Cash Outflow Accelerates, Production Expansion Intensifies: Undercurrents in Chunguang Group's IPO

Jingguan Automotive

A materials company that grew relying on magnetic powder business is facing multiple challenges as it pushes toward the capital markets: questions about growth quality, expansion risks, and past governance issues.

Shandong Chunguang Technology Group Co., Ltd. (hereafter “Chunguang Group”) is in a critical stage of its IPO process. Since submitting its application in June 2025, the company has undergone two rounds of review inquiries from the stock exchange and further questions from the review center following their implementation opinions. Regulatory focus centers on growth potential, technological innovation positioning, revenue authenticity, cash flow quality, and capacity digestion of fundraising projects.

According to the prospectus, Chunguang Group mainly engages in R&D, production, and sales of soft magnetic ferrite magnetic powders, extending into core materials, electronic components, and power supplies. During the reporting periods, its revenue was 1.015 billion yuan, 930 million yuan, 1.077 billion yuan, and 546 million yuan, with net profits of 77.14 million yuan, 87.03 million yuan, 98.89 million yuan, and 58.51 million yuan, respectively.

In terms of industry position, the company indeed has certain scale advantages. According to data from the China Electronic Materials Industry Association, its sales of soft magnetic ferrite powders ranked first domestically from 2022 to 2024.

However, when reading this prospectus alongside the regulatory inquiry letter, a more complex picture emerges: beneath the narrative of industry leader, the company faces multiple challenges including slowing growth, tight cash flow, a single business structure, and large-scale expansion plans.

Cash Flow “Stalling,” Growth Quality Under Regulatory Scrutiny

Regulators raised multiple questions about Chunguang Group’s growth and operational quality in both inquiry rounds.

The stock exchange first focused on the company’s growth structure. During the reporting periods, revenue remained relatively stable, but growth was modest, with a compound annual growth rate of about 2.98% from 2022 to 2024. Under the GEM’s growth-centric review framework, this rate is not particularly impressive.

Meanwhile, the company’s revenue structure is highly concentrated. The inquiry letter shows that over 80% of revenue came from soft magnetic ferrite powders, with core materials and other businesses being relatively small.

This structure indicates a high dependence on a single product. Unlike comparable listed companies such as Hengdian DMEGC, Tainong Co., Ltd., which mainly sell core materials and internally digest magnetic powders, Chunguang primarily sells powders to external core manufacturers.

This also raises a potential issue: if downstream core manufacturers increase self-supply or industry competition intensifies, the market space for the company’s powders could be squeezed.

Cash flow further amplifies this concern.

During the reporting periods, net cash flows from operating activities were 80.10 million yuan, 31.37 million yuan, 28.65 million yuan, and -2.47 million yuan, showing a continuous decline and turning negative in the first half of 2025. The exchange explicitly asked the company to explain the reasons and reasonableness of the sustained decline in operating cash flow.

From the asset structure perspective, issues are also evident. Accounts receivable increased from 250 million yuan to 358 million yuan, with receivables accounting for nearly 40% of current assets. Meanwhile, receivables turnover and inventory turnover rates declined.

This suggests that while sales are expanding, more funds are being trapped in receivables and inventories rather than generating real cash inflows.

In manufacturing companies, this often means maintaining sales through more lenient credit policies. If industry demand fluctuates or customer payment cycles lengthen, cash flow pressures can escalate rapidly.

Therefore, the exchange requested the company to disclose how changes in receivables, inventories, and operating cash flows impact its ongoing viability, and whether there are any practices such as extending credit periods to sustain revenue growth.

Expansion Gamble and Industry Competition Pressure

More uncertain than cash flow is the company’s large-scale expansion plan.

According to the prospectus, the company plans to raise funds through the IPO to build a “Smart Power Magnetic Materials Project,” adding 75,000 tons of magnetic powder and 3.2 million power supply units of capacity. Compared to current scale, this expansion is substantial.

In 2024, the company’s sales of soft magnetic ferrite powders reached 101,600 tons, with the new capacity from fundraising accounting for nearly 70% of current sales. Regulators have thus focused on questioning the reasonableness and digestion capacity of this capacity increase. Industry data shows that from 2020 to 2024, China’s soft magnetic ferrite sales grew from 415,000 tons to 506,000 tons, with an average annual growth rate of about 5.08%. In an industry growing at roughly 5% annually, a single company’s large expansion requires continuous market share gains.

Adding to the complexity is the competitive landscape.

The inquiry letter discloses that companies like Hengdian DMEGC, Guanyouda, and Tainong are planning new capacities for soft magnetic ferrites, some for self-produced core products. Additionally, some steel mills are entering the ferrite powder business leveraging raw material advantages, further increasing industry competition.

Price pressures are already evident. During the reporting periods, the average selling price of the company’s powders declined from 10,899.92 yuan/ton to 8,906.75 yuan/ton. Although gross profit margin remains around 20%, the company explains that the margin improvement is mainly due to raw material price declines, not increased product premium. Meanwhile, raw materials like iron oxide, manganese oxide, and zinc oxide account for about 80% of main business costs, making profits vulnerable to raw material price fluctuations or intensified competition.

Regulators also pointed out that some comparable companies’ profitability in emerging fields like photovoltaic energy storage soft magnetic ferrites has declined, indicating increasing industry competition. Against this backdrop, the company’s large-scale expansion is a high-risk gamble. If demand for new energy vehicles, energy storage, and data center power supplies continues to grow, the company could leverage scale to increase market share; but if industry growth slows, the new capacity could become inventory and depreciation costs.

Technical Path and Governance Issues

Beyond operational uncertainties, regulators also scrutinized the company’s technological innovation positioning. They asked the company to clarify the competitive relationship between ferrite soft magnetic materials, metallic soft magnetic, amorphous, and nanocrystalline technologies, and whether its innovation capabilities support its GEM positioning.

Currently, the company’s core products mainly focus on manganese-zinc ferrite materials. Compared to peers with multi-path layouts, its technical route is relatively single. Additionally, regulators are concerned about the authenticity and accuracy of R&D investment disclosures, requiring sponsors to verify the reasonableness of R&D expenses. Past governance issues are also under review.

The prospectus reveals that the company initially had equity holding arrangements and, in 2022, engaged in transfer loans through suppliers and related parties, providing fund channels for clients. The company states these issues have been rectified and do not constitute major violations. While these may not pose insurmountable obstacles in IPO approval, they leave questions about internal controls and governance standards.

Chunguang Group is clearly not an unestablished enterprise. It has scale advantages in the niche of soft magnetic ferrite powders and is part of the supply chain for growing industries like new energy vehicles, power modules, and data centers. But when approaching the capital markets, the focus shifts from industry position to growth quality and operational structure.

With cash flow pressures, concentrated business models, intensifying industry competition, and large expansion plans, whether this magnetic powder leader can pass GEM review and sustain stable growth post-listing remains to be seen.