IPO Observation | Questionnaire Response Shines, Yet Again; Zhirui Electronics' Abnormal Profit Rate Raises Concerns!

As a successor to Lingji Technology's IPO road, Zhirui Electronics entered its second round of questioning.

Zhirui Electronics is an industrial smart interconnected company that develops, produces, and sells embedded board cards and modules, CAN-bus bus communication products, and testing measurement analysis instruments. Its main customers are in the fields of new energy vehicles, photovoltaic energy storage, intelligent manufacturing, medical equipment, and others.

This time, Zhirui Electronics plans to issue no more than 20 million ordinary shares in RMB, with a total amount of CNY 800 million, mainly for new generation industrial smart interconnected products research and development projects, replenishing working capital, and other four projects. The replenishment of working capital accounts for CNY 2.18 billion, taking up 27.25% of the fundraising.

As a successor to Lingji Technology's IPO road, Zhirui Electronics has always been concerned about its independence. However, apart from its independence, Zhirui Electronics' abnormal profit rate is also an issue that cannot be ignored.

One: Abnormal Profit Rate, Questionnaire Response Shines!

Zhirui Electronics mainly has three product lines, including embedded board cards and modules, CAN-bus bus communication products, and testing measurement analysis instruments. In the first half of 2023, the three product lines' sales revenue was CNY 1.02 billion, CNY 0.73 billion, and CNY 0.71 billion, accounting for 41.49%, 29.67%, and 28.85% of the total sales revenue, respectively.

Zhirui Electronics has an abnormal profit rate phenomenon. In the first half of 2023, Zhirui Electronics' overall profit rate was 64.75%, while CAN-bus bus communication products' profit rate reached 80.19%. Compared to comparable companies, such as Swiss HMS, Zhirui Electronics' profit rate is significantly higher.

For example, let's take a look at Zhirui Electronics' CAN-bus bus communication products. This product line has a certain degree of import substitution in China, usually with domestic brands having an advantage in terms of price-performance ratio. Therefore, its profit rate is slightly lower than that of imported products. However, Zhirui Electronics' profit rate is still much higher than Swiss HMS'.

Moreover, apart from the abnormal profit rate, Zhirui Electronics' profitability is also different from that of comparable companies.

In the first round of questioning, regulatory agencies explicitly require quantification and analysis of each product's profit rate, highlighting that the profit rate and net profit ratio are significantly higher than those of comparable companies during the reporting period. Whether there is a situation where costs are offset by related parties; whether there is a risk of significant downward adjustment in the future; and whether relevant risks have been adequately disclosed.

In response to the first round of questioning, Zhirui Electronics simply analyzed that customers are not sensitive to prices, and the company's technical level is high. It attempted to gloss over the issue.

Facing Zhirui Electronics' response, the Shanghai Stock Exchange again required Zhirui Electronics to provide detailed quantification and analysis of each product's profit rate, as well as a comparison with comparable companies.

Two: Selective Comparison Still Difficult to Explain!

After repeated questioning, Zhirui Electronics finally disclosed its quantitative analysis results, but still performed selective comparisons.

Zhirui Electronics selected 8 comparable companies for comparison, raising the average profit rate of comparable companies. However, in terms of business-specific comparisons, it only selected a few companies to compare. Thus, Zhirui Electronics' high profit rate is still difficult to explain.

Zhirui Electronics' high profit rate is mainly due to the following reasons: domestic labor costs are low, company software attributes are strong, pricing capabilities are strong, and Swiss HMS gives up some of its profits to distributors. Among them, giving up some of its profits to distributors is one of the main reasons.

Zhirui Electronics' response shows that Swiss HMS gives up 10% to 20% of its profit space to distributors. Therefore, Zhirui Electronics' high profit rate difference with Swiss HMS has a rational basis.

However, it's worth noting that Zhirui Electronics also exists in the same situation as Swiss HMS. According to the prospectus, the company tests and measures instruments products and some CAN-bus bus communication products through distributors. In 2023, the sales revenue of these products reached nearly CNY 1 billion, accounting for nearly 40% of total sales revenue.

Therefore, it can be seen that Zhirui Electronics' high profit rate cannot be attributed to giving up profits to distributors.