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Introduction: Whether from Hainor's own fundamentals, or from the new regulatory policies on IPO review in recent years, or even from the fact that Hainor has been stuck in the IPO review process for a long time, it is not surprising that it failed to gain listing space this time. However, compared with the previous two unpleasant listing experiences, this third attempt to list on the GEM, although it still ended in failure, is the closest Hainor has come to realizing its dream of listing on the A-share market.

This article was exclusively published by Koukou Finance (ID: koukouipo)

Author: Fang Zhiyue@Beijing

Editor: Zhai Rui@Beijing

Under the registration system, Hainor Environmental Protection Industry Co., Ltd. (hereinafter referred to as "Hainor"), the record holder for the company that took the longest time to submit its registration application after its IPO was approved but still was not allowed to do so, has finally come to the end of its journey to be listed on the A-share market.

On the evening of July 23, 2024, the Shenzhen Stock Exchange issued a "Decision on Terminating the Review of the Initial Public Offering and Listing of Hainor Environmental Protection Industry Co., Ltd. on the GEM" (hereinafter referred to as the "Termination Decision"), which put a regrettable but not unexpected end to Hainor's GEM listing journey.

Like the vast majority of companies that failed in their IPO attempts, Hainor proactively withdrew its IPO application to halt its long-planned capital deployment.

Anyone who has paid a little attention to Hainor's capitalization process should know that actively stopping the IPO is the only option Hainor has to take.

Before having to give up this IPO, Hainor had been waiting in the queue for GEM IPO approval and registration for nearly three years, making it the company that has been waiting the longest in this process since the registration system reform.

As the biggest holdout among the IPO companies that have passed the review and are waiting to submit for registration, Hainor successfully obtained the review result of "meeting the issuance conditions, listing conditions and information disclosure requirements" at the 65th review meeting of the GEM Listing Committee in 2021 held on November 5, 2021.

During the nearly four-year review process for Hainor's listing on the Growth Enterprise Market, Koukou Finance has tracked, observed and reported on it (see the relevant reports of Koukou Finance for details: "Another record in the review of the registration system has been set! It has passed the review for a year but has not yet submitted its registration. Why did Hainor encounter obstacles in its "three attempts at IPO in ten years": the "Jiuding System" regulation-related aftermath and the "curse" of lack of internal control has existed for ten years", "It has passed the review for two years but has not yet been approved to submit its registration. Can Hainor, which has set a new review record, still be listed? The aftermath of de-"Jiuding" is not over, and the R&D indicators "touched the line" of the Growth Enterprise Market's "red line". Compliance remains to be questioned!").

As mentioned above, whether from Hainor's own fundamentals, or from the new strong regulatory policies on IPO review by the regulatory authorities in recent years, or even combined with the fact that Hainor has been stuck in the review process after its IPO, it is not surprising that it ultimately failed to use time to gain listing space.

More than half a year ago, on December 14, 2023, the media interviewed Hainor about the delay in its IPO after it was approved. The relevant staff of Hainor claimed that "the company's IPO is progressing normally", but they also admitted that "the regulators have not required the company to submit its registration."

At that time, people from intermediary agencies who were also close to Hainor expressed different views to Kekou Finance.

The person from the intermediary agency admitted to Kekou Finance that in order to meet the GEM's positioning of "three creations and four innovations", in recent years Hainor has been working to increase investment in innovation indicators such as R&D expenses while strengthening corporate internal control management compliance. However, the regulatory authorities do not seem to approve of the results of its related rectifications, and the space for listing is getting smaller and smaller.

Founded in 1999, Hainor stated in its GEM IPO application materials submitted to the Shenzhen Stock Exchange that it has been committed to urban domestic waste treatment business for many years and is a domestic waste treatment service provider targeting small and medium-sized cities.

In fact, in the past decade, in addition to devoting itself to the development of its main business, listing has always been Hainor's unswerving goal, which it has repeatedly failed but has fought for again and again.

Before applying for listing on the GEM under the registration system, Hainor had already sounded the charge for A-share IPO twice, but both ended in failure. It first tried to go public on the GEM in 2012, but was ruthlessly rejected by the China Securities Regulatory Commission. Seven years later, in 2019, it applied for listing again, but unexpectedly withdrew the materials and terminated the application after only three months. It also received a warning letter from the China Securities Regulatory Commission.

Compared with the two previous unpleasant listing experiences, this third attempt to list on the GEM, although still ended in failure, is already the closest Hainor has come to realizing its dream of listing on the A-share market.

If we talk about profitability alone, Hainor does have the strength to be listed on the A-share market.

As early as 2020, Hainor's non-GAAP net profit exceeded 100 million yuan. In the following two years, with the continuous growth of revenue, its net profit reached 232 million and 280 million in 2021 and 2022 respectively.

However, despite its excellent operating data, the problem of "effectiveness of corporate internal control", which was the culprit that caused its first two IPOs to fail, has become its lingering curse.

In addition, due to its involvement in the investigation initiated by the intermediary agency and the "substantial" obstacles involving "sensitive" shareholders, Hainor's third listing journey has been full of twists and turns.

What is more fatal is that Hainor, which applied for listing on the Growth Enterprise Market again, may not have thought that the registration system has already given a clearer positioning to the Growth Enterprise Market than more than ten years ago - to thoroughly implement the innovation-driven development strategy, adapt to the general trend of development that relies more on innovation, creation, and creativity, mainly serve growing innovative and entrepreneurial companies, and support the deep integration of traditional industries with new technologies, new industries, new formats, and new models. It is for this reason that the regulatory authorities have clear criteria for judging the revenue and R&D investment of companies that intend to be listed on the Growth Enterprise Market.

For example, in terms of R&D investment, companies planning to be listed on the GEM must meet the "Three Creations and Four Innovations" standards, namely, "the compound growth rate of R&D investment in the past three years is not less than 15%, and the amount of R&D investment in the past year is not less than 10 million yuan" or "the cumulative amount of R&D investment in the past three years is not less than 50 million yuan."

Although the above standards were not implemented until December 30, 2022, after Hainor's IPO passed the review of the Shenzhen Stock Exchange, this also had a direct impact on the subsequent IPO review progress of Hainor - according to this standard, Hainor no longer met the listing conditions of the GEM for a long time.

"Previously, Hainor's performance had good growth, but it still lacked the ability to innovate, create, and be creative. So in 2023, it worked hard to increase its R&D investment, and the relevant data did go up, but Hainor's revenue growth hit a bottleneck at this time." The above-mentioned intermediary agency person close to Hainor told Kekou Finance after Hainor officially confirmed the termination of the latest IPO review that had lasted nearly four years.

Due to a variety of internal and external factors, Hainor's IPO, which had not been further reviewed and promoted by the Shenzhen Stock Exchange for a long time, had to bow to reality.

1) The effect of removing the “Nine Tripods” is hard to see

The equity dispute with the "Jiuding Group", which is still quite sensitive in the A-share market, was once considered the biggest obstacle for Hainor's IPO.

Earlier, Koukou Finance exclusively reported that Hainor was involved in the "Jiuding Group" regulatory punishment and "regulation" storm.

As a co-invested enterprise of the well-known A-share private equity "Jiuding Group" at that time, and the first proposed listed company that successfully passed the review under the registration system with the "Jiuding" gene, although the "Jiuding Group" does not hold a large proportion of shares in Hainor, its every move in the IPO was interpreted by the outside world as a weather vane of the regulatory authorities' policies related to the "Jiuding Group".

Obviously, many years have passed, and Jiuding Investment, a well-known private equity firm that once "made things happen with a flip of a finger" in the A-share IPO market, has still not recovered from the "tumultuous autumn" of 2018.

As early as mid-2018, Koukou Finance exclusively reported that the regulatory authorities had halted several IPO projects in which Jiuding Investment had participated (see Koukou Finance's exclusive report "Exclusive and Important || Jiuding Enters Autumn: Regulatory authorities have suspended its multiple IPO investment projects").

At that time, an insider close to the regulatory authorities revealed to Kekou Finance that "the internal regulatory window guidance requires that among the companies planning to go public, if there are companies invested by Jiuding Investment, their application materials should be temporarily postponed, and their review and approval should be postponed as much as possible." Afterwards, various signs also proved the authenticity of the news.

Since May 2018, Jiuding Investment, which had reached its peak in 2017, suddenly ceased operations in the A-share market. This PE giant, which once aspired to be the "Goldman Sachs of China", almost disappeared from the A-share IPO market in the following years. Not only did no IPO company invested by it successfully pass the review, but many companies planning to IPO also chose to withdraw their listing applications because of its investment.

In the second half of 2021, the regulatory authorities once showed signs of loosening their supervision of the companies invested by the Jiuding Group. In July of the same year, an IPO of Shaanxi Meineng Clean Energy Group Co., Ltd. (hereinafter referred to as "Meineng Energy") successfully passed the review of the CSRC's Issuance Examination Committee.

Jiuding Investment is also one of the important shareholders of Mei Neng Clean. Before the IPO of Mei Neng Clean, Suzhou Yinxu Jiuding Investment Center (Limited Partnership) (hereinafter referred to as "Suzhou Jiuding") under the "Jiuding Group" was the third largest shareholder of Mei Neng Clean with an 8% equity ratio, and was also the largest external shareholder.

For a time, news about the lifting of the ban on the "Jiuding Group" in the IPO market after being dormant for three years was widely circulated.

In the following months, many details and facts did show that the regulators had a more relaxed attitude towards the IPO-listed companies in which the Jiuding Group had a stake.

It was also during this period that the IPO applications of several companies involving "Jiuding Group" holdings, including Hainor, successfully passed the regulatory review.

But the good times didn’t last long.

In the second half of 2021, shortly after the relaxation of regulations on the proposed IPO projects in which Jiuding Group participated, as Wu Gang, the actual controller of Jiuding Group, was investigated, the regulatory authorities once again cautiously strengthened their "internal guidance" of Jiuding Group.

Therefore, we have seen that several IPO companies invested by Jiuding Group, including Meiya Energy and Hainor, have successfully passed the IPO review, but have not received any further progress since then.

At the same time, some companies planning to go public, such as Zhejiang Hengda New Materials Co., Ltd. and Xizhuang Co., Ltd., have spared no expense to buy back all of the shares held by the Jiuding Group in the companies listed for review in order to "de-Jiuding" in order to obtain the opportunity to be reviewed as soon as possible.

In mid-September 2022, 14 months after the IPO was approved, the IPO of Minergy Energy finally received the approval of the CSRC for issuance. Immediately afterwards, Minergy Energy quickly launched its IPO issuance.

On September 16, 2022, the IPO of Meiya Energy was finally successfully released and the official issuance began. Does this mean the revival of the "Jiuding Group"?

The answer is of course no.

After the IPO of Mei Energy was approved, it was delayed in getting the final approval from the regulators. In order to sort out the listing obstacles brought by the regulators' "internal guidance" to the "Jiuding Group" as soon as possible, the major shareholder had to quietly clear the relevant shares held by the "Jiuding Group" by "buyback" nearly a year after the IPO of Mei Energy was approved. After May 2022, the "Jiuding Group", which originally held a considerable proportion of shares in Mei Energy, withdrew from the market in disgrace.

This change in the equity of an important shareholder after the company's listing was approved is very rare in previous IPO review cases. It is also behind this rare equity adjustment after the company's approval that it also indirectly reflects the reality that the "Jiuding Group" may not be "unsealed" in the short term.

With so many precedents of "repeating mistakes", it is not difficult to understand the embarrassing situation that Hainor IPO had to go through the meeting for a long time but still had difficulty submitting the registration.

Public information shows that the "Jiuding Group" has been lurking in Hainor for 7 years.

As early as July 2015, Suzhou Dingcheng Jiuding Investment Center (Limited Partnership) (hereinafter referred to as "Suzhou Jiuding") and Suzhou Wellcome Investment Center (Limited Partnership) (hereinafter referred to as "Suzhou Wellcome") under the "Jiuding Group" respectively acquired 625,000 and 375,000 shares of Hainor from natural person Liu Ruping through equity transfer, and together held 1 million shares of Hainor, accounting for 0.91% of its total share capital before the IPO.

Liu Ruping is not only an important shareholder of Hainor, but also the ex-wife of Lu Yili, the actual controller of Hainor, and the mother of Luo, a director and vice president of Hainor.

As the companies that are planning to go public and have a stake in the "Jiuding Group" are once again under the principle of "prudent review", Hainor's IPO seems to have to be pushed forward and submitted to the China Securities Regulatory Commission for registration as soon as possible. Like its "similar companies", "de-Jiuding" is undoubtedly the best option at present.

Hainor has also made efforts to "de-Jiuding".

On June 24, 2022, that is, after Meineng Energy successfully cleaned up the "Jiuding" investment, Hainor also officially issued an announcement stating that the company's shareholders Liu Ruping and Luo Yili formally filed an arbitration with the China International Economic and Trade Arbitration Commission, requiring Suzhou Jiuding and Suzhou Wellcome to return all relevant shares held in Hainor.

The reason why Liu Ruping and Luo Yili filed for equity arbitration against Suzhou Jiuding and Suzhou Wellcome once again confirmed that Hainor's IPO was affected by the "Jiuding Group" regulation.

According to the arbitration case filed by Liu and Luo with the China International Economic and Trade Arbitration Commission, "through industrial and commercial information inquiries and equity penetration, the actual controller and ultimate beneficiary of the two respondents is Wu Gang", "during the company's IPO review process, the parent company of the two respondents, Tongchuang Jiuding Investment Holding Co., Ltd., and the actual controller Wu Gang were successively investigated and punished by the China Securities Regulatory Commission", "in order to safeguard the legitimate rights and interests of the applicants themselves, the company, and all shareholders of the company, the applicants specially apply for arbitration in accordance with the law."

One and a half years have passed since the arbitration case was filed, and Hainor has not yet announced the progress and outcome of the relevant arbitration.

However, the 2023 interim report information recently released by Hainor shows that before the end of June 2023, Liu Ruping still had not taken back the relevant equity from Suzhou Jiuding and Suzhou Wellcome.

According to Hainor's 2023 interim report, as of June 30, 2023, Liu Ruping's shareholding in Hainor was still 1.9568 million shares, accounting for 1.787% of Hainor's total share capital - this data is consistent with the amount in Hainor's IPO prospectus (draft for the meeting) disclosed at the end of October 2021.

On February 14, 2023, the China Securities Regulatory Commission officially issued the "Market Ban Decision [2023] No. 2" to Wu Gang, deciding to take five-year market ban measures against Wu Gang, prohibiting him from continuing to engage in securities business in the original institution or any other institution or serving as a director, supervisor, or senior manager of other listed companies or non-listed public companies.

2) Lack of internal control and abnormal R&D expenses

Three IPOs in the past decade have all ended in failure. In addition to the "troubles" brought about by the "Jiuding Group"'s shareholding status, the "curse" of lack of internal control that has hindered Hainor's listing still seems to be lingering.

As early as April 2012, Hainor had attended the review meeting of the GEM IPO Examination Committee, but was rejected.

The main reason given by the CSRC at that time for rejecting it from the A-share market was that it had violated environmental laws and regulations many times during the IPO reporting period and was punished. There were also problems such as production projects exceeding the operating period and not obtaining environmental protection acceptance permits. It was believed that the company's internal control system could not reasonably guarantee the legality of its production and operation.

In June 2019, nearly seven years after its failed initial listing, Hainor restarted its IPO and submitted its GEM listing application to the China Securities Regulatory Commission for the second time.

However, less than three months later, on September 30, 2019, Hainor terminated its plan to "reenter prison" by voluntarily withdrawing its IPO application.

In April 2020, the China Securities Regulatory Commission issued a warning letter to take regulatory measures, revealing the mystery of Hainor's second IPO "escape".

It turned out that Hainor's IPO was selected for on-site inspection by the China Securities Regulatory Commission that year. Subsequently, the regulatory authorities found many "hard flaws" - there were irregularities in the accounting treatment of technical service fees related to the operation and management of some projects, and failure to disclose restricted monetary funds truthfully.

The above-mentioned warning letter from the CSRC is not the only regulatory measure that Hainor has received in the past two years.

In March 2021, Hainor and its related responsible parties, which were listed on the New Third Board, were subject to self-regulatory measures such as a warning letter issued by the National Equities Exchange and Quotations due to information disclosure violations.

In addition, in December 2020 and July 2021, the reporting period of Hainor's latest IPO, safety accidents occurred at two of its construction projects, resulting in casualties.

Whether it is the warning letters or production safety accidents that followed one after another, the focus of the regulatory authorities' IPO review has once again been focused on whether Hainor's relevant internal control systems are sound and effectively implemented.

Although at the GEM Listing Committee review meeting held in early November 2021, questions about Hainor's internal control issues were raised, and it successfully passed the Shenzhen Stock Exchange's review thanks to its net profit of over 200 million that year and a year-on-year increase of nearly 70%, it was administratively punished for safety accidents during the "awkward" one-year waiting period when it was waiting to submit its registration.

Public information shows that on March 24, 2022, the Sichuan Provincial Department of Housing and Urban-Rural Development issued a "Construction Administrative Penalty Decision" (Sichuan Construction Supervision and Penalty [2022] No. 8) to Sichuan Qilunda Construction Engineering Co., Ltd., a wholly-owned subsidiary of Hainor, deciding to impose an administrative penalty on Qilunda to temporarily withhold its "Safety Production License" for 30 days, and at the same time set a deadline of 30 days for rectification.

As problems with the effectiveness of Hainor’s internal controls continued to be exposed, controversy arose over whether it complied with the GEM’s “Three Creations and Four Innovations” positioning.

On December 30, 2022, with the approval of the China Securities Regulatory Commission, the Shenzhen Stock Exchange officially issued the "Interim Provisions on the Application and Recommendation for Issuance and Listing of GEM Companies (Revised in 2022)" (hereinafter referred to as the "Interim Provisions") and required their immediate implementation.

It is also the "Interim Provisions" that clearly require that companies planning to be listed on the GEM must meet the following requirements: "the compound growth rate of R&D investment in the last three years is not less than 15%, and the amount of R&D investment in the last year is not less than RMB 10 million" or "the cumulative amount of R&D investment in the last three years is not less than RMB 50 million."

At this point, Hainor has not yet supplemented and updated its 2022 annual report data, and it is clear that it no longer meets the above-mentioned "positioning" standards for listing on the GEM.

Because in the "recent three years" of Hainor, from 2019 to mid-2021, its R&D investment was only 10.2339 million, 7.9368 million and 9.959 million respectively.

Fortunately, the 2022 annual report data of Hainor, which was updated at the end of March 2023, temporarily saved Hainor's IPO from the brink of failure.

According to the "Interim Provisions", Hainor's IPO must meet relevant regulations. If 2020 to 2022 is recognized as the last three years of the IPO reporting period, then its R&D investment in 2022 will reach at least 10.496 million.

According to Hainor's 2022 annual report released at the Stock Transfer Center, its R&D investment in 2022 was approximately 11.305 million yuan, which is only 809,000 yuan more than the minimum requirement required by the "Interim Provisions", which can be said to be "barely meeting" the standard.

"R&D investment is an important indicator for regulators to determine whether a company meets the GEM's positioning. Regulators will be more cautious, especially for those who 'barely meet the requirements'. In particular, they will focus on whether the R&D expenses are accurately collected and whether the R&D investment is real. After all, for companies that do not have ample R&D investment, there is often a possibility of falsifying data in order to meet the requirements." A senior sponsor representative from Shanghai once told Kekou Finance about the controversial issue of Hainor's R&D expenses.

According to a series of data obtained by Kekou Finance, there are indeed doubts about the rationality and authenticity of Hainor's R&D expenses in recent years.

Compared with 2021, Hainor's R&D expenses in 2022 did not increase but decreased, with the most important material and power consumption costs decreasing from 5.12 million in the same period of 2021 to 5.10 million. However, the largest increase was in employee salaries, commissioned R&D, and laboratory testing fees.

In mid-2022, the number of certified R&D personnel at Hainor suddenly increased from 25 at the beginning of the year to 36, so the salary expenses of R&D personnel increased by 548,100 to 5.2157 million from 4.577 million in 2021.

But what is puzzling is that in 2022, almost all of the R&D personnel added by Hainuo had a bachelor's degree or below, and it was also during this period that more than half of its only two remaining R&D personnel with a master's degree were lost, leaving only one.

In addition, while the number of R&D personnel increased significantly, Hainor also outsourced part of its R&D, which increased the expenditure of commissioned R&D by 564,000 yuan. This was the first time Hainor had commissioned R&D in recent years. Public information shows that at least from 2018 to mid-2021, Hainor had no precedent of commissioned R&D.

Similarly, in 2022, Hainor's R&D expenses for "laboratory testing fees" also reached 219,900 yuan. In 2020 and 2021, Hainor's testing expenses were only 12,000 yuan and 0 yuan.

After entering 2023, in order to get rid of the suspicion of "barely meeting" the R&D investment target, Hainor has been working hard to "increase" its R&D expenses.

According to the 2023 interim report released by Hainor, its R&D expenses in the first six months of 2023 alone have reached 8.481 million, an increase of nearly 90% from 4.473 million in the same period of 2022. Among them, employee wages alone increased by more than 2 million, a year-on-year increase of nearly 95%.

In sharp contrast to the skyrocketing salaries of R&D staff, the number of technical personnel at Hainor has been declining in the first half of 2023.

According to Hainor's employee composition data obtained by Koukou Finance, in the first half of 2023, the number of Hainor employees decreased from 794 at the beginning of the year to 767, of which the number of technical personnel decreased from 73 to 69. Compared with the same period in 2022, in the first half of 2023, the number of Hainor's technical personnel not only did not increase significantly, but also experienced a loss. At the end of June 2022, Hainor had 71 technical personnel.

In the first half of 2023, while Hainor's R&D investment changed, its once proud growth potential also began to show signs of fatigue.

Also according to Hainor's 2023 interim report, in the first half of 2023, it recorded operating income of 327 million, a year-on-year increase of only 0.04%, but the corresponding non-net profit was only 126 million, a year-on-year decline of 5.72%.

Having failed three times in its attempts to go public on the A-share market, will Hainor continue to pursue its dream of going public after repeated failures?

The answer is most likely yes.

"Hainol has signed multiple gambling agreements with several of its investment institutions. These gambling agreements include issues such as equity repurchase and performance compensation. Previously, they were temporarily terminated for the compliance of IPO review, but the parties agreed that if Hainor ultimately fails to go public, the effectiveness of the relevant gambling clauses will be immediately restored, and Hainor's controlling shareholder and related persons will be at risk of being required to fulfill their obligations to repurchase shares." The above-mentioned person from an intermediary institution close to Hainor revealed to Kekou Finance.

Under the pressure of repurchase, where will Hainor's next stop be after its listing?

Like most companies that have suffered setbacks in their IPOs in Shanghai and Shenzhen, listing on the Beijing Stock Exchange may be the best way for Hainor to achieve listing in the short term.

If Hainor turns to the Beijing Stock Exchange, in addition to the advantage of its operating scale, it has a natural front-end advantage as it has been listed on the New Third Board for many years.

Public information shows that Hainor was listed on the New Third Board and entered the innovation layer in November 2015. It was not until September 2023 that its IPO was delisted from the National Equities Exchange and Quotation System because it had passed the review of the Shenzhen Stock Exchange's Growth Enterprise Market Listing Committee and was based on the company's future development and strategic planning needs.

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