Zhengdao Technology IPO: Profit Fluctuations + Cash Flow Divergence + Difficult to Digest Fundraising and Capacity Expansion — Who Will Bear the Three Major Risks?

Ask AI · With long-term negative cash flow, how does the company ensure its ability to continue operating?

《Electric Eel Finance》/ by Electric Eel Media

The latest status of Zhejiang Zhengdao Technology Co., Ltd. (hereinafter referred to as “Zhengdao Technology”) on the Beijing Stock Exchange (BSE) IPO has been “under inquiry” (as of March 28, 2026). The company’s responses to the third round of inquiries were disclosed on January 6, 2026. The company is currently waiting for the BSE to further arrange its review. The company’s main businesses are data cables and communication transmission cables. Its data cables rank among the top three in domestic production and sales. The company plans to raise RMB 245 million to expand capacity and supplement working capital.

It is worth noting that concerns have been raised about Zhengdao Technology’s financial fluctuations, with people worried that such risks could be passed on to investors.

Profit “fluctuations” questioned

The annual review report disclosed on February 10, 2026 shows that Zhengdao Technology achieved net profit of RMB 56.3318 million in fiscal year 2025, up 4.96% year over year. In fact, the company’s earlier “profit fluctuations” had already drawn the exchange’s attention.

The prospectus shows that in 2020, Zhengdao Technology’s revenue was RMB 550 million, while the non-recurring profit and loss (non-GAAP) net profit was a loss of RMB 4.8171 million for the same period. In 2024, the company’s revenue reached RMB 1,290 million, and its non-GAAP net profit reached RMB 52.49 million. Over five years, the company’s revenue doubled. The year-on-year growth rates of non-GAAP net profit from 2022 to 2024 were 100%, 106%, and 21%, respectively. In particular, the growth rates in 2022 and 2023 doubled for two consecutive years. Zhengdao Technology said that the growth of its performance was mainly affected by downstream industry conditions and the development of intelligent communications (5G communications, the Internet of Things, etc.). But in the same period, the net profits of publicly listed peers that overlap with Zhengdao Technology’s products—such as Baosheng Co., Ltd., Wanma Co., Ltd., Zhaolong Interconnect, and Hengfeng Teedong—fell instead.

Why could Zhengdao Technology surge against the trend? In the first round of review inquiries, the BSE asked Zhengdao Technology to explain the reasons for the substantial increase in non-GAAP net profit. As for the reasons behind the sharp rise in non-GAAP net profit, Zhengdao Technology stated that the company’s scale effects had emerged, fixed costs were spread out, and the growth rate of operating costs and period expenses was lower than the revenue growth. The period expense ratio declined year by year, driving the growth in non-GAAP net profit. Zhengdao Technology specifically mentioned that because the base of non-GAAP net profit was relatively low (only RMB 10.5 million in 2021), the growth rates in 2022 and 2023 (both exceeding 100%) were far higher than the revenue growth rates in the same period.

Perhaps Zhengdao Technology’s explanation was not sufficiently convincing. In the second round of review inquiries, the BSE again required the company to explain the reasons for the growth in operating performance and the authenticity of sales revenue.

The BSE’s rationale for the second round of questions was also simple: the operating performance of comparable companies in the same industry did not increase significantly during the same period. Whether the BSE will accept Zhengdao Technology’s responses still remains uncertain. In its prospectus and responses to the third round of inquiries, the company provided a complete evidence chain (customer contracts, acceptance documents, payment collection vouchers, and industry data comparisons). The intermediaries also issued review opinions with no objections.

Performance vs. cash flow divergence

According to the prospectus, the net cash flow from operating activities in each period (2022–2024) was continuously negative, amounting to -RMB 199.1878 million, -RMB 232.7347 million, and -RMB 72.6437 million, respectively. The asset-liability ratios in each period were 76.83%, 68.20%, and 70.45%, respectively. Compared with peer companies in the same industry whose products overlap heavily with the issuer, Zhaolong Interconnect’s asset-liability ratio was about 18% during the reporting period. As of the end of 2024, the company’s total liabilities payable amounted to RMB 720.24M. The amount of long-term borrowings increased from RMB 20.0217 million at the end of the prior period to RMB 148.26M at the end of the current period. Accounts payable and notes payable also increased to some extent. At the end of 2024, the company held cash and cash equivalents of RMB 94.5525 million, of which the restricted amount was RMB 67.6510 million. The amount of discounted notes was RMB 87.9519 million. The company expects that the total incremental working capital shortfall over the next three years will be RMB 162 million.

Based on the latest disclosed review report for January–December 2025, the company’s net cash flow from operating activities in 2025 was RMB 146 million, finally turning positive.

The BSE requires the company to, together with comparable companies in the same industry, analyze and demonstrate the reasons for differences in the company’s solvency by considering the issuer’s customer structure, upstream and downstream settlement policies, cash flows from operating activities, asset-liability ratio, current ratio, and quick ratio. Based on the specific due dates of the company’s RMB 720.24M in liabilities payable, the sources of repayment funds and repayment arrangements, and the sources of funds to fill the incremental working capital shortfall over the next three years, the company should demonstrate whether there is a risk of a cash flow break, whether the business model of obtaining cash flows through note discounting is stable and sustainable, whether the fact that cash flow from operating activities has been negative continuously has any major adverse impact on the issuer’s ability to sustain operations, and explain, among other things, the reasons why the accounts receivable turnover ratio has decreased and is lower than that of comparable companies in the same industry.

With RMB 330 million in accounts receivable sitting on the books, and operating cash flows that have been negative for three consecutive years, yet Zhengdao Technology bravely proceeds on its path to an IPO.

In its inquiry clarification regarding the above questions, Zhengdao Technology stated that, for the incremental working capital shortfall over the next three years, the company may fill it through cash and cash equivalents it holds, accumulation of cash from operating activities, demolition and relocation subsidy funds, bank financing, equity financing, and other means. By combining active market expansion with strengthened internal lean and precise management, the company will continuously optimize cash flow from operating activities, improve the efficiency of funds utilization, and the effectiveness of relevant improvement measures has gradually begun to show.

Industry insiders say, however, that if a company has been in this condition for a long time, it likely means it does not have sufficient cash flow to maintain day-to-day operations, and it would have to rely on external financing.

Funds from the offering can absorb the risks big

According to the application documents and inquiry responses: the company plans to raise RMB 245.2153 million this time, of which RMB 215.2153 million will be used for the construction project of a factory producing 1 million boxes of 5G big data transmission cables per year and a factory producing 50k kilometers of communication transmission cable per year. RMB 30.00 million will be used to replenish working capital. In the reporting period, in 2024, the sales revenue from data cables Class 6 and above accounted for 11.86%, while in the comparable company Zhaolong Interconnect, the share of Class 6 and above data cables was 28.84%. Some of the company’s parts in high-end markets face challenges such as long R&D cycles and difficulty in expanding customers.

The BSE requires the company to, in combination with the issuer’s current land area and factory building area and the matching relationship with existing capacity, personnel, and production lines; the planned new factory building area for the proposed projects and the matching relationship with production capacity, personnel, and production lines after reaching full production; detailed list of hardware equipment to be purchased under the proposed projects; the advanced nature of the software systems to be purchased compared with the existing systems; explain whether the proposed projects involve expanding or relocating existing production lines, the necessity of the new factory buildings, and whether there is any risk of idle use. Explain the necessity of the equipment to be purchased. Also explain the pricing basis and fairness of detailed items such as building construction costs, equipment purchase costs, engineering construction and other fees related to the proposed projects, and the reasonableness of the scale of the funds to be raised.

In its analysis, Zhengdao Technology stated that the company’s proposed projects do not involve expanding or relocating existing production capacity. The newly built factory buildings under the proposed projects are necessary and there is no risk of idle use. The purchased equipment is necessary as well. The construction project costs, equipment purchase costs, engineering construction and other fees under the proposed projects have a reasonable pricing basis and are fair. The scale of funds to be raised by the issuer is reasonable. The categories of weak-current cable products to be produced under the proposed projects will enhance the production capacity for mid-to-high-end products based on the existing product structure.