Family Members' Cash-Out Exceeds 400 Million, Then Raises 560 Million, Xinxing Tools Seeks to Double Production Capacity, Who Will Absorb It? | Understanding IPO

This article is sourced from Times Business Research Institute. Author: Hao Wenran

Source | Times Business Research Institute

Author | Hao Wenran

Editor | Han Xun

Leading domestic hole processing tool company—Zhejiang XinXing Tool Co., Ltd. (hereinafter referred to as “Xinxing Tools”)—has reached a critical milestone in its pursuit of a listing on the Growth Enterprise Market. On February 27, the company responded to the third round of inquiry from the Shenzhen Stock Exchange.

This national manufacturing “Champion of Single Item” has consistently focused on the research, development, production, and sales of drilling tools within hole processing tools since its establishment. Its products are widely used in steel structure engineering, rail transit, shipbuilding, energy equipment, and other fields.

According to the prospectus, during the reporting period (2022 to the first half of 2025), the company’s operating revenues were 391 million yuan, 425 million yuan, 467 million yuan, and 244 million yuan, respectively; net profits attributable to parent after deducting non-recurring gains and losses were 165 million yuan, 171 million yuan, 184 million yuan, and 97 million yuan.

However, behind steady performance growth, there are repeated questions from the Shenzhen Stock Exchange regarding its performance stability, R&D conversion efficiency, abnormal raw material consumption, family control, and sudden dividend distributions. Under close scrutiny, the IPO path of Xinxing Tools revolves around two core issues: sluggish growth and the reasonableness of fundraising.

On March 13, Times Business Research Institute sent a letter and made inquiries to Xinxing Tools regarding these issues. As of the time of publication, the company has not yet responded.

Small industry “low” ceiling, how to absorb doubled capacity?

The cutting tool industry where Xinxing Tools operates has stabilized after decades of development, with a clear three-tier global market structure: European and American companies leading in high-end technology; Japanese and Korean companies competing on cost-performance in the mid-range; and numerous domestic companies mostly focused on traditional tools.

Xinxing Tools operates in a narrower niche—hole processing tools. According to the third inquiry response, the global steel plate drill market size in 2024 is only 920 million yuan, with a compound annual growth rate of 9.31% from 2022 to 2024. Meanwhile, the company’s revenue from steel plate drills in 2024 has exceeded 300 million yuan, with a global market share of 32.6%. At the same time, new customer revenue from steel plate drills and hole drills accounts for only 5.69% and 2.37%, respectively. This indicates that its traditional main business has already hit the industry ceiling.

Downstream demand growth is also weak. In 2024, the national steel production growth rate was only 1%, with crude steel output declining year-on-year. In response to regulatory questions about the statement that “downstream markets are continuously and rapidly developing,” the company admitted that the original wording was not sufficiently precise and has revised the relevant description in the prospectus from “continuous rapid development” to “continuous stable development.”

Contradicting the market stagnation, however, the IPO fundraising plan aims to expand capacity. The prospectus shows that Xinxing Tools plans to use the raised funds to build a digital factory for precision CNC tool fixtures. Once operational, this project will add 5 million threaded tools, 1 million replaceable head tools, and 450,000 solid carbide drills annually, nearly doubling the existing capacity in 2024.

This creates an unavoidable contradiction—on one hand, the company admits it has “basically covered the major leading customers aligned with its product positioning,” but on the other hand, it seeks to massively expand capacity. In a highly competitive, limited-scale niche, how will a company with over 30% market share absorb the capacity after doubling? This is undoubtedly the biggest doubt about the reasonableness of its fundraising.

Further examining the company’s financial data reveals a set of inconsistent figures that deepen market concerns. From 2022 to 2024, the consumption of W6 high-speed tool steel, a core raw material, increased by 163%, while the output of high-speed steel drills grew only 75%, and sales revenue increased just 37%. This mismatch raises questions.

In response, the company stated that overall, the consumption of main raw materials aligns with production and sales, and that some differences in raw material consumption over time are due to product and raw material usage for other production purposes, production specifications, and other factors, which are reasonable.

However, this explanation still leaves potential gaps in cost accounting and production management. The significant increase in raw material consumption compared to product output and revenue suggests a possible “inventory buildup” or inefficiency, especially given the slow downstream market growth. Further scrutiny is needed.

“Master craftsman” model faces transformation bottlenecks

Xinxing Tools’ “technological” credentials are also under scrutiny. During the reporting period, R&D expenses as a percentage of revenue were 5.21%, 5.15%, 4.90%, and 4.82%, showing a continuous decline. The first half of 2025’s R&D expense ratio of 4.82% is notably below the industry average of 6.27%. Additionally, only 21.88% of R&D personnel hold bachelor’s degrees or higher.

This may be related to the steel plate drill industry’s emphasis on experience accumulation and process improvements. In its reply, Xinxing Tools acknowledged that its core technology is “proprietary” rather than disruptive innovation, mainly based on improvements to industry-standard processes.

The company’s core technical leader, Yao Hongfei, has over 30 years of experience in drill bit manufacturing, leading the development of over 110 national patents, and overcoming technical bottlenecks in multi-flute steel plate drills, making Xinxing Tools the first domestic enterprise to achieve large-scale production of steel plate drills. In September 2025, Yao Hongfei was listed among the “Great Craftsmen” by the All-China Federation of Trade Unions.

Yao Hongfei holds a college diploma, reflecting that R&D in the tool industry is not entirely driven by high academic qualifications. Job postings for process R&D technicians and cutting tool application engineers specify “college degree or above,” differing from the typical highly educated R&D teams in high-tech enterprises.

This “experience-oriented, lower-education” talent strategy indicates a reliance on master craftsmen’s skills. However, whether such incremental process improvements meet the “hard technology” criteria encouraged by the Growth Enterprise Market is debatable.

This R&D model also reveals issues. During the reporting period, product specifications increased from 8,724 to 15,183 varieties, yet the solid drilling series, which accounts for over 70% of R&D investment, only contributed about 6% of revenue. The company attributes this to capacity constraints, but data shows that from 2022 to 2024, output of this series increased from 118,800 to 233,400 units. The doubling of specifications with limited output growth highlights a gap between R&D investment and market conversion.

Under the constraints of traditional R&D approaches and a low-education workforce, whether Xinxing Tools can continue to build a sustainable technological moat remains to be seen.

Family control and sudden dividends raise further questions about fundraising legitimacy

The issues of family control and large dividend payouts further cast doubt on the company’s governance reliability.

Firstly, the company’s shareholding structure is highly concentrated, with five actual controllers—Zhu Dongwei, Zhu Hongmei, Yao Hongfei, Zhu Hulin, and Yu Qijuan—controlling 92.65% of shares.

Under this structure, the company has repeatedly paid high dividends, totaling 473 million yuan from 2020 to 2024, accounting for about 70% of net profit during that period. Based on their shareholdings, the controlling family received approximately 437 million yuan.

It is unusual that after such large dividends, the company applied for an IPO in June 2025, planning to raise 560 million yuan for capacity expansion. If expansion is the goal, why engage in “exhaustive” dividends beforehand? This raises serious questions about the reasonableness of the fundraising.

In late April 2024, the Shanghai and Shenzhen stock exchanges issued “Guideline No. 2,” explicitly stating that “whether there are large dividends before listing” is an important consideration during review. Xinxing Tools’ actions have undoubtedly touched regulatory nerves.

Another concern is the “restoration clause” in the escrow agreement. Before the IPO, the company introduced nine investment institutions, including Zhejiang Chuangtou, which would face share repurchase obligations if the listing fails.

Beyond governance concerns, the company’s reliance on its business model also poses risks.

During the reporting period, about 60% of revenue came from ODM OEM, while the self-branded “Chuangheng CHTOOLS” accounted for only about 30%. The largest customer, Sanhuan Import & Export, is a trading company, with 2022 to mid-2025 revenue shares of 29.26%, 24.30%, 23.62%, and 25.96%. Most of Sanhuan’s business with Xinxing Tools is via ODM cooperation, making this single customer dependency as high as 25%, which could threaten overseas revenue stability.

Meanwhile, sales to Indian major customer B&DLTD plummeted 66% in the first half of 2025. The company admits that a slowdown in India’s infrastructure investment could impact performance.

In terms of accounts receivable, the top five customers account for over 60%, with Sanhuan alone over 35%. The financial health of key customers is closely tied to the company’s cash flow. Inventory provisions are also high, with nearly 20% of raw materials over three years old, indicating potential impairment risks.

Xinxing Tools’ growth ceiling is evident. Its capacity expansion plan conflicts with limited market size. Family-controlled dividend distributions further question the legitimacy of fundraising. Risks from the escrow agreement, ODM dependence, and customer concentration threaten sustainable operations.

When the prospectus’s “continuous rapid development” was changed to “continuous stable development,” Xinxing Tools must demonstrate not only its growth potential and financial data authenticity but also its sincerity and ability to establish trust between family interests and public company responsibilities.

(Full text: 2868 words)