#精品长文创作季#
Author: Mu Qing, Editor: Xiao Shimei
On March 10, 2024, Zhaogang submitted to the Hong Kong Stock Exchange that it wanted to complete the backdoor listing of the Hong Kong stock market through a merger with Aquila (07836.HK), a special purpose acquisition company (SPAC), becoming the first successful De-SPAC listing transaction in Hong Kong.
The so-called De-SPAC transaction is a transaction in which a listed shell company acquires an unlisted company within a specified period of time, so that the unlisted company can obtain listing status.
It's just that, compared with the submission in August 2023, the current Zhaogang Network continues to lose money, and problems such as profitability difficulties and high valuations still exist, making the results of this sprint still very uncertain.
[The head of the industry, continuous losses]
It is reported that Zhaogang was founded in 2012 and is a digital platform company that takes bulk steel trading as the entry point, covering the whole value chain of comprehensive services such as online steel trading, logistics, warehousing and processing, and financial technology solutions. At the same time, the company is also expanding the diversified non-steel industrial raw material market, including electronic components, electrical and electrical, as well as hardware and electromechanical.
▲ Main business type, source: prospectus
According to CIC, according to the statistics of 2022, Zhaogang recorded a third-party steel trading volume of 35.3 million tons on the digital platform, accounting for about 38% of China's total third-party online steel transactions, and is also the largest third-party steel trading terminal logistics service provider in China, and the only asset-light digital trading platform in the industry that provides comprehensive services.
Since its establishment in 2012, Zhaogang has completed 6 rounds of financing, with a cumulative financing amount of 2.5 billion yuan, and well-known investment institutions such as Zhen Fund, Jingwei Venture Capital, Sequoia China, and Shougang Fund have participated in it to help its development.
However, despite the blessing of strong capital, Zhaogang has not been able to achieve profitability.
According to the prospectus, from 2021 to 2023 (referred to as: the reporting period), the operating income of Zhaogang Network will be 1.35 billion yuan, 905 million yuan and 1.17 billion yuan respectively, with an overall fluctuation decline of 13.33%, and the net profit in the same period will be -270 million yuan, -370 million yuan and -470 million yuan respectively, with a total loss of 1.11 billion yuan, and there is a tendency to expand year by year.
▲Operating performance, source: prospectus
A closer look at the reasons for this shows that the difficulty in making a profit is closely related to the company's high expenses and price wars.
[High costs, intensified competition]
According to the prospectus, during the reporting period, the gross profit margin of Zhaogang was 25.5%, 25.4% and 32.5% respectively. The overall increase was 7 percentage points. However, the percentage of the company's sales, administrative and R&D expenses in revenue soared from 36.2% to 63.1%, an increase of 26.9 percentage points, and the overall increase in the administrative expense ratio reached an astonishing 450.77%. As a result, the gap between gross margin and expense ratio deteriorated from 10.7 percentage points to 30.6 percentage points, resulting in a year-on-year increase in net loss.
▲Gross profit margin and various expense ratios, source: prospectus
However, as a digital platform company, under the condition of the overall expense ratio rising, the R&D expenditure closely related to the company's subsequent competitiveness has been reduced year by year, from 9.6% to 5.1%, a decrease of nearly 50%, and the absolute amount of R&D expenditure has also dropped from 130 million yuan to 59 million yuan.
At the same time, the steel industry, on which the steel network depends, has also entered a downward cycle as a whole, and it is not yet known when it will come out of the pit. As of the end of the third quarter of 2023, according to the statistics of Oriental Wealth, the operating income of all A-share iron and steel enterprises in the first three quarters decreased by 6.28% year-on-year, and the total net profit attributable to the parent company decreased by 37.05% year-on-year.
▲ The situation of various indicators, source: prospectus
Moreover, as can be seen from the figure above, during the reporting period, although the number of large customers increased from 58 to 67, the commission per ton charged to large customers decreased from 166.1 yuan to 132.2 yuan, a decrease of 20.41%. At the same time, it is not difficult to see that the overall prosperity of the steel industry is still declining rapidly, and the average steel price will drop from 5259.0 yuan/ton in 2021 to 3994.8 yuan/ton in 2023, a decrease of 24.04%.
At present, there are more than 300 various steel e-commerce platforms in the country, and the competition is fierce, among which Shanghai Ganglian and Ouyeel Yunshang are well-known steel e-commerce companies, and they are also strong opponents of Zhaogang Network. At the same time, such as Gangbao shares, Sinosteel e-commerce, etc., there is a steel giant standing behind it, backed by a big tree, in the downward cycle, compared with an independent third party such as the steel network, the survival pressure is obviously much smaller.
Returning to the issue of backdoor listing, valuation and timing are unavoidable problems in this listing sprint.
【借壳Aquila,真能圆梦?】
It is reported that Aquila was jointly initiated by CMB International Asset Management Co., Ltd. and AAC Mgmt Holding Ltd, and was successfully listed on the Hong Kong Stock Exchange on March 18, 2022, when it was subscribed by 99 professional investors (including 40 institutional professional investors), raising more than HK$1 billion.
Under the current rules, Aquila must announce a SPAC transaction within 24 months of listing. At the moment, this rule has been met. At the same time, the Hong Kong Stock Exchange also requires Aquila to complete the M&A transaction within 36 months after listing, which means that Aquila must complete the transaction before March 18, 2025, and the remaining time is less than one year.
However, judging from the experience of Zhaogang.com's submission in August 2023, the current profitability of Zhaogang.com and the competition problems it faces have not been fundamentally improved compared with the last submission, so it is difficult to say whether it can successfully break through this time, which means that whether Aquila can complete the transaction within the specified time is still full of uncertainty. Moreover, the current valuation of Zhaogang may be difficult for investors in the secondary market to accept.
▲The amount of PIPE investment and the proportion of shares, source: prospectus
According to the investment amount of HK$605.3 million, accounting for 6.05%, the valuation of Zhaogang is about HK$10.004 billion. However, by analogy with the already listed Shanghai Ganglian (300226. SZ), with a net profit of 305.3 million yuan in the first three quarters of 2023 and a total market value of 8.1 billion yuan (about 8.7 billion Hong Kong dollars), is still in the process of losing money. At the same time, after the meeting in November 2022, Ouyeel Yunshang, a peer company, failed to submit for registration, which also made the market speculate whether it was because of the loss problem, unable to inquire about a good price and did not dare to register, and whether Zhaogang would face similar problems in the future?
Zhaogang wants to use Aquila to complete the first De-SPAC listing transaction in Hong Kong, but selling steel also needs its own hardness, and achieving profitability as soon as possible is the right solution.
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The content of this article related to listed companies is the author's personal analysis and judgment based on the information publicly disclosed by listed companies in accordance with their legal obligations (including but not limited to temporary announcements, periodic reports and official interactive platforms, etc.), and the information or opinions in this article do not constitute any investment or other business advice, and Market Value Watch does not assume any responsibility for any actions arising from the adoption of this article.
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