Jinyang Co., Ltd. IPO: Difficulties in Large Customer Payments

Investor Network - Hou Shuqing

Editor - Wu Yue

New energy vehicles are undoubtedly one of the hottest sectors in the capital market over the past two years, with numerous star companies emerging. Many enterprises along the upstream and downstream of this industrial chain have also joined the IPO wave, among which Wuxi Jinyang New Materials Co., Ltd. (hereinafter referred to as “Jinyang”) is one.

Jinyang focuses on the research, development, production, and sales of precision structural components and materials for batteries, primarily producing battery packaging housings, safety valves, and nickel-based conductive materials. Currently, it has established stable cooperation with well-known enterprises such as LG Chem and BYD (002594).

In 2019, Jinyang experienced a certain degree of decline in revenue and net profit. Jinyang stated that the performance fluctuation was due to major client BAK Battery being adversely affected by the retreat of new energy vehicle subsidy policies, leading to difficulties in cash collection and resulting in bad debts. However, the proportion of bad debts in revenue in the prospectus does not seem to support this explanation.

In September 2020, Jinyang conducted a capital increase at a price of 16.49 yuan per share, resulting in a valuation of 1.02 billion yuan after the increase. If the listing is successful this time, Jinyang’s valuation will reach 2.633 billion yuan, but compared to September 2020, there has been no breakthrough change in Jinyang’s performance.

“Policy-Sensitive” Industry

From 2018 to September 2021 (hereinafter referred to as the “reporting period”), Jinyang achieved revenues of 608 million yuan, 549 million yuan, 754 million yuan, and 853 million yuan, with net profits attributable to the parent company of 40.62 million yuan, -26.71 million yuan, 68.43 million yuan, and 112 million yuan, respectively. Jinyang’s performance during the reporting period exhibited significant fluctuations.

In particular, in 2019, Jinyang’s revenue experienced a certain degree of decline compared to 2019, with net profit shifting from profit to loss.

From a business perspective, Jinyang’s battery precision structural components business has consistently accounted for about 60% of revenue in each period, making it the company’s primary source of income. However, the sales revenue of this business saw a slight decline in 2019, dropping from 387 million yuan in 2018 to 213 million yuan, while another main business, nickel-based conductive materials, continued to grow during the same period.

Specifically analyzing Jinyang’s battery precision structural components business, in 2019, the sales revenue of packaging housings significantly decreased from 344 million yuan in 2018 to 271 million yuan. This indicates that the poor performance of packaging housing products was the main reason for Jinyang’s performance decline in 2019.

Jinyang explained the performance decline in 2019 in the prospectus, stating that it was influenced by factors such as the retreat of new energy vehicle subsidy policies, which adversely affected the business operations and capital turnover of some lithium battery industry clients, including BAK Battery.

Although the aforementioned policy changes are short-term factors, after 2019, Jinyang’s operating revenue and net profit both exceeded 2018 levels. However, as a new industry, the fluctuations in policies may always hang over Jinyang like the “Sword of Damocles.”

Bad Debts Pose Risks

In 2018, BAK Battery was Jinyang’s largest customer, contributing sales of 90.9381 million yuan, accounting for 14.96% of that period’s revenue.

However, the business relationship with BAK Battery also brought a large amount of accounts receivable to Jinyang. By the end of 2018, accounts receivable from Zhengzhou BAK Battery Co., Ltd. (hereinafter referred to as “Zhengzhou BAK”) and Shenzhen BAK Power Battery Co., Ltd. (hereinafter referred to as “Shenzhen BAK”) totaled 57.5521 million yuan.

This accounts receivable laid hidden risks for Jinyang’s performance in 2019. BAK Battery began to default on payments to upstream suppliers due to difficulties in cash collection from downstream automotive manufacturers.

In 2019, Jinyang conducted an impairment test for accounts receivable and individually recognized a bad debt provision of 50.1608 million yuan, with Zhengzhou BAK and Shenzhen BAK accounting for a total bad debt provision of 33.57 million yuan.

To reduce risks, Jinyang lowered its sales to BAK Battery in 2019 to 24.3358 million yuan, slightly below the 26.1479 million yuan from its fifth-largest client, Jinshan Industrial.

However, when the industry warmed up in 2020, BAK Battery again became Jinyang’s third-largest customer, with sales amounting to 46.8577 million yuan.

Although the industry had improved, the accounts receivable balance from BAK Battery at that time only decreased by less than 2 million yuan from 2019, falling from 38.1985 million yuan to 36.6237 million yuan. As of September 30, 2021, this figure exceeded the 40.4924 million yuan recorded at the end of 2018, rising to 55.5890 million yuan.

Nevertheless, Jinyang’s cooperation with BAK Battery did not decrease as a result; from 2019 to September 2021, the transaction amount between Jinyang and BAK Battery increased from 24.3358 million yuan to 56.8556 million yuan.

Reflecting on the history of cooperation between Jinyang and BAK Battery, Investor Network found that Jinyang’s bad debt provision accounted for 7.67% of accounts receivable balance in 2018, which rose to over 20% in 2019 and has not decreased since.

If Jinyang’s increasing bad debt scale is influenced by changes in industry policies, why has the scale not only failed to decrease after 2019, but rather gradually increased? Against the backdrop of high difficulties in BAK Battery’s receivables and high bad debt scale, why did Jinyang allow BAK Battery to continue expanding its transaction scale with the company? These are questions that Jinyang needs to address.

Jinyang is not the only “victim”; BAK Battery was previously sued by Rongbai Technology (688005) for failing to pay nearly 200 million yuan in goods and overdue penalties on time.

High Debt Repayment Pressure

During the reporting period, Jinyang’s debt-to-asset ratio was 56.73%, 56.66%, 50.11%, and 53.86%, respectively. In comparison, the average debt-to-asset ratios of Keda Li (002850), Zhongrui Electronics, and Zhenyu Technology during the same period were 37.92%, 37.02%, 43.60%, and 45.22%. Jinyang’s debt-to-asset ratio was consistently higher than the average level of comparable listed companies during the reporting period.

Jinyang stated that the company had moderately increased bank financing to meet production and operational needs, with short-term loans increasing by 42.0091 million yuan compared to the previous period.

Regarding its low debt repayment capacity, the company mentioned that it is currently in an expansion phase and needs to continuously acquire fixed assets and long-term assets such as construction projects, all of which require bank loans, leading to a higher debt-to-asset ratio and lower current and quick ratios.

As of the end of the reporting period, Jinyang had approximately 49.01 million yuan in cash, while its short-term liabilities were as high as 204 million yuan, facing significant debt repayment pressure.

In this IPO, Jinyang plans to issue no more than 25% of its equity and aims to raise 658 million yuan for the research and manufacturing of high-safety performance power battery materials, new factory projects, and working capital.

Jinyang admitted in the prospectus that it had previously lacked financing means and that if the current fundraising is successful, the company’s capital strength will be significantly enhanced, helping to reduce the debt-to-asset ratio and improve debt repayment capacity. (Produced by Siwei Finance)