Since the termination of the GEM listing plan in October 2022, recently, Wenzhou Juxing Technology Co., LTD. (hereinafter referred to as Juxing Technology) transferred to the Beijing Stock Exchange IPO, the company mainly provides electrical contact products for low-voltage electrical products enterprises such as Bull Group (603195.SH, stock price 91.19 yuan, market value 81.3 billion yuan).

From the performance point of view, the operating income of Juxing Technology in 2022 decreased by 17.46% year-on-year, and the net profit of the mother declined for two consecutive years in 2021 and 2022. In 2022, the production capacity of Juxing Technology’s two main products, electric contacts and electrical contact components, has increased, but product sales and capacity utilization have declined, coupled with the decline in product unit price and other factors, resulting in a decline in the company’s performance in 2022.

The “Daily Economic News” reporter noted that the expansion project involved in the IPO of Juxing Technology North Stock Exchange is the “intelligent technology transformation project of the production line”, which is completely consistent with the implementation of the plot and construction time of the expansion project when the GEM was previously declared, but the scale of new production capacity has been greatly reduced compared with it. In the case of declining capacity utilization in 2022 and the first half of 2023, can the company continue to add new capacity successfully digest?

Capacity utilization rate continues to decline still plans to raise capital to expand production

During the reporting period (from 2020 to 2022 and the first half of 2023), Juxing Technology achieved operating income of 407 million yuan, 596 million yuan, 492 million yuan, 263 million yuan, and realized net profit of 67.5626 million yuan, 57.92443 million yuan, 36.722,900 million yuan and 36.720,800 million yuan, respectively.

Among them, the two major products of electric contacts and electrical contact components are the main sources of revenue of the company. In the main business income achieved during the reporting period, the proportion of electrical contacts was 65.62%, 69.34%, 66.85%, 66.59%, and the proportion of electrical contact components was 30.77%, 25.88%, 27.43%, 27.11%, which contributed more than 90% of the main business income.

However, in 2022, although the production capacity of the two major products has increased, product sales and capacity utilization have declined. Compared with 2021, in 2022, the production capacity of electric contacts increased from 360 tons to 370 tons, and the sales volume decreased from 297.91 tons to 268.84 tons; The production capacity of electrical contact components increased from 650 tons to 710 tons, and the sales volume decreased from 970.88 tons to 869.06 tons.

During the reporting period, the capacity utilization rate of electric contacts was 91.82%, 95.36%, 82.34% and 79.82%, respectively. The capacity utilization rate of electrical contact components was 91.62%, 106.51%, 94.17% and 93.40%, respectively, both of which have declined since 2021.

However, the above two products are still the focus of the IPO of Poly Star Technology to raise capital and expand production. Juxing Technology intends to raise funds of 283 million yuan, of which 152 million yuan is used for the “intelligent technology transformation project of the production line”. After the completion of the project, the production capacity of 200 tons of electric contacts and 400 tons of electrical contact components will be added annually, and the new production capacity will account for more than 50% of the annual production capacity in 2022.

After comparing the offering materials, the reporter found that the expansion project of Juxing Technology when it declared the GEM IPO in May 2022 was “annual output of 250 tons of riveted electrical contacts, 180 tons of composite strip and 760 tons of electrical contact components production base construction project” (hereinafter referred to as the GEM capital expansion project), with a total investment of 252 million yuan. It intends to use the raised funds of 172 million yuan. The implementation site of the two expansion projects is industrial land No. 0131376 of Zhejiang (2021) Wenzhou Real Estate Right, and the construction time is 18 months, and the record document number and EIA approval document number are different. Compared with the GEM capital expansion project, the proposed new production capacity of the “intelligent technology transformation project of the production line” has been greatly reduced.

However, after consulting the official website of the Ouhai District people’s Government, the reporter found that the construction project overview of Juxing Technology’s “production line intelligent technology transformation project” is “an annual output of 450 tons of riveted electrical contacts, 180 tons of composite strip and 1160 tons of electrical contact components.”

Why do we need to change the capital expansion plan, and will the GEM capital expansion project continue to be implemented? On January 8 and 9, a reporter from the National Economic News called Juxing Technology and sent an interview email, but did not receive a reply as of press release.

In the case of declining capacity utilization still new capacity, can it be smoothly digested? The exchange also raised questions about this in the audit inquiry letter, requiring the company to further explain the necessity of new capacity of the investment project and analyze the effectiveness of measures to digest new capacity by combining the changes in capacity utilization rate, production and sales rate and sales amount of downstream customers, the reasons and rationality of the continuous decline in capacity utilization rate in the latest year and phase I, etc. Whether there is a risk of overcapacity or undigested capacity.

Main customer self-produced electrical contact products? The inquiry letter asks about the risk

From the perspective of downstream customers, the top five customers of Juxing Technology in 2021 showed a certain decline in the sales amount in 2022, such as the Bull Group from 27.07773 million yuan to 18.4884 million yuan; Sanyou Group, including Sanyou Lianzhong (300932.SZ, share price 15.76 yuan, market value 2.772 billion yuan), sales of 256.358 million yuan in 2021, fell out of the top five customer list in 2022 (the fifth is Bull Group). By the first half of 2023, neither Bull Group nor Sanyou Group appeared in the top five customer lists.

The reporter noted that the exchange mentioned in the audit inquiry letter that according to the application documents, “some of the company’s main customers have self-produced production lines for electrical contacts and electrical contact components, and due to intensifying competition in the same industry or increasing the proportion of self-production, the procurement scale of the company has been reduced since 2022.” The company is required to combine the specific reasons for the decline in the purchase amount of some major customers, the types of self-produced electricity contact products and production capacity, etc., to analyze the specific impact of intensifying competition in the same industry and increasing the proportion of customers’ self-produced electricity on the company’s operating performance, and whether the company is at risk of being replaced by customers’ self-produced production lines or occupying market share.

In addition, during the reporting period, Chunlu Shou Co., LTD. (hereinafter referred to as Chunlu Shou Company) has been the company’s largest customer, but the sales amount has declined year by year, each period was 62,334,100 yuan, 51,883,000 yuan, 46.915,900 yuan, 25.794 million yuan. Choon Luk Tho is a Vietnamese company, and more than 99% of the company’s overseas revenue comes from this customer.

Chunlu Shou company has become the largest customer of Poly Star technology, and the second and three major shareholders of Poly Star Technology Xu Jingfeng, Sun Le couple have a certain relationship. In March 2018, Xu Jingfeng and Sun Le became shareholders of the company through capital increase, and Chunlu Shou Company is the main customer of Wenzhou Liyue Environmental Protection Technology Co., LTD. (hereinafter referred to as Liyue Environmental Protection) controlled by the two. In June of that year, Poly Star Technology acquired Lianyue Environmental Power contact related assets, and cooperated with Chunlu Shou Company.

In this regard, the audit inquiry letter asked the company to explain the commercial rationality of directly undertaking the original environmental protection customer resources, as well as the reasons for the continuous decline in the scale of cooperation between the company and Chunlu Shou Company and the sustainability of cooperation.

Gross margins are much higher than competitors’ net profit still fell for two consecutive years

From the performance point of view, the operating income of Juxing Technology in 2021 has achieved a substantial growth, but the net profit of the mother has declined; By 2022, operating income and net profit to the mother will decline simultaneously.

In this regard, Juxing Technology explained that the decline in net profit in 2021 was mainly due to the large amount of government subsidies in 2020; However, the reporter noted that after deducting non-recurring gains and losses, the net profit of Poly Star Technology in 2021 still declined. In 2022, it is mainly due to a decrease in operating income and a large amount of intermediary service fees, which lead to a large increase in the rate of management expenses.

However, the gross profit margin of Poly Star Technology is much higher than that of its competitors. Although the prospectus (declaration draft) lists four comparable companies, the company is listed as the main competitors are Fuda alloy (603045.SH, share price 15.7 yuan, market value 2.226 billion yuan) and Wenzhou Hongfeng (300283.SZ, share price 6.24 yuan, market value 2.728 billion yuan).

During the reporting period, the company’s comprehensive gross profit margin was 27.64%, 21.81%, 20.53%, 26.24%, while the gross profit margin of Fuda alloy was 11.37%, 10.85%, 10.97%, 11.27%, and the gross profit margin of Wenzhou Hongfeng was 11.16%, 10.62%, 11.03%, 8.57%. The gross margins of the two main competitors are close, while the gross margins of Poly Star Technology are much higher than the two companies.

Juxing Technology explained that the company’s comprehensive gross profit margin is different from that of comparable companies in the same industry, mainly due to differences in product application fields, subdivided product types and customer concentration.