Independent directors frequently resign, related parties purchase at low prices, and Deshuo Technology's family business faces profit difficulties—understanding IPO

Ask AI · How does associated procurement at low prices affect real profitability?

Source | Times Business Research Institute

Author | Lu Shuyi

Editor | Zheng Lin

At the key stage of the IPO, Zhejiang Deshuo Technology Co., Ltd. (hereinafter referred to as “Deshuo Technology”), which has a single controlling shareholder, lost its independent director all at once. Can it still get listed smoothly?

The official website of the Beijing Stock Exchange (BSE) shows that on March 5, 2026, Deshuo Technology’s initial public offering (IPO) review was approved for consideration. However, the announcement of the review meeting results shows that the BSE’s Listing Committee not only required Deshuo Technology to explain the reasonableness of its performance growth and the stability of its operating performance, but also required it to further落实 the reasonableness of the schedule for construction progress of the raised funds investment projects. In addition, it required the sponsor to supplement its verification regarding the status of the legal entity qualification for the first-largest customer’s terminal customers.

The prospectus shows that Deshuo Technology is a high-tech company mainly engaged in the R&D, production, and sales of handheld power tools such as electric drills and electric hammers, as well as related accessories. For this IPO, the company plans to raise RMB 270 million, including RMB 240 million for the technical improvement project for adding 3.5 million sets of intelligent integrated tool production lines annually, and RMB 30 million for replenishing working capital.

It should be noted that Deshuo Technology is a typical family business. Since 2022, multiple independent directors have resigned. One of them even resigned during the key IPO period after the company filed for the IPO, raising concerns about the effectiveness of the company’s internal controls. The Times Business Research Institute also noted that although the pricing of Deshuo Technology’s associated procurement during the reporting period was lower than that of third parties, its gross margin was only barely in line with the average gross margin of comparable companies. If it were purchased at third-party prices, whether the company’s gross margin could be maintained at the current level remains to be answered.

On March 4 and March 20, regarding issues including associated transactions, the problem of one controlling shareholder dominating, and the frequent resignation of independent directors, the Times Business Research Institute sent an email and made phone calls to Deshuo Technology to inquire. However, as of the time of this release, no response had been received from the other party.

Li Yuehui and his wife and their related parties hold 100%. During the reporting period, three independent directors resigned in succession

From the perspective of the shareholding structure, Deshuo Technology clearly has the problem of “one controlling shareholder dominating.”

The prospectus shows that as of the date the prospectus was signed (December 22, 2025), Li Yuehui directly holds 51.50% of the shares of Deshuo Technology. Through the employee shareholding platform Yongkang ShuoGuo Equity Investment Partnership (Limited Partnership) (hereinafter referred to as “ShuoGuo Investment”), he indirectly controls 4.50% of the company’s shares, for a total control of 56.00% of the shares. Currently, Li Yuehui serves as the chairman and general manager of Deshuo Technology, and is also the company’s legal representative.

At the same time, Li Yuehui’s spouse, Cao Meifen, directly holds 40.20% of the shares of Deshuo Technology and serves as a director and assistant general manager of Deshuo Technology. Taken together, Li Yuehui and his wife control 96.20% of the company’s shares, making them the controlling shareholder and the actual controller of the company.

Judging from his background, Li Yuehui, born in 1975, is from Jinhua, Zhejiang, and has a junior college education. In 1994, at the age of only 19, Li Yuehui entered Yongkang Aote Motor Manufacturing Co., Ltd. (hereinafter referred to as “Aote Motor”) and became a workshop director. In July 1999, Li Yuehui left Aote Motor, and in August of that same year, together with Cao Meifen’s father, Cao Cunyun, he invested to found Yongkang Deshi Electrical Appliances Co., Ltd., which is the predecessor of Deshuo Technology.

According to Deshuo Technology’s 2025 annual review report, from 2006 to 2010, as Cao Meifen increased its capital and as her father transferred equity, 100% of Deshuo Technology’s equity was held by Li Yuehui and Cao Meifen.

Currently, although Li Yuehui and his wife’s controlling shareholding has decreased to 96.20%, the company has not introduced external investors, and the remaining equity is held by related parties.

The prospectus shows that, in addition to the 96.2% equity controlled by Li Yuehui and his wife, the remaining 3.8% equity is held by Yongkang Linxi Equity Investment Partnership (Limited Partnership) (hereinafter referred to as “Linxi Investment”). The executive affairs partner of Linxi Investment, Hu Xinnian (holding 36.84% partnership interests), is the spouse of Cao Xiaofang, Cao Meifen’s sister-in-law’s (aunt’s) daughter’s husband’s sibling? (hereinafter referred to as “Cao Xiaofang”), and therefore Linxi Investment is a related party of Deshuo Technology. And Deshuo Technology’s 100% equity is controlled by Li Yuehui and his wife and their relatives, indicating the problem of one controlling shareholder dominating.

In the prospectus, Deshuo Technology also points out the risk of improper control by the actual controller. From the perspective of corporate governance, independent directors play the role of an “independent overseer, professional enabler, and protector of minority shareholders.” The essence of their existence is to balance the interests of controlling shareholders and minority shareholders, improve the company’s corporate governance structure, and prevent operating and compliance risks, ultimately safeguarding the company’s long-term healthy development. In a company where one controlling shareholder dominates, independent directors may find it difficult to achieve substantive checks and balances against the controlling shareholder.

The Times Business Research Institute has noted that since 2022, Deshuo Technology has had multiple independent directors resign, and the company’s internal control and compliance issues are worth attention.

The prospectus shows that He Chengying previously served as an independent director of Deshuo Technology and resigned in April 2022. According to the public transfer explanation released on June 28, 2024 by Deshuo Technology, the company’s independent directors include Peng Youcai, Ling Zhongliang, and Li Hao—three people.

Based on the public transfer explanation and the prospectus, it can be seen that Peng Youcai became an independent director of Deshuo Technology in October 2021 and completed his term and left office in November 2024. In contrast, Ling Zhongliang has served as an independent director of Deshuo Technology since November 2021.

The public transfer explanation shows that Peng Youcai holds professional titles such as senior accountant, senior management accountant, economist, registered tax accountant, certified management accountant in the United States, and international certified internal auditor. During his tenure as an independent director of Deshuo Technology, he also served as the financial controller of Changzhou Shichuang Energy Co., Ltd.

After Peng Youcai’s term ended and he left office, in November 2024, Deshuo Technology elected Zhao Qiang as an independent director through an extraordinary general meeting of shareholders. However, only half a year later, in June 2025—namely the month Deshuo Technology’s IPO application was accepted for review, Zhao Qiang resigned for personal reasons.

Subsequently, Deshuo Technology elected Lu Jianbo as an independent director. Judging from his background, Lu Jianbo previously served as the financial controller of Zhejiang Zheqi Investment Holding Group Co., Ltd. from March 2025 to July 2025. From November 2025 to the present, he has served as a director, secretary of the board of directors, and deputy general manager of Riyue Heavy Industry Co., Ltd.

Judging from his background, Lu Jianbo, like Peng Youcai, has some experience in finance. And behind Peng Youcai’s resignation, Deshuo Technology’s issues related to financial information disclosure and internal controls are worth attention.

Associated procurement amounts to tens of millions; even with low-price procurement, gross margin is still below the average of peers

In terms of the independent director’s professional division of work, the main responsibilities of finance-related independent directors include reviewing the authenticity of financial statements, supervising internal financial controls, and so on. In the context of related-party transactions, finance-related independent directors focus on reviewing the fairness of pricing for related-party transactions, among other things.

For Deshuo Technology, however, during each period of the reporting period (2022 through the first half of 2025), the company’s associated procurement amounts have all reached tens of millions, and the fairness of pricing is worth attention.

The prospectus shows that, in each period of the reporting period, the amounts of Deshuo Technology’s recurring associated procurement were RMB 22.6149 million, RMB 28.4565 million, RMB 33.9481 million, and RMB 14.4493 million, respectively. As a proportion of the company’s total procurement for the period, they were 4.58%, 4.84%, 4.54%, and 4.12%, respectively. The main associated procurement counterparties are Wuyi County Hongming Gear Manufacturing Co., Ltd. (hereinafter referred to as “Hongming Gear”), Wuyi Beilang Gear Manufacturing Co., Ltd. (hereinafter referred to as “Beilang Gear”), and Wuyi County Mingsheng Industry & Trade Co., Ltd. (hereinafter referred to as “Mingsheng Industry & Trade”).

Among them, both Hongming Gear and Beilang Gear are companies in which Cao Xiong holds 49% of the shares and serves as a supervisor; Cao Xiong is the husband’s sister’s younger brother? (connected to Hu Xinnian?) of Hu Xinnian, the director of Deshuo Technology, and Cao Meide is held by Cao Meide? holding 51% and serves as the legal representative, executive director, and manager; and the 51% shareholding and legal roles are held by Cao Meide’s? (hereinafter referred to as “Cao Meide”). Mingsheng Industry & Trade is currently held 100% by Xu Liangjiang, the younger brother of the wife of Cao Shuyin’s younger brother? (hereinafter referred to as “Xu Liangjiang”), who is the brother of Cao Meifen.

Because the amount of associated procurement increases year by year, in the first two rounds of inquiry letters, the BSE repeatedly required Deshuo Technology to explain the fairness of the pricing of associated procurement and whether there are cases where related parties or enterprises related to the actual controller’s relatives advance the company’s costs on its behalf.

The documents responding to the first round of inquiries show that, in each period of the reporting period, for the raw materials purchased by Deshuo Technology from Hongming Gear/Beilang Gear, most of the pricing ranges were lower than third-party procurement unit prices, with the highest difference rate reaching 11.56%. Compared with the transaction prices between Hongming Gear/Beilang Gear and other counterparties, Deshuo Technology’s pricing for the transactions with them was 4% to 7% lower.

In addition, in each period of the reporting period, for the raw materials and entrusted processing services purchased by Deshuo Technology from Mingsheng Industry & Trade, most of the pricing was also lower than the unit prices for third-party procurement. Among them, the difference rate for the raw materials pricing of the purchased items had a highest value of 7.75%, and the difference rate for the pricing of entrusted processing services had a highest value of 8.75%.

Purchasing raw materials at low prices from related parties, or to a certain extent increasing Deshuo Technology’s profitability. The prospectus shows that, in each period of the reporting period, Deshuo Technology’s gross margin was 15.98%, 17.98%, 17.56%, and 18.64%, respectively, and has shown an overall upward trend since 2023. Coincidentally, from 2023 to the first half of 2025, both Hongming Gear and Beilang Gear were among Deshuo Technology’s top five suppliers, except that they were not included in the top five suppliers in 2022.

Although the gross margin has improved during the reporting period, Deshuo Technology is still only at the average level of comparable peers. The prospectus shows that, in each period of the reporting period, the average gross margin of comparable peers was 15.49%, 17.17%, 19.15%, and 18.69%, respectively, which is basically comparable to Deshuo Technology’s gross margin. In particular, in the first half of 2024 to 2025, Deshuo Technology’s gross margin was even lower than the average gross margin of comparable peers.

The puzzling part is: if the impact of purchases from related parties and purchases at low prices compared to related parties is excluded, can Deshuo Technology’s gross margin still be maintained near the average gross margin level of comparable peers?

The documents responding to the second round of inquiries show that, assuming Deshuo Technology purchases from related parties and purchases in comparison with related parties at market prices such as the purchase prices from non-related third parties, the impact on its total profit for each period of the reporting period would be -4.08% to 1.07%, -2.22% to 0.15%, -2.93% to 0.07%, and -1.63% to 0.02%, respectively.

In response, Deshuo Technology stated that assuming the company purchases from related parties at prices equivalent to market prices such as those for non-related third-party purchases, the expected overall impact on total profit would be within -4.08% to 1.07%, which is small.

It is worth noting that the documents responding to the first round of inquiries show that, in terms of the amount proportions of the company’s related-party transactions compared with third-party price benchmarking, in each period of the reporting period, the price comparison ratio of the raw materials Deshuo Technology purchased from Hongming Gear/Beilang Gear was both below 70%, and the price comparison ratio of the raw materials purchased from Mingsheng Industry & Trade was also below 81%. The fairness of pricing for products not participating in benchmarking is worth attention.

(Full text: 3,187 Chinese characters)

Disclaimer: This report is for the exclusive use of clients of the Times Business Research Institute. The company will not treat the recipient as its client merely because the recipient receives this report. This report is prepared based on information that the company considers reliable and has been publicly disclosed, but the company does not make any guarantee regarding the accuracy or completeness of such information. The opinions, assessments, and forecasts contained in this report only reflect the views and judgments made by the company as of the date the report is issued. The company does not guarantee that the information contained in this report will remain up to date. The company may modify the information contained in this report without giving notice. Investors should independently pay attention to relevant updates or modifications. The company strives to ensure the content of this report is objective and fair, but the views, conclusions, and recommendations contained in this report are for reference only and do not constitute the bid or offer price or solicitation price for the securities mentioned. Such views and recommendations do not consider the specific investment objectives, financial conditions, and specific needs of individual investors, and at any time do not constitute private investment advice to clients. Investors should fully consider their own specific circumstances and fully understand and use the content of this report; they should not treat this report as the only factor for making investment decisions. For all consequences arising from reliance on or use of this report, neither the company nor the author assumes any legal responsibility. Within the scope of its own knowledge, the company and the author have no legally prohibited interests and relationships with the securities or investment targets referenced in this report. Where permitted by law, the company and its affiliated institutions may hold and trade the security positions issued by the companies mentioned in this report, and may also provide or seek to provide related services such as investment banking, financial advisory, or financial products. The copyright of this report belongs solely to the company. Without the company’s prior written permission, no institution or individual may infringe the company’s copyright in any form, such as by reprinting, copying, publishing, citing, or redistributing others in any manner. If the company approves citation and publication, it must be used within the permitted scope and the source must be indicated as “Times Business Research Institute,” and any citation, abridgment, or modification that is inconsistent with the original meaning of this report is prohibited. The company reserves the right to pursue relevant responsibilities. All trademarks, service marks, and marks used in all this report are the company’s trademarks, service marks, and marks.