IPO Observation | Zhong Xin Environmental's IPO Eve - Supply Chain "Gridlocked" by Related Transactions

By / Zhou Yang

Zhong Xin Environmental Technology Group Co., Ltd. (hereinafter referred to as "Zhong Xin Environmental") publicly announced the registration statement for its IPO on December 15, 2023. The company's main suppliers, Shandong Liao Wei Paper Co., Ltd. and Nanning Quan Yao Chemical Co., Ltd., both of which have been questioned by the media due to suspected related transactions, appeared in this prospectus.

According to the CSRC's inquiry, whether Nanning Quan Yao has borne costs on behalf of the issuer is unknown. Although the answer was negative, as an intermediary trader, Nanning Quan Yao provided procurement prices to Zhong Xin Environmental that were lower than those of direct production manufacturers, leaving many questions unanswered.

Further observation of Zhong Xin Environmental's supply chain reveals that upstream suppliers' capacity is insufficient, which may threaten the company's capacity expansion opportunities and make it difficult for it to achieve its IPO funding targets.

Nanning Quan Yao is considered a related enterprise of Zhong Xin Environmental because Nanning Quan Yao and Nanning Jun Yao Technology Co., Ltd., which is indirectly controlled by Chen Jian, are both shareholders of Zhong Xin Environmental. Shandong Liao Wei Paper Co., Ltd. has been involved in a joint venture with Nanning Quan Yao since May 8, 2020, making it also considered a related party.

However, neither company is considered a related party according to Zhong Xin Environmental's prospectus.

There are many reasons why these two companies are of great interest to the public. Firstly, they are both Zhong Xin Environmental's main suppliers.

Nanning Quan Yao is not only Zhong Xin Environmental's largest supplier in 2020 and 2021 but also has a long history of operating paper products, pulp, and sugar cane trade, with rich resources in the pulp industry supply chain. The company chose to cooperate with Nanning Quan Yao based on considerations of improving procurement stability, enhancing bargaining power with production manufacturers, and increasing payment flexibility.

However, the public is skeptical about this because Nanning Quan Yao's material prices are lower than those of other suppliers.

The reasons for this price difference are unknown. According to Zhong Xin Environmental's explanation, the company executed a large-scale order with Nanning Quan Yao in August-October 2021, which was signed at the end of 2020 and referred to market prices at that time.

However, it is puzzling why Zhong Xin Environmental did not obtain a similar low price for its orders from other suppliers, especially considering that it has already started direct procurement from production manufacturers in 2020 and 2021.

It is actually Nanning Quan Yao's material prices that are the real mystery. Whether or not these materials are sufficient remains a puzzle.

Nanning Quan Yao has become a major supplier of Zhong Xin Environmental's raw materials, and its procurement prices have been questioned by the public.

The mystery of whether or not Nanning Quan Yao's material prices are sufficient has been revealed through the data provided by Zhong Xin Environmental. In 2020 and 2022, Zhong Xin Environmental paid a total of RMB 2.47 billion to its top three suppliers.

The rapid growth in prepayment for pulp materials demonstrates Zhong Xin Environmental's bargaining power and ability to negotiate prices with upstream suppliers, which has further undermined the credibility of Nanning Quan Yao's low prices.

However, there is also a question mark over whether or not Zhong Xin Environmental's two financing projects will ultimately come to fruition.

According to Zhong Xin Environmental's prospectus, the main purpose of these financing projects is to expand production capacity for biodegradable tableware. However, with upstream suppliers' capacity already insufficient and raw material prices rising, it is unclear whether or not these projects will be successful.