Recently, the main board of the Shenzhen Stock Exchange will welcome another listed company!

Suda shares have been seeking to list on the GEM since 2019. Their first attempt was unsuccessful, but they subsequently moved to the main board of the Shenzhen Stock Exchange and successfully passed the review. Finally, in May of this year, they obtained registration approval from the China Securities Regulatory Commission.

However, the company's association with Zhengzhou Coal Mining Machinery Group, the independence of its business, and the identification of the actual controller are still hot topics of discussion.

According to Glonhoo, on August 23, Zhengzhou Suda Industrial Machinery Service Co., Ltd. (referred to as "Suda shares") completed the subscription and is about to be listed on the main board of the Shenzhen Stock Exchange. Guosen Securities Co., Ltd. is the sponsoring institution.

Suda shares (001277.SZ) will issue shares at a price of 32 yuan per share, with a total issuance of 19 million shares, accounting for 25% of the total issued share capital after the issuance. The total amount of funds raised is expected to be 0.608 billion yuan; the price-earnings ratio is 15.05 times, lower than the average price-earnings ratio of listed companies in the same industry, which is 21.55 times. Given the recent enthusiasm for new shares, there is a high probability that the stock price will rise on the first day of listing.

01

The ambiguous relationship between Suda shares and Zhengzhou Coal Mining Machinery Group

The predecessor of Suda Corporation is Zhengzhou Coal Mining Machinery Group Speed Up Parts and Service Co., Ltd., which has a deep relationship with the listed company Zhengzhou Coal Mining Machinery Group (601717.SH) since its establishment.

The main founder of the company is Li Xiyuan, born in 1973. Before founding Suda Corporation, Li Xiyuan had accumulated rich technical and operational experience in the machinery service industry.

In 2009, based on his own experience, Li Xiyuan determined that the future of the post-market service sector for coal mining machinery would have broad prospects, so he intended to develop in the coal mining machinery service industry.

At that time, the management of Zhengzhou Coal Mining Machinery Group also had a very bullish view on the future broad prospects of the post-market service sector for coal mining machinery. Therefore, the two parties reached an agreement to establish a new company to jointly explore the post-market service of coal mining machinery.

In order to assist Li Xiyuan in successfully transitioning his rich operational experience in the machinery service industry to the coal mining machinery service industry, Zhengzhou Coal Mining Machinery Group discussed and decided to introduce two employees, Jia Jianguo and Li Yousheng, as founders.

Thus, the initial shareholding structure was formed: Li Xiyuan and Zhengzhou Coal Mining Machinery Group each held 40% of the shares, Jia Jianguo held 15%, and Li Yousheng held 5%.

Since then, there have been multiple capital increases and equity transfers. As of January 2021, when it first went public, Zhengzhou Coal Mining Machinery Group held 29.82% of the shares, which was not far from the largest shareholder Li Xiyuan's 30.09%.

The first listing application of Suda Corporation was eventually rejected by the Listing Committee, and the core reason may be the identification of the controlling shareholder.

Before listing, Jia Jianguo and Li Yousheng held a combined 14.91% of the shares, and their shares played a very critical role in determining the actual controller. Both of them are former employees of Zhengzhou Coal Mining Machinery Group, so logically they should have a closer relationship with the company.

However, the prospectus shows that Jia Jianguo and Li Yousheng have a concerted action relationship with Li Xiyuan, so Li Xiyuan, with higher voting rights, is recognized as the actual controller. The Review Committee has raised a key question about this - "Is it an arrangement to avoid recognizing Zhengzhou Coal Mining Machinery Group as the actual controller or co-actual controller?"

Of course, the Review Committee also raised questions about related party transactions and business independence.

Due to multiple issues, Speedy Stock's initial public offering application was rejected. However, Speedy Stock quickly took action and, with the cooperation of various parties, in December 2021, Zhengzhou Coal Mining Machinery Group transferred 10% of its shares to Yangzhong XCMG to reduce its shareholding in Speedy Stock. However, the transfer price was only 16.63 yuan per share, a 47% discount compared to the initial offering price of 31.32 yuan per share.

Speedy Stock submitted its IPO application again in 2023.

The equity structure before the second offering is sourced from the prospectus.

This time, questions about related party transactions, business independence, and the rationality of Zhengzhou Coal Mining Machinery Group's transfer of shares to Yangzhong XCMG were raised again during the inquiry.

During the reporting period, Suda Corporation's proportion of purchasing and sales to Zhengzhou Coal Mining Machinery Group is not low. In 2023, Suda Corporation's proportion of related sales to Zhengzhou Coal Mining Machinery Group and its subsidiaries accounted for 18.33% of revenue, and its proportion of purchases accounted for 14.18%.

In the review inquiry letter, the regulatory authorities require Suda Corporation to explain whether Zhengzhou Coal Mining Machinery Group has a significant impact on its business acquisition and whether the company has the ability to directly and independently operate in the market.

Suda Corporation replied that it mainly obtains customers through its own efforts and has the ability to independently obtain orders in the market, and it does not constitute a significant dependency on Zhengzhou Coal Mining Machinery Group.

Of course, the company's other major customers include subsidiaries of China National Energy Group (including China Shenhua Energy and Ningxia Coal Group) and Shaanxi Coal Group, large coal production companies. During the reporting period, the total income from the top five customers accounted for more than 60%, of which the company's income from subsidiaries of China National Energy Group accounted for approximately 30%, indicating a high customer concentration.

The regulatory authorities also requested an explanation on the background and rationality of Zhengzhou Coal Mining Machinery Group's transfer of 10% of its equity to Yangzhong Xugong, as well as an explanation of the evaluation process, methods, and conclusions involved in the pricing of the equity transfer; Suda Corporation's response was straightforward.

However, this time, Suda Corporation was lucky enough to obtain a listing.

Based on the initial investment amount, the return on investment of Zhengzhou Coal Mining Machinery Group exceeded 110 times.

02

Facing risks related to the coal industry policies.

Suda Corporation's business is currently focused on the development of hydraulic brackets for comprehensive coal mining equipment, providing comprehensive after-market services to coal production enterprises, including repair and re-manufacturing, spare parts supply management, and used equipment leasing and sales, as well as fluid connections products to machinery equipment manufacturers.

Among them, repair and re-manufacturing and spare parts supply management are the core businesses of the company, accounting for more than 60% of the total.

Company's business structure, sourced from the prospectus

From 2021 to 2023 (referred to as the 'reporting period'), the company achieved operating revenues of 0.822 billion yuan, 1.076 billion yuan, and 12.53 billion yuan, respectively, and achieved net profits of 0.102 billion yuan, 0.105 billion yuan, and 1.62 billion yuan, respectively, during the same period. Overall, they showed a stable upward trend; the company's gross margin was 27.65%, 24.03%, and 27.36%, respectively.

In the most recent reporting period, in the first half of 2024, the company's operating revenue was 0.57 billion yuan, and the net profit was 78.9605 million yuan, with year-on-year growth rates of -4.03% and 16.64%, respectively.

Major financial indicators for the reporting period, sourced from the prospectus.

In terms of industry scale, in 2023, China's coal mining and washing industry's main business revenue reached 3.5 trillion yuan, and the annual expenditure on coal mining comprehensive equipment maintenance and accessories (excluding the second-hand equipment rental market) exceeded 30 billion yuan. Currently, the percentage of self-service in the coal mining machinery aftermarket is as high as 60%, while the proportion of market-oriented maintenance for external parties is only 40%.

However, the post-market service industry for coal mining machinery has numerous competitors, but they all have characteristics such as small scale, limited service areas, and single varieties. Except for Sudatel, there are very few companies that can provide comprehensive aftermarket services for all categories.

At first glance, the industry doesn't seem to have any major issues, but as the midstream of the entire industry chain, the aftermarket service industry for coal mining comprehensive equipment needs to pay particular attention to the operation situation, development trends, and policy orientation of the downstream coal industry.

Since 2013, affected by the overcapacity of the coal industry, China's coal production and prices have been declining continuously. In order to improve the supply-demand pattern and curb the decline in coal prices, the national and local governments have introduced a series of policies to reduce coal production capacity in the coal industry since 2016. With the progress of coal supply-side structural reform, the supply-demand balance in the coal industry has been effectively improved, and the operation situation of the downstream coal industry has gradually begun to improve.

It is worth noting that in October 2021, the State Council issued the "Action Plan for Peak Carbon Emissions by 2030", which will have a significant impact on the coal industry. If the relevant authorities further introduce policies related to energy conservation and emissions reduction in the future, they will further affect the downstream coal industry and thus impact the aftermarket service industry for coal mining comprehensive equipment in which the company operates.

03

Epilogue

Overall, Suda Corporation has been unable to avoid issues such as determining the actual controller, related transactions, and business independence since it first submitted its IPO application in 2019. Now that it is about to go public, although the performance during the reporting period has been relatively stable, it is still necessary to pay attention to the policy trends in the coal industry.