40.61%) in 2021, contrary to the trend of domestic sales gross profit margin and the average gross profit margin of comparable companies.

In the first half of 2022, why did Zhongyu Technology's export gross profit margin rise sharply? Is it related to the above contradiction in export revenue data? I'm afraid it all requires a reasonable explanation from the company.

The transferred patent is not included in the intangible asset

According to the "Patents" in the prospectus, as of the signing date of the prospectus (December 29, 2022), Zhongyu Technology and its subsidiaries have a total of 123 authorized patents, including 28 invention patents.

Patent disclosure information shows that 8 of the above 28 authorized invention patents of Zhongyu Technology were obtained through assignment. The eight invention patents are "a spraying rotation angle adjustment mechanism" (CN201610131325.2), "Method for preparing solid-solid phase transition materials by polyethylene glycol/polyester physical blending" (CN201310481693.6), "A high foaming rate EPDM sponge material and preparation process thereof" (CN201410073317.8), "A rubber spline thickness profiling device and method" (CN201510238244.8), High-pressure gas tank forming device and method for polymer-based carbon fiber composites" (CN201110110972.2), "Solidification forming device and method for composite materials with working temperature exceeding 500°C" (CN201110118487.X), "High-pressure water tank forming device and method for polymer-based carbon fiber composites" (CN201110110975.6) and "Device for preparing nanoscale metal powder" (CN200810196316.7), the patent application period is from September 5, 2008 to March 9, 2016, the transfer time is November 2017 and November to December 2020 respectively, the initial applicants are Jiama Machinery Coating Technology (Suzhou) Co., Ltd., Xuzhou Industrial Vocational and Technical College and Jiangsu Technical Normal College and other three unaffiliated third parties, calculated according to the authorized invention patent validity period of 20 years, during the reporting period, the above 8 invention patents are within the validity period.

However, the prospectus shows in the "Intangible Assets Situation" that from the end of 2019 to the end of June 2022, the intangible assets of Zhongyu Technology only include land use rights and software, and do not include patent rights assets formed by transferred patents.

It stands to reason that the prospectus does not disclose that the transferred patent of Zhongyu Technology was obtained free of charge. The above eight invention patents transferred to unrelated third parties should be included in the original value of intangible assets at transaction costs and amortized. If the company does not include the relevant transaction costs in intangible assets, it may result in insufficient amortization of intangible assets and inflated net profit in the consolidated statements.

It is worth mentioning that the prospectus does not disclose in the "patents" how Zhongyu Technology has authorized 123 patents.

Rental properties are not counted as investment real estate

According to the prospectus in the "sale of real estate to related parties", in October 2020, Zhongyu Technology transferred a house to Huang Yuzhong, the actual controller, for a transfer consideration of 54,700 yuan.

The house is the office space of Zhongyu Technology at the beginning of its establishment in 2000, and due to the defect of ownership, the house was used for rent after the company moved to the current office address in 2006. In other words, the property was being rented out before the transfer of the above-mentioned related property occurred in October 2020.

However, the prospectus shows in the "consolidated balance sheet" that as of the end of 2019, the balance of investment real estate of Zhongyu Technology was 0 yuan.

After undercounting intangible assets, does Zhongyu Technology undercount investment real estate?