Despite the bumpy IPO road, Rui Chong International Holdings (01334) seems to have caught up with the good time for IPO.

On July 10th, Ruichang International Holdings officially landed on the Main Board of the Hong Kong Stock Exchange, and was exclusively sponsored by First Shanghai Securities. On the trading market, the stock opened at 1.05 Hong Kong dollars, up 23.81% from the issue price, and then strong rally, rose about 48% at one point. At the close, Ruichang International Holdings rose about 14.3%, reporting 1.20 Hong Kong dollars, with a turnover of 50.953 million Hong Kong dollars and a total market value of 0.6 billion Hong Kong dollars.

According to the Zhìtōng Cáijīng APP, during yesterday's dark pool trading session, Ruichang International Holdings started at a low of 1.03 Hong Kong dollars, and the highest price reached 1.35 Hong Kong dollars, ending at 1.19 Hong Kong dollars, with a rise of 13.33%. A profit of 350 Hong Kong dollars per hand without counting the handling fee.

The tactic of reluctant selling with callback played by institutions

The strong performance of Ruichang International Holdings on the first day of listing is related to the tactic of reluctant selling with callback played by institutions.

It is well known that the new stock issuance of Hong Kong stocks is generally divided into international placement and public offering. International placement is mainly aimed at institutional investors, while public offering is for individual investors (retail investors), and public offering is divided into Group A and Group B. Generally, international placement accounts for 90% of the number of shares offered, and public offering accounts for 10%. However, if public offering is too hot and the oversubscription rate is too high, there will be a callback mechanism, which will "callback" some of the shares of international placement to public offering. In other words, institutional investors hand over some chips to retail investors.

Specifically, the callback ratio and oversubscription ratio have a relatively fixed relationship: if the oversubscription ratio of public offering is at least 15 times to 50 times, the proportion of public offering will increase from 10% to 30%. When it reaches at least 50 times to 100 times, it will increase to 40%, and when it is 100 times or more, it will be called back to 50%. But if the placement is not full and the public offering is full, or both the placement and the public offering are full and the public offering subscription is less than 15 times, the proportion of public offering can be increased to a maximum of 20%, but the lower limit price must be defined.

However, these are only normal situations. If the international placement itself is not full, the sponsor has the right not to follow the corresponding rules for callback. For example, if the oversubscription ratio is 50 times, but when the international placement itself is insufficient, the callback ratio can be artificially lowered to 20%. But the price range must be defined.

Lowering the callback rate indicates that the company does not want to send too many chips out, and the lower limit price is conducive to the upward trend of stock price after listing. With the two working together, the stock price is likely to go up after listing.

Going back to Ruichang International Holdings, according to the previous results of distribution, in terms of global distribution, Ruichang International Holdings distributed 0.125 billion shares, accounting for 25% of the total shares issued; three cornerstone investors, including Huangshan Construction under the State-owned Assets Supervision and Administration Commission of Huangshan City, Huangshan Chenghe Xin Ye, and Mr. Zhang Xinyu's Emsdom, subscribed for 55.045 million shares of issued shares, accounting for 44.04% of the shares issued and 11.01% of the total shares after listing. In terms of subscription funds, Ruichang International Holdings raised a total of about 0.131 billion Hong Kong dollars, with a net amount of about 6200 Hong Kong dollars. Among them, the three cornerstone investors accounted for about 57.692 million Hong Kong dollars, and the remaining international placements accounted for about 56.883 million Hong Kong dollars.

According to analysis by the Zhìtōng Cáijīng APP, Ruichang International Holdings seems to have gathered all the prerequisites for the tactic of reluctant selling with callback, such as a difference of nearly 40% between upper and lower limits, market value of about 0.5 billion, 25% of shares issued, PE ratio of 10 and so on.

As expected, the Hong Kong public offering of the company received a subscription of 19.24 times, and the number of shares allocated to the public offering was finally about 15.675 million shares, accounting for about 12.54% of the total shares issued (after the adjustment of the size of the offering and the reallocation). The international offering received a subscription of 0.97 times, and the number of shares allocated to the public offering was finally about 0.109 billion shares, accounting for about 87.46% of the total shares offered (after the adjustment of the size of the offering and the reallocation).

As mentioned above, under normal circumstances, if the public offering oversubscription ratio of Ruichang International Holdings reaches 19.24 times, the proportion of public offering will increase to 30%. However, due to the shortage of international placements, underwriters have the right to not follow the corresponding rules for callback. In this way, Ruichang International Holdings has started the tactic of reluctant selling and only allocated 12.54% of shares.

With such a tactic of reluctant selling and a lower limit price, it is highly likely that the stock price of Ruichang International Holdings will rise after listing.

In addition, the company completed the subscription of Series A preferred shares before IPO, which was completed in May 2021 at a cost of 0.67 Hong Kong dollars per share, implying a post-transaction valuation of 0.252 billion Hong Kong dollars, a discount of 45% from the issue price. As of the closing price on July 10th, Tang Yinsheng, Li Yijun, and Li Hua had all earned twice.

It is worth mentioning that after the distribution results were announced, some investors were not optimistic about the debut of Ruichang International Holdings. However, the company gave investors a return of 30% at the peak of the dark pool, and continued to perform strongly on the first day of listing, bringing substantial returns to investors who held their positions.

Close cooperation with the top three oil giants and healthy cash flow are worth paying attention to.

In the secondary market, Ruichang International Holdings is highly favored. What about its fundamentals?

Public information shows that in 1994, Ruichang International Holdings was established in Luoyang City, mainly engaged in the manufacturing and sales of oil refining and chemical equipment. Its products mainly include four categories of products: catalytic cracking equipment, heat exchangers, process burners, and sulfur recovery equipment and volatile organic compound incineration equipment, belonging to the top companies in the subdivision field of the industry.

According to the Frost Sullivan report, based on earnings in 2023, Richang International Holdings is the third catalytic cracking equipment manufacturer for China's oil refining and chemical operation, with a market share of about 7.6%. In addition, it is also the third sulfur recovery equipment and volatile organic compound incinerator equipment manufacturer for China's oil refining and chemical operation, with a market share of about 3.4%.

As far as performance is concerned, Richang International Holdings has shown an impressive performance. During the period from 2021 to 2023, Richang International's performance grew steadily. The company's revenue increased from 0.248 billion yuan in 2021 to 0.544 billion yuan, with a compound annual growth rate of 48.11% for two years. The corresponding profitability also increased significantly. The net profit increased from 13.246 million yuan in 2021 to 55.211 million yuan, more than three times growth. The adjusted profit margin also increased from 7.4% to 12.5%.

This is closely related to its high cooperation with the three largest oil refining and petrochemical groups in China for many years. According to the prospectus, Richang International has established a strong and stable relationship with the subsidiaries and branches of three largest oil refining and petrochemical groups in China, as well as the largest EPC contractor in the industry, and its business relationship with the five largest customers ranges from 2 to 28 years.

Therefore, it can reasonably be speculated that these three companies are subsidiaries and branches of China National Petroleum Corporation, China Petroleum & Chemical Corporation, and China National Offshore Oil Corporation. In fact, Richang International's IPO plan also has a certain "state-owned color", with two of its three cornerstone investors having state-owned backgrounds.

However, the high concentration of its major customers has led to an increase in the proportion of its trade receivables, which in turn affects its cash flow health. From 2021 to 2023, the revenue from the top five customers accounted for 46.9%, 75.9%, and 73.6% of the revenue, respectively, which is relatively high. At the same time, the company's trade receivables and accounts receivables continued to rise, reaching 0.16 billion yuan, 0.31 billion yuan, and 0.327 billion yuan, respectively, with an average turnover days of trade receivables and accounts receivables of 198 days, 205 days, and 214 days. The difficulty of capital turnover is undoubtedly a challenge for its cash flow.

In fact, the petroleum refining and petrochemical equipment manufacturing industry where Richang International is located requires more funds. It mainly relies on cash generated from operations and external financing (including bank loans and other borrowing) to meet operating capital and capital expenditure needs. Under the huge remittance pressure, coupled with high-cost expenditure, Richang International's operating cash flow before 2021 was mostly negative, and it was not until 2022 that it began to turn positive, with a net cash flow of approximately 6.4 million yuan in 2023.

In the long run, the growth expectations of the company are the core foundation for the sustainable growth of its stock price.

In terms of the industry outlook, with the increasing refining capacity of China's petroleum refining and the rapid development of the petrochemical industry, it is predicted that the market size of China's petroleum refining and petrochemical equipment will increase at a compound annual growth rate of about 6.5% from 2023 to 2028, reaching 979.2 billion yuan in 2028.

In order to obtain growth dividends in the continuous growth track, seizing market share through capacity expansion has become the company's top priority. According to the financial news app Zhitongcaijing, as business scale grows, the capacity shortage of Richang International Holdings is becoming prominent.

Richang International Holdings has two production facilities centers in Luoyang City, one is responsible for producing sulfur recovery equipment, volatile organic compound incineration equipment, and catalytic cracking equipment, and the other is responsible for producing heat exchangers and process burners. As of the end of 2023, the utilization rates of the two production facility centers were 100.9% and 70.1%, respectively. In June 2023, Richang International Holdings leased a production facility in Jiangsu Province, with a utilization rate of more than 100%.

Unfortunately, as of the end of 2023, Richang International Holdings had a cash balance of only 0.046 billion yuan, which was not sufficient to support the investment in capacity expansion projects. Therefore, Richang International Holdings plans to invest 0.099 billion yuan to construct a production facility on its own land in Luoyang City, which is responsible for the production of sulfur recovery equipment, volatile organic compound incineration equipment, and catalytic cracking equipment.

If it can raise funds through listing, increase investment in capacity construction, and improve the company's cash flow health, Richang International Holdings will also enter a new stage of growth.