With an asset-liability ratio of 2.7 times, Zhonggan Communication (Group) Holding Co., Ltd. (hereinafter referred to as "Zhonggan Communication"), a well-known integrated service provider and software developer from Jiangxi Province, has taken a "hasty" step into the capital market.
Zhitong Financial APP learned that Zhongjiang Communications recently submitted a listing application to the main board of the Hong Kong Stock Exchange, with Zhongtai International as its sole sponsor. The company submitted a listing application to the Hong Kong Stock Exchange on June 30, 2023. Earlier, Zhonggan Communications was listed on the A-share New Third Board and delisted in August 2019.
Backed by the three major telecom operators
According to the prospectus, Zhongjiang Communication was established in 2002 and is headquartered in Jiangxi Province, China. The company focuses on providing telecom infrastructure services and infrastructure digital solution services in China. According to the Ipsos report, in terms of revenue, Zhonggan Communications ranked sixth among all telecom network infrastructure construction and maintenance service providers in Jiangxi Province in 2022, with a market share of about 2.0%. As at the latest practicable date (March 18, 2024), the Company expanded its business to 23 provinces, municipalities and autonomous regions in the PRC.
Zhonggan Communication's revenue is generated from its main services, namely, (i) telecommunications infrastructure services, of which the sub-segments are infrastructure construction services and infrastructure maintenance services, and (ii) infrastructure digital solution services, of which the sub-segments are integrated solution services, system maintenance services and software solution services. In 2023, the company achieved revenue of RMB501 million, accounting for 82.3% of the total revenue, and infrastructure digital solution services achieved revenue of RMB108 million, accounting for 17.7% of the total revenue.
In terms of performance, in 2020, 2021, 2022 and 2023, Zhonggan Communications achieved revenue of approximately RMB337 million, RMB479 million, RMB413 million and RMB609 million respectively, gross profit margin of 25.3%, 19.0%, 25.1% and 24.5% respectively, and profit for the year of approximately RMB32.306 million, RMB36.173 million, RMB34.975 million and RMB68.646 million respectively.
One of the main reasons for the steady increase in the performance period of Zhonggan Communications is that the company has maintained stable business relationships with major customers. According to the prospectus, the company's customers include major players in China's telecommunications industry (including the three major telecom operators, namely China's three major telecom network operators) and the world's largest telecom tower infrastructure service provider.
It should be noted that Zhonggan Communication, which is backed by the three major telecom operators, has a dependence on logarithmic customers. In 2023, the revenue attributable to Zhonggan Communications from the five major customers will be about 592 million yuan, accounting for about 97.2% of its total revenue, while the revenue attributable to the company's largest customer (i.e., customer A) will account for about 48.8% of its total revenue.
Accounts receivable turnover is slow and debt ratios are high
Zhitong Financial APP noticed that because most of the main customers are giants in the telecommunications industry, Zhongjiang Communication does not have strong bargaining power in the process of conducting business. In 2020, the company's trade and other receivables amounted to $127 million, which increased to $242 million in 2023 and further to $278 million on January 31, 2024. The company's trade and other receivables accounted for nearly 40% of the company's revenue in 2023.
In terms of accounts receivable turnover efficiency, in 2022, the number of accounts receivable turnover days of Zhongjiang Communication will reach 689.6 days, and in 2023, it will be 545.4 days. On the other hand, the turnover days of accounts payable are 441.6 days in 2022 and 317.8 days in 2023.
Zhitong Financial APP noticed that since 2020, Zhongjiang Communication has not been able to generate a stable net cash inflow from operating activities. As of 2023, the company's cash and cash equivalents at the end of the year are only about 82 million yuan. This has also led to the need for companies to run their businesses by raising their liabilities.
As of December 31, 2020, 2021, 2022 and 2023, the asset-liability ratios of Zhonggan Communications were approximately 1.6 times, 2.5 times, 2.0 times and 2.7 times, respectively. The company's relatively high debt-to-asset ratio is mainly due to the prolonged settlement of trade debts by customers, resulting in relatively low working capital and cash balances on hand. As a result, the company uses bank borrowings to meet working capital needs and improve liquidity. During the above period, the Company's bank borrowings amounted to approximately $208 million, $311 million, $375 million and $348 million.
The market for telecommunication infrastructure services is expected to grow steadily
In this context, it is reasonable for Zhonggan Communications to seek diversified financing channels, not to mention that the company's business also needs financial guarantee to achieve sustainable growth.
According to the prospectus, the company's main business strategies for the future include: continuing to expand its telecommunications infrastructure services in western China, with a focus on Xinjiang Uygur Autonomous Region and Yunnan Province, selectively making strategic acquisitions to consolidate infrastructure digital solution services, improving its liquidity position and financial ability to obtain new large-scale infrastructure digital solution service projects, strengthening its research and development capabilities to improve the provision of infrastructure digital solution services, and partially repaying certain outstanding bank borrowings。
From the perspective of industry development trends, the ISOP report shows that the overall market value of China's telecom infrastructure service industry has increased from about 197.8 billion yuan in 2018 to about 261.3 billion yuan in 2022, with a compound annual growth rate of about 7.2%, led by the demand for large-scale 4G and 5G infrastructure construction services. The overall market capitalisation is estimated to increase from approximately $277.0 billion in 2023 to approximately $346.8 billion in 2027, at a CAGR of approximately 5.8%. Infrastructure services will continue to be the main driver of the market for the foreseeable future.
The steady expansion of the industry is conducive to the growth of the performance of Zhongjiang Communication. As of 2023, the company has secured 88 additional infrastructure construction service projects. As at the Latest Practicable Date, the Company had 93 infrastructure construction services projects in hand with an outstanding contract value of approximately $810 million.