IPO Observation: Special Environmental's Second Attempt at Going Public
After being rejected by the Northern Securities and Exchange Commission (SEC) in November last year, Shenzhen Special Environmental Technology Co., Ltd. (hereinafter referred to as Special Environmental) has submitted a new application for going public with the SEC just over seven months later. Behind this "urgent" attempt at going public lies many risks, such as significant labor outsourcing and increased accounts receivable; meanwhile, the company's cash flow is worrying, drawing attention from the SEC.
Last year's rejection
And now, another challenge for Special Environmental to overcome "the North"
This June 26th, Special Environmental submitted its application for going public with the SEC. What's noteworthy is that Special Environmental was rejected by the SEC just over seven months ago.
According to the announcement from the SEC's 60th meeting in 2022, "Shenzhen Special Environmental Technology Co., Ltd.: does not meet the conditions for issuance, listing, or information disclosure requirements."
In this rejection, the SEC raised three major issues.
"Regarding contract assets. According to the filing materials, the issuer's contract asset portfolio is mainly composed of assets with a lifespan of one year or less. Please explain the composition of contract assets and their valuation at each period-end, as well as any factors that may have affected the significant decline in contract asset write-downs."
"Regarding industry competition. The main source of funding for pipeline construction or renovation projects is government financial investment. Please provide more information on: (1) new orders obtained; (2) current market share and competitive landscape; (3) measures to enhance market share; and (4) whether there are any low-price competitions in the pipeline industry."
"Regarding technology. Please explain: (1) the advanced nature of the layering method; (2) whether there are any technical barriers; and (3) whether there are any risks of technology leakage due to outsourcing or other means."
And on account receivable.
Profit warning
Labor outsourcing is significant, and this quarter's performance has fallen sharply
From a business perspective, Special Environmental's main revenue comes from pipeline detection and repair services. According to the financial report, Special Environmental's operating income in 2021 was CNY 2.09 billion, CNY 1.90 billion in 2020, and CNY 3.03 billion in 2019. The company's net profit also showed significant fluctuations.
Regarding this, the SEC raised questions, requiring Special Environmental to: (1) provide detailed analysis of the reasons behind the 2021 revenue decline; (2) explain the causes of the significant increase in accounts receivable; and (3) disclose any human factors affecting the company's performance."
Additionally, Special Environmental's labor outsourcing is significant.
Sustainability concerns
Accounts receivable has increased sharply, and cash flow has been negative for two consecutive years
As mentioned earlier, Special Environmental's revenue and net profit have shown significant fluctuations. The sustainability of its operations is under scrutiny.
According to the prospectus, Special Environmental's top five customers accounted for 51.27%, 51.72%, and 67.96% of its total revenue in each period. Meanwhile, the company's accounts receivable has increased sharply.
Special Environmental stated that although its main clients are creditworthy, the company may face risks if their financial situations or credit ratings deteriorate, or if the company's accounts receivable management is inadequate.