Jindi Yang Group IPO: Difficulties in Collecting Large Customer Payments

Investors.com Hou Shuqing

Editor Wu Yue

New energy vehicles are undoubtedly one of the hottest tracks in the capital market in recent years, with many star companies emerging. Numerous enterprises along the industry chain have also joined the IPO wave. Wuxi Jinyang New Materials Co., Ltd. (referred to as “Jinyang Co.”) is one of them.

Jinyang Co. mainly focuses on the research, production, and sales of precise battery structural components and materials, including battery packaging shells, safety valves, and nickel-based conductor materials. Currently, it has established stable partnerships with well-known companies such as LG Chem and BYD (002594).

In 2019, Jinyang Co.'s revenue and net profit experienced some decline. The company attributed the performance fluctuation to the impact of the waning new energy vehicle subsidy policies on key customer BAK Battery, which led to cash flow issues and bad debts. However, the proportion of bad debts in revenue in the prospectus does not seem to support this explanation.

In September 2020, Jinyang Co. conducted a capital increase at 16.49 yuan per share, raising its valuation to 1.02 billion yuan. If the IPO succeeds, the company’s valuation will reach 2.633 billion yuan. However, compared to September 2020, Jinyang Co.'s performance has not shown a breakthrough.

“Policy-sensitive” Industry

From 2018 to September 2021 (the “Reporting Period”), Jinyang Co. achieved revenues of 608 million yuan, 549 million yuan, 754 million yuan, and 853 million yuan, respectively, with net profits attributable to shareholders of 40.62 million yuan, -26.72 million yuan, 68.43 million yuan, and 112 million yuan. The company’s performance fluctuated significantly during this period.

Especially in 2019, Jinyang Co.'s revenue declined compared to 2018, and net profit turned from profit to loss.

In terms of business, the battery precise structural components account for about 60% of the company’s revenue in each period and are its main income source. Revenue from this segment slightly decreased in 2019, from 387 million yuan in 2018 to 213 million yuan, while sales of nickel-based conductor materials continued to grow during the same period.

Specifically analyzing the battery precise structural components business, the sales revenue of packaging shells in 2019 dropped sharply from 344 million yuan in 2018 to 271 million yuan. This indicates that poor performance of packaging shells was the main reason for Jinyang Co.'s decline in 2019.

In the prospectus, Jinyang Co. explained the decline in 2019 as influenced by factors such as the retreat of new energy vehicle subsidy policies, including adverse effects on some lithium battery industry clients like BAK Battery, affecting their business operations and cash flow.

Although these policy changes are short-term factors, after 2019, Jinyang Co.'s revenue and net profit exceeded 2018 levels. However, as an emerging industry, policy fluctuations may always be a “Damocles sword” hanging over Jinyang Co.

Hidden Risks in Bad Debts

In 2018, BAK Battery was Jinyang Co.'s largest customer, contributing sales of 90.94 million yuan, accounting for 14.96% of that year’s revenue.

However, business with BAK Battery also brought large accounts receivable. By the end of 2018, receivables from Zhengzhou BAK Battery Co., Ltd. (“Zhengzhou BAK”) and Shenzhen BAK Power Battery Co., Ltd. (“Shenzhen BAK”) totaled 57.55 million yuan.

These receivables posed hidden risks for Jinyang Co.'s 2019 performance. Due to cash flow issues downstream, BAK Battery also began delaying payments to upstream suppliers.

In 2019, Jinyang Co. conducted an impairment test on accounts receivable and made a provision for bad debts of 50.16 million yuan, with Zhengzhou BAK and Shenzhen BAK collectively provisioning 33.57 million yuan.

To reduce risks, Jinyang Co. cut sales to BAK Battery to 24.34 million yuan in 2019, slightly below its fifth-largest customer, Jinshan Industrial, which sold 26.15 million yuan.

However, as the industry recovered in 2020, BAK Battery again became the company’s third-largest customer, with sales of 46.86 million yuan that year.

Although the industry improved, the accounts receivable balance from BAK Battery only decreased slightly from 38.20 million yuan in 2019 to 36.62 million yuan in 2020. As of September 30, 2021, this figure increased again to 55.59 million yuan, surpassing the end-2018 level of 40.49 million yuan.

Despite this, cooperation with BAK Battery did not diminish. From 2019 to September 2021, transactions with BAK Battery increased from 24.34 million yuan to 56.86 million yuan.

Reviewing the history of cooperation, Investors.com found that in 2018, bad debt provisions accounted for 7.67% of receivables, rising to over 20% in 2019, and never decreasing afterward.

If the growth in bad debts is due to industry policy changes, why did the scale of bad debts not decrease after 2019 but instead increase? Under the dual challenges of difficult collections and rising bad debt scales from BAK Battery, why did Jinyang Co. allow BAK Battery to continue expanding its transactions? These are questions Jinyang Co. needs to answer.

Jinyang Co. is not the only “victim.” BAK Battery was sued by Rongbai Technology (688005) for nearly 200 million yuan in unpaid payments and overdue penalties for its subsidiary Hubei Rongbai, due to failure to pay on time and in full.

Significant Debt Pressure

During the reporting period, Jinyang Co.'s asset-liability ratio was 56.73%, 56.66%, 50.11%, and 53.86%. In comparison, the average asset-liability ratios of Keda Li (002850), Zhongrui Electronics, and Zhenyu Technology during the same period were 37.92%, 37.02%, 43.60%, and 45.22%, respectively. Jinyang Co.'s ratios have consistently been higher than those of comparable listed companies.

Jinyang Co. stated that to meet operational needs, it moderately increased bank financing, with short-term borrowings rising by 42.01 million yuan from the previous period.

Regarding its low debt-paying ability, the company explained that it is still in a period of business expansion, requiring ongoing purchases of fixed assets and construction in progress, which depend on bank loans, leading to higher asset-liability ratios and lower current and quick ratios.

As of the end of the reporting period, Jinyang Co. had about 49.01 million yuan in cash, while its short-term liabilities reached 204 million yuan, facing significant repayment pressure.

In this IPO, Jinyang Co. plans to issue no more than 25% of its shares, raising 658 million yuan to fund R&D and manufacturing of high-safety energy-type power battery materials, new plant construction, and working capital.

In its prospectus, Jinyang Co. admitted that the company previously lacked financing channels. If the fundraising is successful, the company’s capital strength will be significantly enhanced, helping to reduce its asset-liability ratio and improve debt repayment capacity. (Produced by Think Finance)■