New Era Aluminum IPO: Does Risk "Contrast" with Byd's Support?

Recently, Chongqing New Era Aluminum Technology Co., Ltd. (hereinafter referred to as "New Era Aluminum") will soon be subject to a review by the Shanghai Stock Exchange's SME Board for its IPO.

It is said that New Era Aluminum is seeking to raise funds of RMB 10 billion this time, with RMB 8 billion used for the "Southwestern District's annual production of new energy vehicle components" project, and the remaining RMB 2 billion used to supplement working capital.

Upon reviewing New Era Aluminum's prospectus, investors are not only concerned about its increasing revenue, but also the company's specific situation with Byd (002594) (Figure 1).

Rapid Revenue Growth vs. Deteriorating Cash Flow

New Era Aluminum is mainly engaged in the research, development, production, and sale of aluminum alloy components for new energy vehicle battery systems. Its main products are battery boxes, which are a key component of new energy vehicle power battery systems.

During the period from 2020 to 2022, New Era Aluminum's operating revenue grew rapidly, increasing from RMB 3.32 billion in 2020 to RMB 14.21 billion in 2022, with a compound annual growth rate of 107.03%.

During the same period, the company's net profit also quickly rebounded and surged to RMB 1.74 billion in 2022.

In the first quarter of 2023, New Era Aluminum's operating revenue and net profit continued to grow rapidly. The company achieved

operating revenue of RMB 4.84 billion, with a year-on-year growth rate of 104.01%, and net profit of RMB 4,507.05 million, with a year-on-year growth rate of 95.54%.

It is worth noting that during New Era Aluminum's rapid revenue growth, the company's cash flow from operating activities also continued to deteriorate.

In 2020, the company's cash flow from operating activities was outflowing RMB 7.68 billion, and by 2022, this outflow had increased to RMB 8.03 billion, with a growth rate of 1045.35%, far exceeding the revenue growth rate.

Furthermore, the company's asset-liability ratio also continued to rise, from 40.48% in 2020 to 72.81% in 2022.

Byd-backed Performance

A closer look at the prospectus shows that New Era Aluminum's revenue growth is not independent of Byd (Figure 2).

During the period from 2020 to 2022, New Era Aluminum's top five customers accounted for 88.50%, 91.11%, and 94.76% of its operating revenue, respectively. The company's overall revenue is almost entirely dependent on these top five customers.

Among these top five customers, Byd has the greatest weight.

During the period from 2020 to 2022, New Era Aluminum contributed RMB 64.80%, RMB 70.42%, and RMB 78.87% of its operating revenue to Byd, respectively, with an increasing proportion.

New Era Aluminum provides services mainly in battery boxes to Byd (Figure 3).

During the reporting period, New Era Aluminum's battery box income accounted for a proportion of the company's main business revenue, respectively, as follows: 71.28%, 83.18%, and 86.39%.

Among these proportions, Byd accounted for 51.52%, 58.99%, and 66.12%, respectively (Figure 4).

New Era Aluminum's dependence on Byd naturally raises regulatory concerns. In this regard, New Era Aluminum stated that "this situation will not have a significant adverse impact on the company's future operational capabilities."

New Era Aluminum has provided many reasons, but has not proven that the company does not exist without Byd supply chain risks.

This is similar to the well-known example of Europe Optical (002456), which suffered from a decline in performance after it broke away from Apple's supply chain.

This is not an isolated case, and there are many examples of companies that have suffered from such risks on the capital market (Figure 5).

It is worth noting that in the prospectus' third section on risk factors, New Era Aluminum lists a number of risk factors, including operating risks.

In the operating risks section, New Era Aluminum points out the risk of dependence on its first major customer Byd (Figure 6).

(Source: New Era Aluminum Prospectus)

New Era Aluminum's dependence on Byd, does it have any risks? Will it produce adverse effects? It seems that the prospectus does not provide a unified answer.

It is worth noting that New Era Aluminum has also stated that operating risks include "the risk of technological iteration between Byd and itself."