Jinyang Co., Ltd. IPO: Difficulties in Large Customer Payments

《Investor Network》 Hou Shuqing

Editor Wu Yue

New energy vehicles are undoubtedly one of the hottest tracks in China’s capital markets in the past two years. A number of star companies have emerged around this industry, and many other businesses along the upstream and downstream of this industrial chain have also joined the IPO rush. Wuxi Jinyang New Materials Co., Ltd. (hereinafter “Jinyang Co.”) is one of them.

Jinyang Co. is mainly engaged in the R&D, production, and sales of battery precision structural components and materials. Its products mainly include battery encapsulation shell housings, safety valves, and nickel-based conductor materials. At present, it has already reached stable cooperation with well-known companies such as LG Chem and BYD (002594).

In 2019, Jinyang Co.’s revenue and net profit saw a certain degree of decline. Jinyang Co. said that performance fluctuations were due to the main customer, Bick Battery, being affected by the withdrawal of new energy vehicle subsidy policies, which led to difficulties in the company’s cash collection and in turn resulted in bad debt. But in the prospectus, the proportion of bad debts included in revenue does not seem to support this explanation.

In September 2020, Jinyang Co. carried out a capital increase at a price of 16.49 yuan per share. After the capital increase, Jinyang Co.’s valuation was 1.02 billion yuan. If this listing succeeds, Jinyang Co.’s valuation would reach 2.63B yuan; however, compared with September 2020, Jinyang Co.’s performance has not shown any breakthrough changes.

“Policy-sensitive” industry

From 2018 to September 2021 (hereinafter the “reporting period”), Jinyang Co. achieved revenue of 608 million yuan, 549 million yuan, 754 million yuan, and 853 million yuan, respectively, while net profit attributable to the parent company was 40.6209 million yuan, -26.7160 million yuan, 68.4315 million yuan, and 112 million yuan, respectively. During the reporting period, Jinyang Co.’s performance fluctuated significantly.

Especially in 2019, Jinyang Co.’s revenue decreased to a certain extent compared with 2018, and net profit turned from profit into loss.

From a business perspective, the battery precision structural component business’s share in each period’s operating revenue has remained at around 60%, making it the company’s main source of revenue. In 2019, sales revenue from this business saw a slight decline: it fell from 387 million yuan in 2018 to 213 million yuan. Meanwhile, sales revenue from another major business, nickel-based conductor materials, continued to grow over the same period.

Based on a more specific analysis of Jinyang Co.’s battery precision structural components business, in 2019, sales revenue of encapsulation shell housings under this business dropped noticeably, from 344 million yuan in 2018 to 271 million yuan. Therefore, it can be concluded that the poor performance of the encapsulation shell housing product was the main reason for Jinyang Co.’s performance decline in 2019.

In its prospectus, Jinyang Co. provided an explanation for the performance decline in 2019, stating that it was affected by factors such as the ramp-down of new energy vehicle subsidy policies, which adversely affected business development and capital turnover of some lithium battery industry customers, including Bick Battery.

Although the above policy changes belong to short-term factors, after 2019, both Jinyang Co.’s operating revenue and net profit exceeded the levels of 2018. But as a new emerging industry, new energy may have always been the “Sword of Damocles” hanging over Jinyang Co.’s head.

Hidden risks in bad debts

In 2018, Bick Battery was Jinyang Co.’s largest customer. In that year, Bick Battery contributed sales revenue of 90.9381 million yuan, accounting for 14.96% of revenue for the period.

However, the business with Bick Battery also brought Jinyang Co. a large amount of accounts receivable. At the end of 2018, accounts receivable from Zhengzhou Bick Battery Co., Ltd. (hereinafter “Zhengzhou Bick”) and Shenzhen Bick Power Battery Co., Ltd. (hereinafter “Shenzhen Bick”) totaled 57.5521 million yuan.

This accounts receivable planted a hidden risk for Jinyang Co.’s 2019 performance. Because Bick Battery’s downstream terminal auto manufacturers had difficulties collecting payments, Bick Battery also began to substantially delay payments to upstream suppliers.

In 2019, Jinyang Co. conducted an impairment test for accounts receivable and individually accrued a bad debt provision of 50.1608 million yuan; Zhengzhou Bick and Shenzhen Bick, together, accrued bad debt provision of 33.57 million yuan.

To reduce risk, in 2019 Jinyang Co. reduced its sales to Bick Battery to 24.3358 million yuan, slightly lower than the 26.1479 million yuan sales of Jinshan Industrial, the fifth-largest customer in that year.

But after the industry warmed again in 2020, Bick Battery became Jinyang Co.’s third-largest customer once more. The sales amount for that year was 46.8577 million yuan.

Although the industry had already turned warmer, the carrying balance of accounts receivable from Bick Battery during that year decreased by less than 2 million yuan compared with 2019—falling from 38.1985 million yuan to 36.6237 million yuan. As of September 30, 2021, this figure exceeded the 40.4924 million yuan at the end of 2018, increasing to 55.5890 million yuan.

However, cooperation between Jinyang Co. and Bick Battery was not reduced as a result. From 2019 to September 2021, the transaction amount between Jinyang Co. and Bick Battery increased from 24.3358 million yuan to 56.8556 million yuan.

Looking back at the cooperation history between Jinyang Co. and Bick Battery, Investor Network found that in 2018, the proportion of bad debt provision in the accounts receivable balance was 7.67%. After it rose to above 20% in 2019, this proportion never decreased again.

If the growing scale of Jinyang Co.’s bad debts was influenced by industry policy changes, then why, after 2019, did Jinyang Co.’s bad debt scale not decrease but instead gradually increase? Against the backdrop that both payment collection difficulty and the size of bad debts were high for Bick Battery, why did Jinyang Co. allow Bick Battery to continue expanding the scale of transactions with the company? These are all questions that Jinyang Co. needs to answer.

Jinyang Co. is not the only “victim.” Bick Battery was once sued by Rongbai Technology because it failed to pay in full and on time nearly 200 million yuan in invoices to Rongbai Technology’s subsidiary, Hubei Rongbai, and also failed to pay overdue default damages.

Significant repayment pressure

During the reporting period, Jinyang Co.’s asset-liability ratios were 56.73%, 56.66%, 50.11%, and 53.86%, respectively. Meanwhile, the asset-liability ratio average values of three companies—Kedali (002850), Lion Rui Electronics, and Zhenyu Technology—were 37.92%, 37.02%, 43.60%, and 45.22%, respectively. During the reporting period, Jinyang Co.’s asset-liability ratios were all higher than the average levels of comparable listed companies.

Jinyang Co. stated that, in order to meet the needs of production and operations, the company had increased bank financing to a certain extent, and the balance of short-term borrowings increased by 42.0091 million yuan compared with the previous period.

Regarding the company’s relatively weaker ability to repay, it said that it is currently still in a period of business expansion and also needs to continuously purchase long-term assets such as fixed assets and projects under construction. These require support from bank loans, which in turn leads to the company’s higher asset-liability ratio, and a lower current ratio and quick ratio.

At the end of the reporting period, Jinyang Co. had total cash and cash equivalents of about 49.01 million yuan, while the balance of current liabilities on the company’s books for the period was as high as 204 million yuan, facing substantial repayment pressure.

For this IPO, Jinyang Co. plans to issue equity of no more than 25%, and plans to raise 658 million yuan for the R&D and manufacturing of high-safety-performance energy-type power battery dedicated materials, the construction of new factory premises, and to supplement working capital raised.

In its prospectus, Jinyang Co. candidly acknowledged that in the past the company lacked financing tools; if the proceeds from this fundraising are in place, the company’s capital strength will be significantly enhanced, which will help the company reduce its asset-liability ratio and improve its ability to repay.(Produced by Think Finance) ■

(Editor-in-charge: Zhou WenKai ）

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