Recently, Shenhua Industrial Holdings Limited (hereinafter referred to as "Shenhua Industrial") submitted a listing application on the Hong Kong Stock Exchange, with Zhongtai International as its sole sponsor. Bedo Finance has learned that this is its third impact on the Hong Kong stock market, and the company has previously submitted two statements in June 2020 and March 2021, but both ended in "invalidity".
According to the prospectus, Ginsenghua Industry is a leading manufacturer of special powder products located in Hebei, China. The company's predecessor, Gu'an County Dadi Flour Processing Co., Ltd., was established in 2002 and has a history of more than 20 years selling general flour and special flour products under the brand name "Ginsenghua".
After two years, what new story can be told about Ginseng Flower? What are the concerns behind its prospectus that may hinder its listing?
First, large flour households, heat treatment to build competitive barriers
According to the Frost & Sullivan report, the production of specialty flour is expected to grow at a higher rate than the overall industry, accounting for about 40.6% of the overall flour production in 2028, with a CAGR of 2.8% from 2023 to 2028, due to the increasing demand for specialty flour due to the increasing demand for specialty flour in different industries in response to unique requirements.
Among them, the upgraded version of specialty flour – heat-treated flour can replace additives used in high-end specialty flour mixtures, such as modified starch. Heat treatment special powder has attracted more and more attention from the market because it can eliminate microbial contamination of flour products, prolong the shelf life, and improve the water absorption performance of flour products.
In terms of production, the market size of heat-treated flour increased from 13,500 tons in 2019 to 15,400 tons in 2023, at a CAGR of 3.4% during the period. The market size of this product is expected to reach 19,300 tons by 2028, growing at a CAGR of 4.6% from 2023 to 2028.
However, due to the high acquisition cost of production equipment and technical knowledge and other entry barriers, flour heat treatment is not widely used in China. Ginseng Hua Industry is one of the few heat-treated flour producers in China, which launched its heat-treated flour products for the first time in 2021 and cooperated with the Chinese Academy of Agricultural Sciences to study the quality characteristics of related products.
Ginseng Flower currently produces and sells a variety of flour products, including more than 110 kinds of general special flour products specially used to make specific foods such as bread, pastries, noodles, dumplings and cakes, more than 10 kinds of special powder products for heat treatment, and 4 kinds of general flour products suitable for making a variety of foods.
In addition, Shenhua Industrial plans to develop new products for heat treatment that can be used to produce or prepare muffins, puffs, waffles, fried chicken, dumplings and cold noodles. According to Ginseng Industries, the investment will help the company take the production and supply of heat treatment powder products to a new level.
According to the Frost & Sullivan report, in terms of sales volume of special powder, Ginsenghua Industry will rank third in Hebei in 2023, with a market share of about 3.7%, and won the title of National Key Leading Enterprise of Agricultural Industrialization and Key Enterprise of Agricultural Industrialization in Hebei; In terms of heat-treated flour production, Ginseng Hua ranks second in China, with a market share of about 29.7%.
Second, the income has increased steadily, and we have cooperated with Dali Group for many years
In 2021, 2022 and 2023, the operating income of Shenhua Industrial will be 500 million yuan, 469 million yuan and 544 million yuan respectively, of which the revenue from the sale of flour products will be 434 million yuan, 407 million yuan and 465 million yuan respectively, accounting for about 86.8%, 86.8% and 85.5% of the total revenue, respectively.
Further division of flour products shows that ordinary special flour is still the main source of income for Ginseng Flower Industry. During the reporting period, the revenue of this category was 320 million yuan, 262 million yuan and 318 million yuan respectively, accounting for 64.1%, 55.9% and 58.4% of the total revenue respectively.
At the same time, since the commercialization of Ginsenghua Industry's heat treatment special powder in 2021, it has also achieved a good market response, with the revenue scale rising from 96.97 million yuan in 2021 to 142 million yuan in 2023, with a compound annual growth rate of about 21.0%, and the second growth curve is beginning to take shape.
However, it should be pointed out that the sales objects of Ginsenghua Industry are mainly B-end enterprises, and they do not directly sell to C-end. During the reporting period, the company's sales to food processors and wholesalers generated revenue of 421 million yuan, 427 million yuan and 525 million yuan respectively, accounting for 84.2%, 91.1% and 96.5% of the total revenue, accounting for a concentrated proportion year by year.
Not only that, Ginsenghua Industrial revealed in the prospectus that it will not establish any long-term sales agreements with customers, and will only cooperate through short-term framework agreements and separate purchase orders. In 2021, 2022 and 2023, the number of customers of the company decreased significantly with 298, 114 and 92, respectively.
Specializing in B-end business, the overall performance of Ginsenghua Industry is also subject to transactions with large customers. During the reporting period, the company's sales from the top five customers were 243 million yuan, 289 million yuan and 344 million yuan respectively, accounting for 48.6%, 61.7% and 63.2% of the total revenue, of which the largest customer contributed 27.0%, 22.0% and 19.0% of the revenue respectively.
One of the top five customers of Ginsenghua Industry is Dali Group (03799.HK), a domestic bakery, snack and ready-to-drink beverage company. HK), the two companies have been working together since 2012. However, Ginhua Industrial's sales to Dali Group are continuing to decline, from 135 million yuan in 2021 to 64.419 million yuan in 2023.
Third, the gross profit is sluggish, and the fundraising is on the way
It should be pointed out that although Ginsenghua Industry is a pioneer in heat treatment flour technology in the industry, the company's long-term operating benefits are not significant, with gross profits of 50.430 million yuan, 62.290 million yuan and 68.769 million yuan from 2021 to 2023, and gross profit margins of 10.1%, 13.3% and 12.6% respectively.
Looking back, it can be seen that the gross profit performance of Ginseng Flower Industry from 2018 to 2020 was more limited, once below 10%. The increase in gross profit margin is mainly due to the introduction of special heat treatment powder products with a high gross profit level, but in the foreseeable future, the price of raw materials represented by wheat and the inventory status will have an impact on its gross profit.
During the same period of the reporting period, the profit before tax of Shenhua Industrial was 32.229 million yuan, 45.459 million yuan and 40.797 million yuan respectively, the profit attributable to equity shareholders for the year was 32.054 million yuan, 45.256 million yuan and 40.497 million yuan respectively, and the net profit margin was 6.4%, 9.7% and 7.4% respectively, which was also at a low level.
Ginseng Hua Industry said in the prospectus that the listing is mainly for the purchase and development of supporting production facilities, the configuration of new production lines, and the improvement of heat treatment capabilities, so as to improve the company's production capacity and overall production capacity, enrich product categories, expand sales network, and further develop the "Ginsenghua" brand.
However, according to the prospectus, the utilization rate of wheat processing capacity in the reporting period of Shenhua Industry was about 76.6%, 76.9% and 75.9% respectively; The heat treatment capacity utilization rates were 78.6%, 78.5% and 81.8%, respectively. In this dimension, the company's capacity utilization rate is not insufficient, but it still insists on expanding production.
Why is Ginseng Flower Industry in a hurry to go public? The answer may lie in the company's asset quality. The net cash from operating activities in 2023 will be -125 million yuan, which is 21.9% narrower than -161 million yuan in the same period of 2022, but it has been negative for two consecutive years.
Not only that, the bank and other loans of Shenhua Industrial from 2021 to 2023 will be 289 million yuan, 473 million yuan and 600 million yuan respectively, the asset-liability ratio will be 104.9%, 147.5% and 166.0% respectively, and the net current liabilities of 2.6 million yuan will be recorded at the end of 2021.
In this dimension, the rigid demand for the listing of Ginsenghua Industry largely lies in the replenishment of funds.