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Investor Network Zhang Jingyi

Recently, Canhua Industrial Holdings Co., Ltd. (hereinafter referred to as Canhua Industrial/the Company), a flour production and manufacturing company from Gu'an County, Hebei Province, submitted a prospectus to the Hong Kong Stock Exchange for the third time, intending to be listed on the main board of the Hong Kong Stock Exchange. Zhongtai International is its exclusive sponsor. The company submitted listing applications to the Hong Kong Stock Exchange twice in June 2020 and March 2021, but both failed.

It is understood that the flour processing industry is a low-profit industry with a relatively low entry threshold and relatively high homogeneity. By 2023, there will be approximately 3,000 to 4,000 flour manufacturers in China with annual main business revenue of more than 20 million.

According to the Frost & Sullivan report, in Hebei Province, based on sales of special flour, Shenhua Industrial ranks third in Hebei, with a market share of about 3.7%. Nationwide, based on sales of flour, Shenhua Industrial ranks 31st to 35th among all flour manufacturers in China, with a market share of only 0.2%, which is a relatively low market share.

With the industry involution, Canhua Industrial has not yet formed its own unique competitiveness, and still faces difficulties such as single product type, single operation model and worrying capital situation. So what are the chances of the company's third attempt at a Hong Kong IPO?

The product type is single, and the revenue is supported by price increases

Shenhua Industry is a specialty flour manufacturer located in Hebei, China, founded in 2002. The company has been selling flour products and flour by-products under the "Shenhua" brand for more than 20 years, with main products including ordinary specialty flour, heat-treated specialty flour and general purpose flour.

The prospectus shows that from 2021 to 2023, Canhua Industrial achieved revenue of 500 million yuan, 469 million yuan, and 544 million yuan, respectively, and net profits of 32.054 million yuan, 45.256 million yuan, and 40.497 million yuan, respectively. Although the company has been profitable for three consecutive years, its profitability is not strong. In 2023, its revenue increased by 16.09% year-on-year, but its net profit fell by 10% year-on-year, indicating that its revenue increased but its profit did not.

In the current market environment, product diversity has become one of the core elements of corporate competitiveness, but at present, the product categories of Canhua Industrial are relatively single, mainly concentrated in flour products. More than 80% of the company's revenue comes from flour products, which are ordinary special flour and heat-treated special flour. Among them, ordinary special flour has the highest revenue share, accounting for 64.1%, 55.9% and 58.4% of total revenue in 2021-2023 respectively.

In terms of product sales, the total sales of Canhua Industry in 2021-2023 were 168,900 tons, 137,100 tons, and 160,600 tons respectively. 2023 is not the best year for Canhua Industry's sales, and the reason why the company can achieve the highest revenue in the past three years in 2023 is because of the price increase of two core products, ordinary special powder and heat treatment special powder.

In 2023, the price of ordinary special powder of Canhua Industrial will increase by 5 cents per kilogram to 3.68 yuan per kilogram year-on-year, and the price will increase by 50 yuan per ton; the price of heat treatment special powder will increase by 0.18 yuan per kilogram year-on-year, and the price will increase by 180 yuan per ton.

It can be seen that although Shenhua Industrial has achieved growth in revenue and net profit in the past three years, this growth trend is highly dependent on the sales of flour products. It is worth noting that the company's product sales volume fluctuates greatly, and the profit growth trend is not derived from the steady increase in sales, but from the increase in product prices to boost operating income.

Increased reliance on major customers

In addition to the single product line, the operation model of Canhua Industrial is also single, mainly selling to food processors and wholesalers (B-end customers), lacking the To C market. Generally speaking, food companies that rely on To B business will also be relatively dependent on customers, and there is a risk of being constrained by the performance of major customers.

According to the prospectus, Canhua Industrial is in this situation. The company is particularly dependent on its top five customers for revenue, with sales from the top five customers accounting for 48.6%, 61.7% and 63.2% of total revenue in 2021-2023 respectively. On the other hand, the company has lost more than two-thirds of its customers, with the number of customers falling from 298 in 2021 to 92 in 2023, and customer concentration has risen significantly.

Over-reliance on major customers can lead to uncertainty in the company's future revenue when customer relationships change or demand decreases, and may also affect the stability of the company's business.

It is worth mentioning that Dali Group, a well-known baked goods company, is also one of the top five customers of Canhua Industrial, and the two have been cooperating since 2012. However, in recent years, the company's sales to Dali Group have continued to decline, from 135 million yuan in 2021 to 64.419 million yuan in 2023, and its ranking has also dropped from the largest customer to the third largest customer.

Financial situation is worrying

Canhua Industrial faces multiple challenges in terms of financial risks, mainly reflected in high asset-liability ratio, increased current liabilities, negative operating cash flow for two years, and reduced debt repayment ability.

First, the operating cash flow of Canhua Industrial has been negative for two consecutive years. According to the prospectus, the company still had a positive cash flow of 3.8 million yuan in 2021, but then it took a sharp turn for the worse, falling to -161 million yuan and -125 million yuan in 2022 and 2023 respectively. This shows that the imbalance between the company's cash inflows and outflows in its main business activities has continued to intensify, which has put significant pressure on its daily operating capital chain.

Secondly, the debt ratio of Canhua Industrial has been rising sharply. The company's debt ratio was 104.9% in 2021, climbed to 147.5% in 2022, and reached a high of 166% in 2023. Specifically, the company's current liabilities increased significantly from about 155 million yuan to about 429 million yuan in 2023. This series of growth not only reveals the increasingly heavy debt burden in the company's capital structure, but also reflects the potential financial leverage risk and debt repayment pressure, which has posed a challenge to the company's long-term financial health.

However, in sharp contrast to the rapid growth of current liabilities, the company's current assets are gradually declining. Canhua Industrial's current assets decreased from approximately RMB 522 million at the end of 2022 to approximately RMB 437 million at the end of 2023.

Finally, the "bank and other loans" of Canhua Industrial are also increasing. From 2021 to 2023, the company's bank and other loans were 289 million yuan, 473 million yuan and 600 million yuan respectively, and reached a new high of 682 million yuan at the end of the first quarter of 2024. It is worth noting that Yao Zhiwan, the controlling shareholder of Canhua Industrial, currently serves as a director of Hebei Gu'an Rural Commercial Bank. As of March 31, 2024, the company still has 30 million yuan of debt to repay the bank.

Perhaps, the eagerness of Canhua Industrial to go public and raise funds is also related to its financial situation. The company admitted in its prospectus that it plans to use part of the raised funds to "repay some existing loans from banks and other financial institutions." However, under the above-mentioned serious problems, can Canhua Industrial successfully list on the Hong Kong Stock Exchange this time? "Investors Network" will continue to pay attention. (Produced by Siwei Finance) ■

Shenhua Industry