IPO Observation: Subsidiary Vice President's Son Becomes Supplier! Under the "Limit Plastic" Background, Chaoyang Shares' IPO Road becomes Even More Challenging

Recently, with people's living rhythm speeding up and lifestyle changing, demand for online food delivery has been increasing continuously, leading to rapid expansion of fast-food, tea shop, etc. industries, which in turn have driven the growth of single-use disposable products. This has brought both opportunities and challenges to single-use disposable product companies.

Recently, Chaoyang New Materials Technology Co., Ltd. (hereinafter referred to as "Chaoyang Shares") has updated its IPO application review progress on the Shanghai Stock Exchange, with the company having disclosed the second round of inquiry responses. The main issues addressed in the responses include operating income, suppliers and procurement, sales expenses and gross profit rate, etc.

However, certain countries' and regions' "limit plastic" policies have cast a shadow over Chaoyang Shares' IPO. At the same time, Chaoyang Shares itself has faced challenges that increase the difficulty of the IPO review process.

Vice President's Son Becomes Supplier

The prospectus shows that Chaoyang Shares is one of the leading enterprises in China's single-use disposable product industry, specializing in the development, production, and sales of plastic disposable products, biodegradable disposable products, and paper disposable products. The company's main products include various types of disposable tableware, cups, straws, etc., which belong to fast-moving consumer goods and are widely used in daily life, food packaging, household daily use, outdoor travel, and public services.

On June 26, 2023, the Shanghai Stock Exchange officially accepted Chaoyang Shares' IPO application document (draft). The company plans to issue no more than 30.93 million shares and raise approximately RMB 7.23 billion for the projects of "Biodegradable New Materials Product Development" and "Vietnam Paper Products Expansion".

Chaoyang Shares has a subsidiary in Vietnam, namely Ningbo Chaoyang Plastic Co., Ltd. (hereinafter referred to as "Vietnam Chaoyang"), which has already achieved certain production capacity and can directly export products to overseas markets, reducing the negative impact of tariffs.

Chaoyang Shares has also revealed that its vice president's son, Cheng Xiu Feng, is the controller of Ningbo Tian Jie Plastic Co., Ltd. (hereinafter referred to as "Tian Jie"), which not only supplies products to Chaoyang Shares but also receives loans from Chaoyang Shares' controlling shareholder Xu Jian Hui for RMB 308 million.

Chaoyang Shares has not disclosed the specific criteria for selecting suppliers, nor has it explained how Tian Jie became a supplier of Chaoyang Shares within one year of its establishment.

Last Year's Performance Slumped

From an operational perspective, Chaoyang Shares reported revenues of RMB 5.12 billion, RMB 6.23 billion, and RMB 9.19 billion in 2020, 2021, and 2022, respectively, as well as net profits of RMB 730 million, RMB 530 million, and RMB 1.25 billion. The company's revenue has been steadily growing, but its net profit experienced a significant decline last year.

According to Chaoyang Shares' latest disclosed data, the company reported revenues of RMB 81272.95 million in 2023, a decrease of 11.53% compared with the previous year. The main business income and other business income both decreased by 5.48% and 88.52%, respectively.

Chaoyang Shares has also reported that its net profit in 2023 was RMB 10797.82 million, a decline of 13.39% compared with the previous year.

Regarding Chaoyang Shares' 2023 performance slump, the Shanghai Stock Exchange asked the company to explain whether it exists and what factors contribute to this phenomenon.

Sales Expense Ratio Significantly Lower than Same-Industry Companies

Normally speaking, a company's sales expense ratio is not significantly different from that of its same-industry companies. However, Chaoyang Shares' sales expense ratio is significantly lower than that of the same industry.

Chaoyang Shares reported sales expenses of RMB 969.69 million, RMB 1161.85 million, and RMB 1808.76 million in 2020, 2021, and 2022, respectively, accounting for 1.89%, 1.86%, and 1.97% of the company's operating income, respectively. However, the average ratio of same-industry companies is 2.43%, 2.47%, 2.57%, and 3.02%. This shows that Chaoyang Shares' sales expense ratio is generally lower than that of the same industry.

Chaoyang Shares stated that its sales expense ratio is close to that of Hongda Group and Xinxiang Group, but lower than that of Jia Liang Technology and Fu Rong Group. The main difference lies in the composition of sales expenses.

Chaoyang Shares noted that its products are mainly exported abroad, with overseas sales accounting for 95.80%, 95.96%, 98.25%, and 96.95% of the company's operating income. Among them, the United States is the company's main export destination, and it is expected that the company will continue to rely heavily on North America, Europe, and other major markets in the future.

Currently, the United States, European Union, Canada, the UK, and China have all implemented various levels of "limit plastic" policies, which poses a significant risk to Chaoyang Shares, a company mainly engaged in plastic disposable products.

Furthermore, "replacing plastic with biodegradable materials is a long-term and gradual process that is also faced by consumers, manufacturers, and policymakers alike."