IPO Observation | Zhongshi Optoelectronics Breaks Through Deep Mainboard, Can Over 30% Employee Turnover Rate Survive ESG Testing?

Currently, China has become the world's largest producer of liquid crystal display products. Domestic companies, including Hunan Zhongshi Optoelectronics Co., Ltd. (600184), are actively engaged in exporting liquid crystal display products.

In recent times, Zhongshi Optoelectronics has been working on its IPO progress for listing on the deep mainboard, and the company has updated its new prospectus. Notably, despite ESG's increasing importance in evaluating corporate value, Zhongshi Optoelectronics' employee turnover rate has remained above 30% for several years.

Major Product Pattern Focusing on Overseas Markets

Zhongshi Optoelectronics' main products include monochrome liquid crystal display screens, monochrome liquid crystal display modules, and color liquid crystal display modules. However, the company's core major product is "monochrome liquid crystal display products."

During the reporting period, Zhongshi Optoelectronics' revenue from monochrome liquid crystal display products accounted for a high proportion, at 92.63%, 88.35%, 88.12%, and 86.68%. From 2020 to 2022, Zhongshi Optoelectronics ranked first in the country in terms of sales volume.

Currently, Zhongshi Optoelectronics' revenue primarily relies on overseas markets, with revenue proportion gradually increasing. For the period from 2022-2023H1, Zhongshi Optoelectronics' main business income included overseas sales amounting to RMB 2.14 billion, RMB 3.36 billion, RMB 4.32 billion, and RMB 1.92 billion, accounting for 38.14%, 45.32%, 54.44%, and 51.15% of the company's total main business income.

Zhongshi Optoelectronics' products are mainly exported to European, Chinese Taiwan, Japanese, Korean, and Southeast Asian regions.

ESG Value vs High Employee Turnover Rate

The manufacturing industry's employee turnover rate is generally higher than that of other industries. Zhongshi Optoelectronics' employee turnover rate seems to be even higher than the average level in the manufacturing industry.

In terms of ESG, employees occupy an important position. In Zhongshi Optoelectronics' IPO prospectus, employee turnover rate is one of the key issues that the exchange has highlighted. According to the exchange's statement, "In 2021 and 2022, the company's employee turnover rate was 53.95% and 45.78%, respectively." Therefore, the exchange has required Zhongshi Optoelectronics to provide explanations on the reasons and rationality behind its employee turnover rate and whether it is consistent with that of comparable companies in the same industry.

Zhongshi Optoelectronics has explicitly pointed out that "According to the 'Chenzhou Yongxing County 2022 National Economic and Social Development Statistical Bulletin', the average annual salary of residents in Yongxing County was RMB 3.28 million, while the company's average annual salary for production staff was around RMB 6 million, which is a competitive wage level."

However, this comparison lacks rationality. The average salary is only applicable to employees who are still employed, whereas the per capita disposable income is calculated based on families, including both employed and unemployed family members.

According to data from Zhijia Network, the average monthly salary in Chenzhou City in 2023 was RMB 6,813. If this estimate is used, the city's average annual salary would be around RMB 81,900, which is higher than Zhongshi Optoelectronics' reported average annual salary of RMB 6 million.

Furthermore, according to data released by Chenzhou City People's Government in 2022, the average annual salary for non-private employees in urban areas was around RMB 61,875, which is comparable to Zhongshi Optoelectronics' reported average annual salary.

Aside from the comparison of average salaries, only employee turnover rate is considered. Zhongshi Optoelectronics has pointed out that "Due to the local residents' participation in some local specialty agricultural products, such as sugar oranges, during the peak season, a portion of employees may choose to leave their jobs and engage in seasonal agricultural activities."

According to statistics, by the end of 2022, the proportion of production staff who re-joined the company after leaving in 2020 was 23.36%, while that of those who left in 2021 was 19.23%.

In terms of ESG value, Zhongshi Optoelectronics' employee turnover rate may have a certain impact on the company's overall value.

Twice Without Authorization, Receiving Administrative Punishment

According to Tianyan Check, Zhongshi Optoelectronics has been subject to administrative punishment twice for unauthorized construction. Both times, the reason was "unauthorized construction."

In 2023, on May 17th, Zhongshi Optoelectronics was fined RMB 152,533.2 by Yongxing County Urban Management and Comprehensive Law Enforcement Bureau for constructing buildings without obtaining a construction engineering plan permit in 2018. According to the penalty calculation formula, Zhongshi Optoelectronics' unauthorized construction area reached approximately 3,050.64 square meters.

In addition, on May 25th, 2023, Zhongshi Optoelectronics was fined RMB 234,000 by Yongxing County Urban Management and Comprehensive Law Enforcement Bureau for constructing buildings without obtaining a permit in the Zhongshi II Cotton Fluff Factory area.