IPO Observation | Hong Kong Tools IPO Enigma: Pre-IPO Dividend, Different Stock Prices and Low Debt Ratio Compared to Industry
Another domestic CNC tool manufacturer is planning to go public on the sci-tech board.
In recent days, the Shanghai Stock Exchange (SSE) conducted a first-round inquiry into the IPO application of Hong Kong Tools System Co., Ltd. (hereinafter referred to as "Hong Kong Tools"), which was previously suspended by the SSE in September 2023 due to expired financial statements and resumed in December 2023.
According to Hong Kong Tools' prospectus, this IPO will issue no more than 64,572 million shares, all of which are new shares, accounting for at least 15% of the company's total shares after issuance. The company expects to raise RMB 367 million and use the funds to upgrade the production capacity of hard alloy and super-hard cutting tools, develop a precision cutting tool research center, and replenish working capital.
Reasonable Dividend Payment Before IPO
Data shows that Hong Kong Tools was established on July 27, 2004 and changed its corporate structure to a joint-stock company on September 27, 2017. The actual controller is Wu Jianxin, and the company is a high-tech enterprise specializing in the research, production, sales, and service of super-precision CNC cutting tools and integrated circuit encapsulation dies.
From 2020 to 2022, Hong Kong Tools' operating income was RMB 2.31 billion, RMB 2.96 billion, and RMB 3.47 billion, respectively, with net profits attributable to shareholders of RMB 240 million, RMB 430 million, and RMB 570 million, respectively.
From a performance growth perspective, Hong Kong Tools' operating income and net profits both showed steady growth. However, according to the information disclosed by Hong Kong Tools, the company's production capacity utilization rate has exceeded its design capacity, requiring it to raise funds to support future development.
Hong Kong Tools' prospectus shows that this RMB 367 million in fundraising will be invested in three projects: a hard alloy and super-hard cutting tool production capacity expansion project (RMB 243.8 million), a precision cutting tool research center upgrade project (RMB 64 million), and a working capital replenishment project (RMB 60 million).
Why do we need to supplement working capital? Hong Kong Tools explained that it is based on the company's actual operating situation, taking into account its existing financial condition, operational cash flow requirements, and future strategic development goals. It aims to further enhance the company's financial stability and risk resistance capabilities.
Why Share Prices Differ
As Wu Jianxin is the controlling shareholder of Hong Kong Tools through his indirect control of 61.02% of the shares, he also holds a minority stake in the company through employee shareholding platform Wuxi Jingfeng Investment Partners (Limited Partnership). Therefore, Wu Jianxin effectively controls 64.99% of Hong Kong Tools.
However, Hong Kong Tools' capital structure shows that there is a phenomenon of different stock prices for the same shares.
In April 2020, Hong Kong Tools held its first extraordinary shareholders' meeting and agreed to reduce its total shares from 36 million to 35 million by repurchasing 1 million shares from Wuxi Know Source Investment Partners (Limited Partnership) at a price of RMB 5.9388 per share, with a total repurchase amount of RMB 59.388 million.
However, one year later, on January 25, 2022, Hong Kong Tools held its first extraordinary shareholders' meeting and agreed to increase its total shares from 35 million to 36.591 million by issuing new shares to Beijing Guofeng Aviation Engine Industry Investment Center (Limited Partnership) at a price of RMB 3.14 per share, with an issue amount of RMB 50 million.
Why did Hong Kong Tools buy back old shares at RMB 5.9388 per share and then issue new shares at RMB 3.14 per share? The difference between the two prices is RMB 2.7988, a gap of approximately 47%.
In addition to these irregularities, Hong Kong Tools' performance has consistently grown from 2020 to 2022, with no signs of asset depreciation. This "different stock price" phenomenon raises questions about whether there are underlying shareholding or other special interests at play.
The company did not provide detailed explanations for this issue in its prospectus.
Low Debt Ratio Compared to Industry
As Hong Kong Tools' operating income continues to grow, the company's accounts receivable also increase accordingly.
From 2020 to 2022, Hong Kong Tools' accounts receivable balance was approximately RMB 1.13 billion, RMB 1.48 billion, and RMB 1.69 billion, respectively, accounting for 48.07%, 56.42%, and 52.55% of the company's total working capital.
Hong Kong Tools believes that as the company's income scale continues to expand, its accounts receivable balance will also show a steady growth trend, matching the company's credit policy.
However, Hong Kong Tools' debt ratio is significantly lower than that of comparable industry companies.
From 2020 to 2022, Hong Kong Tools' current ratio was 1.37, 1.33, and 1.83, respectively, while the average value for comparable industry companies was 5.08, 4.20, and 3.88; quick ratio was 1.08, 0.97, and 1.39, respectively, while the average value for comparable industry companies was 4.32, 3.37, and 2.96.
On the other hand, Hong Kong Tools' total asset leverage ratio is higher than that of comparable industry companies. From 2020 to 2022, Hong Kong Tools' total asset leverage ratio was 27.90%, 29.50%, and 23.77%, respectively, while the average value for comparable industry companies was 17.77%, 18.30%, and 22.45%.
Hong Kong Tools explained that its high debt ratio is due to the company's rapid expansion and need for bank loans to purchase raw materials and invest in engineering and equipment, which has led to a lower current ratio and quick ratio.