IPO Observation: High Commission Rates and Abundant Overseas Income - Richen Group's IPO Prospects in A-Shares

In recent years, China's beverage market has been dominated by a single product - milk tea. Whether it's on the streets, at movies, or at restaurants, many people have taken to holding cups of milk tea and enjoying them. Various popular milk tea shops have emerged like mushrooms after a spring rain, all deeply loved by the masses.

As a result, numerous companies that provide products for these milk tea shops have capitalized on this trend and benefited significantly. Some have even begun their IPO journey.

Recently, Richen Technology Co., Ltd. (hereinafter referred to as "Richen Group") updated its review dynamics on the Shanghai Stock Exchange (SSE). The SSE issued an opinion letter to Richen Group, stating that it had reviewed and accepted the company's IPO application. On February 24, 2023, Richen Group is expected to list on the SSE main board, with Dongfang Securities as its underwriter.

According to the review dynamics, Richen Group has completed its second round of inquiries and responses. The inquiry topics include income, historical development, shareholders, and sales commissions.

Richen Group's IPO prospectus shows that it plans to issue no more than 1.47 billion shares, accounting for at least 25% of the total share capital; expected to raise CNY 10.61 billion, which will be used for the production and upgrading projects of recyclable plastic products, biological degradable plastic products, research and development center upgrading projects, and supplementary working capital.

Richen Group is a high-tech company mainly engaged in the development, production, and sales of plastic dining utensils and biological degradable plastic dining utensils. Its products include plastic and biological degradable plastic dining utensils, such as forks, knives, spoons, cups, plates, lids, packaging boxes, and paper products.

Among these products, plastic dining utensils are the company's main source of income. Products can be used in restaurants and for take-out orders, making them a type of fast-moving consumer goods.

A closer look at Richen Group's sales performance shows that its overseas sales revenue has accounted for more than 90% of total operating revenue during each reporting period, with commission rates as high as 92.10%, 81.57%, and 85.50%.

Another point worth noting is that Richen Group's board chairman, Huang Qi Jun, had long-term loans to the company's shareholders. From 2005 to 2021, Huang Qi Jun provided large-scale foreign loans to the company's shareholders.

In February 2021, Faith Holdings Limited (TOTOL FAITH HOLDINGS LIMITED) transferred its 15% stake in Tai'an Richen Plastic Co., Ltd. (the predecessor of Richen Group) to Huang Qi Jun's wholly-owned subsidiary, Feng Wind Investment Company (hereinafter referred to as "Feng Wind"). The transfer price was $1.5035 per registered capital.

The Shanghai Stock Exchange asked Richen Group to explain the background, reasons, and specific conditions for Huang Qi Jun's long-term loans to the company's shareholders. Whether there are any stock-holding, convertible bonds, guarantees, hedging agreements, or performance commitments, and whether there are any disputes, foreign exchange, tax, or other legal regulations that need to be followed.

Richen Group explained in its response that the founder's debt of $1.07 million has been settled by Huang Qi Jun (Feng Wind) through multiple debt settlements, and all parties do not need to make separate payments.

Additionally, Richen Group pointed out that the company's sales commissions are relatively high due to its cooperation with sales service providers.

The report shows that Richen Group's sales commission revenue was CNY 1.78 billion, CNY 2.63 billion, CNY 4.33 billion, and CNY 1.85 billion during each reporting period.

A closer look at the figures reveals that four main sales service providers account for more than 92% of the total commission revenue.

Richen Group's response stated that there are no relationships between the company and its related parties, relatives, or delegated shareholders. The company's sales commission calculation method is mainly based on the sales amount or agreed-upon amount multiplied by the commission rate, which varies depending on the sales representative, customer, and product.

Although Richen Group's income has shown a stable growth trend, its production capacity utilization rate is not high; for example, in 2020 and 2022, there was no significant increase in knife and spoon sales. Therefore, after Richen Group increases its production capacity, the company's production capacity utilization rate will decrease from 94.66% in 2020 to 86.25% in 2022.

Although Richen Group has a high commission rate and abundant overseas income, it still plans to raise CNY 4.21 billion for the production and upgrading projects of recyclable plastic products, biological degradable plastic products, research and development center upgrading projects, and supplementary working capital.