With high debt and overcapacity in the industry, Luda Group, which is burdened with multiple "mountains", went to the United States to "decompress"

Since 2023, steel enterprises have been squeezed by the decline in terminal downstream demand and high raw material prices, and their profitability has generally declined, which has become an irrefutable fact in the industry.

For example, in 2023, the performance of Valin Steel (000932.SZ) and Anshan Iron and Steel Co., Ltd. (000898.SZ), which rank high in terms of revenue, have declined to varying degrees, among them, Valin Steel's revenue fell by 2.5% year-on-year, and net profit fell by 13.5% year-on-year, while Anshan Iron and Steel Co., Ltd. has a sharp decline in profit, with a net loss of 3.223 billion yuan.

However, surprisingly, even if the steel industry is in a downward cycle, there are still "warriors" who choose to go against the market -

On March 4, the holding company of Luda Development Co., Ltd. (hereinafter referred to as "Luda Group") submitted a listing prospectus to the U.S. Securities and Exchange Commission (SEC) to list on the New York Stock Exchange under the ticker symbol "LUD". The company plans to raise $9 million by issuing 2.5 million shares at a price of $3 to $4. Based on the median of the proposed offering price range, Luda Technology Group will have a market capitalization of $79 million.

Next, we might as well use Luda Group as a sample to further explore the development potential of the steel industry and the company's growth strength through its fundamentals and business map.

High debt and tight cash flow are the "two mountains" at the top

It is reported that Luda Group was founded in 2004, is a manufacturer and trader of stainless steel and carbon steel flanges and accessories products, headquartered in Hong Kong, the company's production base is located in Tai'an City, Shandong Province, China, and the main body of the company is Tai'an Longtai Metal Products Co., Ltd.

From the perspective of business structure, Luda Group is currently mainly engaged in the manufacture and sales of stainless steel and carbon steel flanges and accessories; Trade in steel pipes, valves and other steel pipe products. The company's sales network includes customers from China, South America, Australia, Europe, Asia (excluding China) and North America, and the company's customers include manufacturers and traders from the chemical, petrochemical, maritime and manufacturing industries.

Although Luda Group's business context is clear and complete, it is worth noting that Luda Group's fundamentals in recent years have been decent, and there are even operational risks such as high debt and tight cash flow.

Specifically, in terms of revenue, from 2021 to 2023, Luda Group achieved revenue of US$34.14 million, US$49.85 million, and US$25.08 million respectively, maintaining a steady growth trend.

However, in terms of the performance of net profit, it is not so robust. From 2021 to 2023. The company's net profit was US$4.94 million, US$3.07 million, and US$2.16 million respectively, of which the net profit in 2022 fell by about 38% year-on-year, and the overall performance of net profit in the past two years has been relatively volatile.

Under the fluctuation of net profit, Luda Group is also facing the "two mountains" of tight cash flow and high debt.

According to the prospectus data, as of December 31, 2022, Luda Group's cash and cash equivalents were US$4.1186 million, restricted cash was US$161,500, and outstanding bank borrowings were US$8.0984 million, of which about US$6 million in bank borrowings will be repaid within one year and US$2.1 million in bank borrowings will be repaid within one year. In the same year, the company had a cash outflow from operating activities of $1 million.

In addition to the tight cash flow, Luda Group's debt level is also very high - as of December 31, 2022, the company's current assets were approximately US$33.9 million and current liabilities were approximately US$22.6 million, which is evident in the debt repayment pressure.

As of June 30, 2023, Luda Group's cash inflow from operating activities was US$0.4 million, with a net increase of US$822,300 in cash and cash equivalents.

(Data source: Luda Group prospectus)

Based on the above, it is not difficult to see that in the context of the general decline in the profitability of the steel industry, Luda Group seems to be unable to escape the downward trend of the industry.

There is a "solution" to the overcapacity of the industry, and there is "no solution" to the competitive pressure?

As we all know, as early as ten years ago, the word "overcapacity" was not unfamiliar in the steel industry, and in a round of supply-side structural reform in 2016, the steel industry was also a key regulated industry.

Now that ten years have passed, in many industry conferences and performance announcements of steel mills in 2023, the words "overcapacity", "imbalance between supply and demand", and "strong supply and weak demand" are still frequently mentioned.

According to Quam Securities, crude steel production has entered a plateau period after reaching a peak of 1.065 billion tons in 2020, and as of October 2023, crude steel production increased by 1.64% over the same period last year. In 2024, with the deepening of supply-side reform, the resolution of excess capacity and output, and the tightening of policy production control, it is estimated that the crude steel output will be about 1.021 billion tons, a year-on-year decrease of 1.5%.

In addition, the current downstream demand for steel is facing structural adjustment, the drag on real estate is gradually reduced, the infrastructure demand is expected to be strong, and the manufacturing industry continues to prosper, which has gradually become the main driving force for steel demand, and steel demand is expected to stabilize and grow in 2024, steel exports will fall, and supply and demand fundamentals will improve.

At the same time, under the guidance of the policy of "energy conservation and emission reduction", steel industry leaders and other players have also begun to actively invest in advanced technologies to improve production efficiency, reduce production costs and improve the overall quality of steel. Thus, it can be seen that despite China's attempts to cut steel production to reduce pollution, production levels have grown steadily in recent years, and steel production on the mainland has risen steadily.

Taking the development of China's steel pipe fittings division as an example, in the past ten years, driven by the development of downstream industries, the demand for steel pipe fittings has grown steadily. Steel pipe fittings are mainly used in downstream industries such as chemical and petrochemical, electric power, shipbuilding, as well as construction, machinery and wastewater management. In addition, in the mainland, steel pipe fittings have begun to be widely used in "West-to-East Gas Transmission", "South-to-North Water Diversion", million kilowatt nuclear power units, ethylene plant engineering, oil and gas pipelines and other major equipment projects such as transportation, coal chemical industry, etc., these projects have also promoted the steady growth of industry demand to a certain extent.

From this, it can be seen that for the domestic iron and steel enterprise industry, under the guidance of multiple factors such as policy and technology, the problem of overproduction in the industry has been significantly alleviated.

However, it should be noted that under the influence of the long-term oversupply situation, the industry competition is becoming increasingly fierce, and for the iron and steel enterprises in the track, this is also an unavoidable development "problem".

At present, domestic iron and steel enterprises are mainly facing the following forms of competition: First, capacity competition. Overcapacity in China's steel profile industry, industry competition is becoming increasingly fierce, and enterprises compete with each other to reduce costs, improve efficiency, improve product quality, and better serve the market. The second is market competition. Enterprises compete in product quality, marketing and service to seize market share and gain more customers. Finally, there is the competition of technology. Enterprises increase investment in technology, develop more advanced steel profile production technology, and make their products more competitive.

In view of this, Luda Group also bluntly stated in the prospectus: "The steel forging industry is highly competitive and fragmented. A company's ability to remain competitive in the market is critical to the company's business development. It is important for companies to remain competitive in terms of price and quality, product variety, product certification, and delivery times. ”

In addition, in the view of Zhitong financial APP, the current steel industry is in a downward trend, although the industry's "overcapacity problem" has been alleviated, but it can be predicted that in this development background, the follow-up industry Matthew effect will become more and more obvious, their own strong fundamentals, excellent profitability of steel enterprises in the industry gradually clear the process of advantages will be further amplified, on the contrary, those insufficient profitability, fundamentals are not bright enough small and medium-sized steel enterprises or face the risk of being accelerated to squeeze the living space.

Based on the above, Luda Group obviously has a sense of the multiple pressures faced by the company. In the prospectus, the company referred to the company's business strategy and future expansion plans, saying that in the future, the company will continue to expand its customer base and geographical coverage, and enhance the company's development and manufacturing capabilities. In the future, we will wait for the test of time whether Luda Group can further enhance the company's strength through the above-mentioned expansion plan.