IPO Observation: Exposure of Customer Dependence Risk? Zijin's Registration Submission Behind: Key Client Sales Plummet by 90%, Gross Margin Down, Accounts Receivable Significantly Increase

After the new year, "breakthrough" to the Northbound Exchange Listing Company Hengyang City Jinzhi Special Steel Co., Ltd. (referred to as Zijin) submitted its registration application. However, behind Zijin's registration submission are numerous risk points worth paying attention to. During the reporting period, although annual performance showed growth, past-year performance was a notable exception, with a significant downward trend in the first half of the year, where net profit after deducting non-recurring gains and losses plummeted by 40%. Meanwhile, from a comprehensive gross margin perspective, the reporting period saw a two-percentage-point decline; another point worth noting is that accounts receivable also significantly increased and exceeded the credit period, with a notable increase in accounts receivable exceeding the credit period.

Exposure of Customer Dependence Risk?

Main Clients' Sales Plummet by 90%, Main Business Profit Down by 40%

According to the prospectus, Zijin's customer concentration is relatively high. In 2020, 2021, and 2022, as well as the first half of 2023, the company's top five clients and their designated processing agents' sales revenue totaled RMB 10,314.06 million, RMB 15,288.05 million, RMB 19,886.94 million, and RMB 7,325.07 million, respectively, accounting for 60.91%, 65.59%, 72.67%, and 64.92% of the period's revenue.

Zijin warned that if its main clients' production operations are significantly affected by changes in industry cycles or other factors, it will have a significant adverse impact on the company's financial performance and operating results for the year.

As expected, Zijin's performance in the first half of 2023 showed a significant downward trend, with one important reason being that key client sales plummeted by 90%.

Zijin further indicated that in the first half of 2023, the company's operating revenue decreased by 15.47%, and net profit attributable to shareholders after deducting non-recurring gains and losses decreased by 41.15%. Among them, the second-largest main reason was that Zijin's clients' products' or standards changed, demand shifted, market competition affected, and the sales income of three flower automotive parts decreased by RMB 2,064.20 million, resulting in a reduction of RMB 588.20 million in gross profit, accounting for 46.11% of the decrease.

According to the prospectus, Zijin's top five clients' information shows that in the reporting period, Sanjiaozhi's sales revenue was RMB 2,659.49 million (accounting for 15.71%), RMB 4,991.76 million (accounting for 21.42%), RMB 8,401.83 million (accounting for 30.70%), and RMB 1,748.39 million (accounting for 15.50%).

Except for the significant downward trend in the first half of 2023's performance, from the full-year performance forecast, there is still a significant downward trend. In 2023, Zijin expects its operating revenue to be RMB 24,866.37 million, down 9.13% from the previous year; and net profit attributable to shareholders after deducting non-recurring gains and losses is expected to be RMB 2,771.51 million, down 10.25% from the previous year.

Gross Margin Down by Two Percentage Points

Accounts Receivable Significantly Increased, Exceeding Credit Period Accounts Receivable Ratio Up

Zijin mainly produces wear-resistant alloys, high-temperature alloys, and other products. With a focus on wear-resistant alloys, it is one of China's major producers of wear-resistant alloys, with applications in refrigeration, automotive, small appliances, gas control, and fluid control fields.

Another point worth noting is that the cost structure shows that raw material costs account for a relatively high proportion of operating costs. In the reporting period, the company's product raw materials costs accounted for a relatively high proportion of main business revenue, at 62.80%, 65.73%, 71.13%, and 68.81%. The main raw materials used by Zijin include pure iron, chromium-iron, nickel, and other metal materials, whose prices are affected by changes in national industrial policies, market demand, and supply fluctuations.

Risk warning: If future raw material prices continue to rise, product costs will increase, and sales prices cannot adjust accordingly, it will have an adverse impact on Zijin's gross margin and operating results.

Zijin indicated that in 2022, the company's gross margin decreased due to the upward trend in raw materials market prices, which affected the company's product costs, while sales prices did not adjust accordingly. Without considering other factors, if a certain type of main raw material price increases by 10% to 30%, it will increase or decrease Zijin's gross margin by 0.08% to 5.66 percentage points.

Risk warning: In the future, with the fluctuation in raw material prices, especially pure iron, chromium-iron, nickel, and other main metal materials, there is a risk that Zijin's sales prices may not be able to adjust accordingly, resulting in a decrease in product gross margin.

Except for the downward trend in gross margin or the impact on profit levels, currently, Zijin's increasing accounts receivable also poses a risk of bad debt losses, which will lead to a decline in profits.

Zijin warned that if its downstream clients' production operations are significantly affected by changes in industry cycles or other factors, they may not be able to pay on time, and Zijin's accounts receivable will have a risk of bad debt losses, which will affect the company's operating results.

Zijin further indicated that during the reporting period, its accounts receivable balances at the end of each period were RMB 4,014.30 million, RMB 4,622.53 million, RMB 6,346.54 million, and RMB 6,207.26 million, respectively, accounting for 17.58%, 17.83%, 20.01%, and 20.19% of the company's total assets.