Investor Web by Wu Wei.

After a few months of suspension, A-share IPOs are gradually returning to normal. However, compared to before, the regulatory authorities have clearly stated that the quality of listed companies must be improved, and enterprises with no long-term return capability cannot be brought into the market. In this context, the market has begun to re-examine the companies that have passed the review but have not completed the registration.

Fuling Technology Co., Ltd. (referred to as 'Fuling shares') is a company that has passed the review for months but has not yet completed the registration. The underwriter of this IPO is Dongxing Securities (601198.SH). It is understood that Fuling shares submitted the application materials early in 2023 and passed the review of the listing committee on December 22 of that year. However, as of today, the company has not yet completed the registration. It should be pointed out that Fuling shares have not updated their financial data since their IPO application was suspended on March 31.

In fact, as early as November 2015, Fuling shares had already been listed overseas on the Nasdaq, but when the company was privatized in 2021, the overall valuation of the enterprise was only USD 3.713 million (about RMB 27 million); this time, with the company's issuance and fundraising plan, Fuling shares will have a market cap of up to RMB 2.6 billion, an increase of about 9 times in just a few years.

In the context of regulatory authorities intending to raise the quality of listed companies, can Fuling shares, which have experienced 18.38% and 11.07% declines in revenue and net profit respectively in the first half of 2023, still successfully issue an IPO?

New wine in old bottles.

The predecessor of Fuling shares was Fuling Co. Ltd., which is currently controlled jointly by Jiang Guilan and her son Hu Qian. The company is mainly engaged in the research and development, production and sale of plastic tableware and biodegradable material tableware for dining. The company's direct or end customers include many well-known domestic and foreign enterprises such as McDonald's, Wendy's, KFC, Tea Box, Meet Fresh and Bawang Tea Lady.

As a successful producer of plastic tableware, Fuling shares had already been pushing for capitalization in 2015. In that same year, Fuling shares began to build a red chip structure and successfully landed on the Nasdaq in November of that year. At the time, the company's IPO price was USD 5 per share, with a market cap of USD 78.52 million (about RMB 570 million) at the time of issuance.

After the company went public, Fuling shares' stock performance was not ideal, so Fuling shares had plans to return to A-shares. On June 20, 2020, Jiang Guilan, on behalf of the founding shareholders, and Huang Qijun signed the 'joint acquisition agreement', agreeing to jointly raise funds to pay the acquisition price and other expenses to the public shareholders of Fuling Global.

In July 2020, Jiang Guilan and Huang Qijun finally privatized Fuling shares at a price of USD 2.35 per share. Calculated based on the then 4.72 million public shares of the company, the shareholders spent a total of USD 11.092 million (about RMB 80 million) to privatize Fuling shares; at this time, the company's overall valuation was only USD 3.713 million (about RMB 27 million).

After privatization, capital increase and equity adjustment, as of the time before the issue, Jiang Guilan and Hu Qian, the actual controllers, together held 85.44% of the shares and voting rights of the company, and Hu Qijun's Gruewind Investment held 14.56% of the shares issued by Fuling before the issue.

It should be pointed out that according to the pre-listing draft disclosure of Fuling shares, in this IPO, Fuling shares are planning to issue no less than 25% of the shares to raise RMB 661 million for project construction and supplementary working capital; according to this calculation, after the issuance, Fuling shares will have a market cap of up to RMB 2.644 billion, an increase of about 8.79 times compared to its valuation of RMB 270 million in 2021 when Fuling shares were privatized. According to the prospectus disclosed on September 27, 2023, if 25% of the shares are issued to raise RMB 1.061 billion in funds, after the issuance, Fuling shares' market cap will reach as high as RMB 4.244 billion.

IPO runs into trouble.

Although the main production base of the company is located in Wenling City, Zhejiang, most of the company's products are sold overseas, with the United States being the most important market. As of the first half of 2023, the US market contributed 67.61% of Fuling shares' revenue.

The products exported by Fuling shares are mainly plastic tableware, such as knives, forks, spoons, cups, lids, straws, take-out boxes and take-out bowls, et cetera. With the gradual increase in people's environmental awareness, the United States, Canada and other major markets of Fuling shares have all formulated policies to limit the use of disposable plastic tableware, and in this context, Fuling shares' income and profits growth have also been affected.

According to Fuling shares' disclosure, thanks to the development of the domestic market, the company's income showed a growth trend from 2019 to 2022, with its income increasing from RMB 1.072 billion in 2019 to RMB 2.154 billion in 2022, more than doubling. However, in the first half of 2023, Fuling shares' sales of plastic tableware decreased by 11.51% compared to the same period in 2022; as a result, the company's revenue and net profit fell by 18.38% and 11.07% respectively year-on-year.

After the decline in sales volume, the production capacity utilization rate of Fuling Co., Ltd. also declined without any significant increase in production capacity. For example, the production capacity of Fuling Co., Ltd.'s cutlery products in the first half of 2023 was 19,600 tons/year, but the company's utilization rate was only 60.46% during the same period, while in 2022, the production capacity of Fuling Co., Ltd.'s cutlery products was 39,100 tons/year, at which time the company's utilization rate was still 86.25%.

In addition, the utilization rate of Fuling Co., Ltd.'s straw-type products also decreased from 68.39% in 2022 to 58.95% in the first half of 2023. Even when Fuling Co., Ltd. expanded its paper product capacity from 6,750 tons/year to 14,000 tons/year, the utilization rate was only as high as 66.1%.

It should be pointed out that in this IPO, Fuling Co., Ltd. plans to raise 421 million yuan for the construction of an annual output of 20,000 tons of recyclable plastic products and 20,000 tons of biodegradable plastic product technological transformation project. Recently, the regulators have clearly stated that they will further promote the improvement of the quality of listed companies, from the "entrance" of listed companies to continuous supervision, and to the "exit", all are establishing stricter institutional arrangements; companies without long-term return capabilities cannot be brought into the market.

In the first half of 2023, when Fuling Co., Ltd.'s production capacity utilization was already unsaturated, will raising funds to build new capacity be able to improve Fuling Co., Ltd.'s return capability?

Pressure on Dividends

After the IPO was suspended for more than three months, the regulators raised their requirements for the companies planning to go public, especially in terms of dividends. On May 15, the China Securities Regulatory Commission issued the "Regulatory Rules Application Guidelines - Issue 10" file, which had a lot of content on what IPO companies need to disclose in terms of dividends.

According to the financial data of Fuling Co., Ltd., the net income of the company exceeded 100 million yuan after 2021, reaching 116 million yuan; while in 2019 and 2020, Fuling Co., Ltd. carried out two profit distributions, with a total net income distribution of 80.38 million yuan. In addition, from 2019 to 2020, Fuling Co., Ltd. also used undistributed profits to increase its share capital by 35 million U.S. dollars (about 252 million yuan). Therefore, Fuling Co., Ltd., which went public on the U.S. stock market in 2015, after multiple years of profitability until the first half of 2023, has an undistributed profit balance of only 397 million yuan on its balance sheet.

Although Fuling Co., Ltd. still has an undistributed profit of 397 million yuan to be distributed to shareholders by the first half of 2023, the company's liquidity position is not good during the same period. As of the first half of 2023, although the asset-liability ratio of Fuling Co., Ltd. is 38.26%, the company's quick ratio is only 0.88 times, which has been below 1 for a long time.

In terms of debt structure, Fuling Co., Ltd.'s main debt is short-term borrowing. As of the first half of 2023, the book balance of the company's short-term borrowing was as high as 204 million yuan, accounting for 44.89% of the company's current liabilities during the same period. In 2019, the book balance of Fuling Co., Ltd.'s short-term borrowing was only 118 million yuan. Under high debt, in 2021 and 2022, Fuling Co., Ltd.'s interest expenses both exceeded 16 million yuan.

To alleviate liquidity pressure, according to the company's prospectus, Fuling Co., Ltd. plans to raise 200 million yuan in this IPO to supplement working capital, accounting for 30% of the total funds raised of 661 million yuan; while in the previous version of the prospectus, Fuling Co., Ltd. planned to raise 600 million yuan to supplement working capital, accounting for nearly 60% of the total funds raised of 1.061 billion yuan.

With declining revenue and profits and a desire for funding, will Fuling Co., Ltd.'s original shareholders see their fortunes rise after the company goes public, while ordinary shareholders are left without returns? (Produced by Thinking Finance) ■