IPO Observation | High Assets-to-Equity Ratio and Accounts Receivable, Guangming Electronics' Debt Ability Raises Concerns from Shanghai Stock Exchange

Recently, China's automotive industry has developed rapidly and scaled up, with related automobile parts industries enjoying continuous growth and steady development. Additionally, the government's ongoing efforts to promote the automotive industry have led to a prominent position of automobile parts in the industry, which has also "nurtured" some major players in the automobile parts sector.

In recent days, Guangming Electronics Co., Ltd. (hereinafter referred to as "Guangming Electronics") updated its listing application review dynamics on the Shanghai Stock Exchange, with the company having replied to the exchange's IPO second-round inquiries.

According to reports, Guangming Electronics submitted its initial public offering (IPO) prospectus and prospectus draft in March 2023, which was accepted by the Shanghai Stock Exchange.

A review of Guangming Electronics' responses to the exchange's inquiries reveals that the company has addressed various concerns, including high assets-to-equity ratio, accounts receivable, and debt ability.

High Assets-to-Equity Ratio

Data shows that Guangming Electronics was established in 1989 and focuses on automotive electronic components, a professional comprehensive solution provider for automobile body electronic control systems. The company's main products include driver assistance systems, seat control systems, intelligent optical systems, door and window control systems, and seat adjustment systems.

The prospectus shows that Guangming Electronics' actual controller is Zhou Mingming, Wu Xianwei, and Zhou Yuan, among whom Zhou Mingming and Wu Xianwei are husband and wife, while Zhou Yuan is their son. Zhou Mingming, Wu Xianwei, Zhou Yuan, and Zhou Shouxi have signed a joint action agreement.

Guangming Electronics plans to issue 40 million shares in this IPO, accounting for approximately 10% of the company's total share capital after issuance. The company will invest around CNY4 billion in this IPO, mainly using the funds raised to build its new factory project (Phase II) and supplement working capital.

However, it is worth noting that Guangming Electronics' assets-to-equity ratio is relatively high.

In the first half of 2023, Guangming Electronics' assets-to-equity ratio was 75.50%, 71.85%, 78.81%, and 69.07%, respectively, significantly higher than the average level of similar companies in the industry.

For a company, a high assets-to-equity ratio may lead to certain financial risks and potentially impact the company's normal operations.

In its prospectus, Guangming Electronics has also highlighted the risk associated with its high assets-to-equity ratio, stating that "the company's operating funds mainly come from operational income and institutional loans. If the issuer's customers are unable to pay their accounts receivable or there are limitations on external financing, it may put pressure on the company's normal operations, affecting its debt ability and continuous operation."

The Shanghai Stock Exchange has also raised concerns about Guangming Electronics' high assets-to-equity ratio in its first-round inquiries, requiring the company to explain "the reasons for and rationality of its high assets-to-equity ratio" and analyze related risks and measures taken by the company.

In response to the exchange's inquiry, Guangming Electronics stated that "the company's high assets-to-equity ratio is reasonable based on its actual operating situation." The company also emphasized that it will reduce its assets-to-equity ratio after this IPO and increase its liquidity.

High Accounts Receivable

A review of Guangming Electronics' financial statements shows that the company's accounts receivable have been growing rapidly, with a significant proportion of these receivables becoming bad debt.

In response to the exchange's inquiry about the reasons for and rationality of its high accounts receivable, Guangming Electronics stated that "the main reason is the rapid growth of the company's business, which has led to an increase in accounts receivable. The company will continue to actively manage its accounts receivable and take measures to reduce bad debt."

Debt Ability Raises Concerns from Shanghai Stock Exchange

Despite Guangming Electronics' responses to the exchange's inquiries, there are still concerns about the company's debt ability.

In response to the exchange's inquiry about the company's debt ability, Guangming Electronics stated that "the company has a good debt repayment ability and does not have any significant debt risks. The company will continue to actively manage its accounts receivable and take measures to reduce bad debt."