IPO Observation: Family-controlled company with significant equity stake "breaks through" the backdoor of the GEM board: high accounts receivable, bad debt provision walks high, multiple customers become execution persons

　　As a family-controlled company with significant equity stake, Shanxi Condensation New Materials Co., Ltd. (hereinafter referred to as Condensation) is currently "breaking through" the backdoor of the GEM board. The Shanghai Stock Exchange's latest review shows that Condensation is in the process of responding to the third round of inquiry letters. Since the IPO application was approved over 10 months ago, Condensation has been focusing on its high accounts receivable and bad debt provision issues.

　　It is worth noting that the high accounts receivable is accompanied by a significant increase in the number of customers who have become execution persons this year. Among Condensation's top five largest account receivable clients, multiple customers have already been listed as being executed.

　　High accounts receivable, bad debt provision walks high

　　According to Condensation's latest prospectus, the company is a high-tech enterprise engaged in the development, production, and sale of special materials. Its main products are used for coal mining, tunnel construction, and other fields, with applications including solidification, support, filling, sealing, and fire prevention. These products not only reduce the risk of major accidents in the coal industry but also improve the recovery rate and resource utilization, and enhance industry production efficiency.

　　During the reporting period, Condensation's revenue was RMB 2.91 billion, 4.05 billion, 4.21 billion, and 1.73 billion respectively; its net profit was RMB 0.49 billion, 0.62 billion, 0.62 billion, and 0.29 billion respectively.

　　From a year-over-year perspective, Condensation's performance has shown significant growth, although the revenue and net profit growth rate slowed down in 2022. In addition, looking at the first half of this year, Condensation stated that its performance has slightly decreased due to concentrated purchases by large customers.

　　Condensation further stated that its future business performance growth is subject to various factors such as macroeconomic conditions, China's coal industry intelligence process, industrial policies, coal industry cyclicality, market trends, and competition, among others. If these factors experience significant negative changes, the company will still face certain operational risks.

　　From the above table, although revenue and net profit have grown, the high accounts receivable is a notable issue. According to Condensation's prospectus, its accounts receivable ratio is relatively high, with the balance at the end of each reporting period being RMB 19.57 billion, 28.78 billion, 26.30 billion, and 26.59 billion respectively, accounting for 53.60%, 57.14%, 51.52%, and 55.07% of total assets respectively.

　　It is worth noting that as of June 30 this year, the accounts receivable balance has exceeded last year's value. Furthermore, from a half-year perspective, the accounts receivable balance is 1.53 times higher than revenue. Condensation stated that its end customers are mainly large state-owned enterprises, and their settlement periods are relatively long due to procurement budget and payment process issues. Although most of these customers have good credit ratings, there are still some customers who cannot make timely payments due to financial difficulties.

　　Therefore, Condensation's bad debt provision has been continuously increasing. Based on cautious consideration, Condensation provisions for specific customers' accounts receivable one by one, with the amounts being RMB 254.50 million, 633.68 million, 662.53 million, and 662.53 million respectively.

　　According to Condensation's latest disclosed data, as of August 31, 2023, Shanxi Xinlun Group still had an outstanding balance of RMB 1.56153 million. Condensation stated that although it has taken measures such as filing lawsuits and applying for compulsory execution against certain customers, there is still a risk that the long-term accounts receivable may not be fully recovered if these customers' operating conditions deteriorate.

　　Multiple customers become execution persons

　　Apart from the above-mentioned customer's accounts receivable issue, what about other customers? According to Condensation's prospectus, as of June 30 this year, the top five largest account receivable clients are Shanxi Lanhua Technology Co., Ltd., Jineng Coal Industry Group Co., Ltd., Weinan Shannxi Coal Technology Co., Ltd., and Shanghai Datun Energy Co., Ltd.

　　Among them, as of November 21 this year, Jineng Coal Industry Group Co., Ltd. has execution information reaching 12 cases, with a cumulative amount of approximately RMB 2883.86 million according to Tianyancha data.

　　Similarly, the fifth largest account receivable client has also had execution information this year. According to Tianyancha data, this company has a history of being executed with over 12 cases and a cumulative amount of nearly RMB 3500 million.

　　Regarding Condensation's accounts receivable issues, the Shanghai Stock Exchange has repeatedly emphasized this point in its first and second rounds of inquiry letters.

　　For example, in the first round of inquiry letters, the Shanghai Stock Exchange asked Condensation to explain the reasons for the changes in its accounts receivable balance, whether it matches the company's operating scale, and whether it is consistent with industry characteristics. It also asked about the credit period agreed upon with customers, the settlement situation after the credit period, and whether there is a risk of not being able to recover the accounts receivable.

　　Looking back at the above-mentioned customer Shanxi Xinlun Group's accounts receivable issue, according to Condensation's response in its second round of inquiry letters, in 2020 and 2021, the company accounted for Shanxi Xinlun Group's outstanding balance as accounts receivable. In 2022, the company reached an "Execution and Settlement Agreement" with Shanxi Xinlun Group, agreeing that Shanxinlun Group would repay RMB 250 million per month from September to December 2022 and RMB 150 million per month in 2023, with a final settlement of all outstanding balances by the end of 2023.

　　As of now, there is only one more month left until the end of 2023. Can Shanxi Xinlun Group still fulfill its obligations? What about other customers who have become execution persons? This is worth paying attention to.

　　(Source: China Execution Information Open Network, Shanghai Stock Exchange, Tianyancha)