"Investor's Network" Zhang Jingyi
Recently, Shenhua Industrial Holdings Co., Ltd. (hereinafter referred to as "Shenhua Industrial/Company"), a flour production and manufacturing company from Gu'an County, Hebei Province, submitted a prospectus to the Hong Kong Stock Exchange for the third time to be listed on the main board of the Hong Kong Stock Exchange, with China Thailand as its sole sponsor. The company submitted two listing applications to the Hong Kong Stock Exchange in June 2020 and March 2021, but both were unsuccessful.
It is understood that the flour milling industry is a low-profit industry, with a relatively low entry threshold and relatively high homogenization, with about 3,000 to 4,000 flour manufacturers in China with annual main business revenues of more than 20 million yuan in 2023.
According to the Frost & Sullivan report, in Hebei Province, in terms of sales volume of special powder, Ginseng Flower Industry ranks third in Hebei, with a market share of about 3.7%. Nationally, in terms of flour sales, Shenhua ranks 31st to 35th among all flour manufacturers in China, with a market share of only 0.2%, and a low market share.
Under the serious involution of the industry, Ginseng Flower Industry has not yet formed its own unique competitiveness, and there are still difficulties such as single product type, single operation mode and worrying financial situation. So what are the chances of the company's third impact on the Hong Kong stock IPO?
The product type is single, and the revenue is supported by price increases
Ginseng Flower Industry is a specialty powder products manufacturer located in Hebei, China, established in 2002. The company has been selling flour products and flour by-products under the brand name "Ginsenghua" for more than 20 years, and its main products include ordinary special powder, heat treatment special powder and general powder.
According to the prospectus, from 2021 to 2023, Shenhua Industry will achieve revenue of 500 million yuan, 469 million yuan, and 544 million yuan respectively, and net profits of 32.054 million yuan, 45.256 million yuan, and 40.497 million yuan respectively. Although the company has recorded profitability for three consecutive years, its profitability is not strong, with a year-on-year increase of 16.09% in revenue in 2023, but a 10% year-on-year decline in net profit.
In the current market environment, product diversity has become one of the core elements of enterprise competitiveness, but at present, the product category of ginseng flower industry is relatively single, mainly concentrated in flour products. More than eighty percent of the company's revenue comes from flour products, which are ordinary special flour and heat treatment special powder. Among them, the revenue of ordinary special powder accounts for the highest proportion, accounting for 64.1%, 55.9% and 58.4% of the total revenue from 2021 to 2023, respectively.
From the perspective of product sales, from 2021 to 2023, the total sales volume of Shenhua Industry will be 168,900 tons, 137,100 tons, and 160,600 tons respectively. 2023 is not the best year for ginseng industry's sales, and the reason why the company can achieve the highest revenue in the past three years in 2023 is because of the price increase of two core products such as ordinary special powder and heat treatment special powder.
In 2023, the price of ordinary special powder for ginseng industry will increase by 5 cents year-on-year to 3.68 yuan, or 50 yuan per ton, and the price of heat-treated special powder will increase by 0.18 yuan per kilogram year-on-year, or 180 yuan per ton.
It can be seen that although Ginseng Flower Industry has achieved revenue and net profit growth in the past three years, the growth trend is highly dependent on the sales of flour products. It is worth noting that the company's product sales volume fluctuates greatly, and the profit growth trend does not come from the steady increase in sales, but with the help of product price increases to boost operating income.
Dependence on large customers is aggravated
In addition to the single product line, the operation model of Ginseng Flower Industry also presents a single characteristic, mainly selling to food processors and wholesaler customers (B-end customers), lacking a To C-end market. Generally speaking, food companies that rely on the To B business will also have a relatively high dependence on customers, and there is a risk that they will be constrained by the performance of their major customers.
According to the prospectus, Ginseng Flower Industry is in this situation. The company is particularly dependent on its top five customers for revenue, with sales from the top five customers accounting for 48.6%, 61.7% and 63.2% of total revenue from 2021 to 2023, respectively. On the other hand, the company has lost more than two-thirds of its customers, and the number of customers has dropped from 298 in 2021 to 92 in 2023, and the customer concentration has increased significantly.
Over-reliance on large customers can lead to uncertain impact on the company's future revenue when customer relationships change or demand shrinks, and may also affect the stability of the company's business.
It is worth mentioning that Dali Group, a well-known bakery food company, is also one of the five major customers of Shenhua Industry, and the two have been cooperating since 2012. However, in recent years, the company's sales to Dali Group have continued to decrease, from 135 million yuan in 2021 to 64.419 million yuan in 2023, and the ranking has also slipped from the position of the first largest customer to the third largest customer.
The financial situation of the funds is worrying
Shenhua Industry faces multiple challenges in terms of capital risk, which are mainly reflected in the high asset-liability ratio, the increase in current liabilities, the negative operating cash flow for two years, and the decline in debt repayment ability.
First of all, the operating cash flow of Shenhua Industrial has been negative for two consecutive years. According to the prospectus, the company still had a positive cash flow of 3.8 million yuan in 2021, but then it took a sharp turn, falling to -161 million yuan and -125 million yuan in 2022 and 2023, respectively. This indicates that the imbalance between cash inflow and outflow in the company's main business activities continues to intensify, which has put significant pressure on its daily operating capital chain.
Secondly, the debt ratio of Shenhua Industrial has risen sharply, with the company's debt ratio of 104.9% in 2021, climbing to 147.5% in 2022 and reaching a high of 166% in 2023. Specifically, the company's current liabilities in 2023 increased significantly from about 155 million yuan to about 429 million yuan. This chain of growth not only reveals the increasing debt burden in the company's capital structure, but also reflects the potential financial leverage risk and debt repayment pressure, which has posed a challenge to the long-term financial health of the company.
However, in stark contrast to the rapid growth of current liabilities, the company's current assets are gradually declining. The current assets of Shenhua Industrial decreased from approximately $522 million at the end of 2022 to approximately $437 million at the end of 2023.
Finally, the number of "bank and other loans" is also increasing. From 2021 to 2023, the company's bank and other loans were 289 million yuan, 473 million yuan and 600 million yuan, respectively, and reached a new high of 682 million yuan by the end of the first quarter of 2024. It is worth noting that Yao Zhiwan, the controlling shareholder of Shenhua Industrial, currently holds a directorship position in Hebei Gu'an Rural Commercial Bank, and as of March 31, 2024, the company still has 30 million yuan of debts outstanding to the bank.
Perhaps, Ginhua Industry's eagerness to go public and raise funds is also related to its financial situation. In its prospectus, the company admitted that it plans to use some of the proceeds to "repay certain existing borrowings from banks and other financial institutions". However, under the above serious problems, can Shenhua Industry successfully list on the Hong Kong Stock Exchange this time? "Investor.com" will continue to pay attention. (Produced by Thinking Finance)■
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