On September 10, the official website of BSE showed that Guangdong Huixing Jinggong Intelligent Manufacturing Co., Ltd. (referred to as 'Huixing Intelligent Manufacturing'), a supplier of BYD and Liyuanyuan, responded to the third round of inquiries, involving the stability of customers and the risk of performance decline.

In the three inquiries, the regulators focused on the major customer Liyuanyuan. During the reporting period, the first major customer of Huixing Intelligent Manufacturing changed frequently. After Liyuanyuan's 'raid' investment, it became the largest customer, and the two parties had frequent related transactions, as well as the risk of conflicts of interest. In addition, there is a difference of over 20 million yuan in the procurement and sales data between Huixing Intelligent Manufacturing and Liyuanyuan, which has attracted regulatory attention.

The first major customer changed frequently and Liyuanyuan made a sudden investment before the IPO.

Huixing Intelligent Manufacturing was established in 2006, mainly engaged in the development, production, and sales of intelligent conveying logistics systems, system modules, and precision parts in factories. Liyuanyuan (688499.SH) and BYD (002594.SZ) are major customers of the company.

From 2020 to 2023, the performance of Huixing Intelligent Manufacturing has grown significantly. According to the reply to the inquiries, the company's operating income was 0.123 billion yuan, 0.207 billion yuan, 0.366 billion yuan, 0.485 billion yuan, and the net profit was -8.4283 million yuan, 5.3313 million yuan, 29.7746 million yuan, 36.1562 million yuan, respectively. From 2021 to 2023, the revenue growth rates were 67.88%, 76.74%, and 32.49%, and the net profit growth rates were 163.26%, 458.48%, and 21.43%.

In 2022, Huixing Intelligent Manufacturing's performance showed significant growth, mainly related to major customers BYD and Liyuanyuan.

According to the prospectus, in 2020, Huixing Intelligent Manufacturing collaborated with BYD, mainly providing lithium battery production and transportation system modules. In 2021, BYD became the company's largest customer. Huixing Intelligent Manufacturing has been cooperating with Liyuanyuan since 2018, but in July 2022, after signing a strategic cooperation agreement, the sales to Liyuanyuan exceeded BYD, and Liyuanyuan became the largest customer. By 2023, the sales to Liyuanyuan suddenly dropped, and BYD once again became the company's largest customer.

According to the prospectus, from 2021 to 2023, the company's sales to BYD amounted to 14.0584 million yuan, 51.5012 million yuan, and 73.4917 million yuan, accounting for approximately 6.79%, 14.07%, and 46.80% respectively; the sales to Liyuanyuan amounted to 1.7626 million yuan, 96.0047 million yuan, and 50.6544 million yuan, accounting for approximately 0.87%, 26.23%, and 10.31% respectively.

It is reported that Liyuanheng is the total integration solution provider for lithium battery production lines, and Huixingzhizao, as a terminal user of the intelligent conveyor logistics system sold to Liyuanheng, is also a BYD. Therefore, in 2022, Huixingzhizao indirectly sold intelligent conveyor logistics systems to BYD through Liyuanheng.

It is worth noting that in 2022, the gross margin of the intelligent conveyor logistics system sold by Huixingzhizao to Liyuanheng was 25.31%, while the gross margin of the intelligent conveyor logistics system sold directly to BYD was only 17.56%.

The fluctuation of transactions and the difference in gross margin between the three parties have attracted the attention of regulatory authorities, requiring Huixingzhizao to explain whether there are any other arrangements of interest among the parties.

Regarding the changes in sales, Huixingzhizao stated that the company's cooperation model with Liyuanheng is direct sales, while the cooperation model with BYD includes both direct sales and indirect sales through integrators.

Before 2022, BYD entrusted Liyuanheng or other integrators to provide workshop production line construction services and products. After 2022, with BYD's gradual understanding of the content of workshop production line construction work and the accumulation of supplier resources, BYD no longer adopts the overall procurement model, but only purchases related equipment or line body from various suppliers. Therefore, the sales revenue between the company, Liyuanheng, and BYD has undergone such changes.

As for the difference in gross margin for the same product sales in 2022, Huixingzhizao stated that the products sold to Liyuanheng mainly consist of lithium battery production conveyors with complex technology and higher gross profit margins. On the other hand, the products sold to BYD are mainly belt conveyor line products, which have mature technology and intense competition, resulting in lower quoted prices and lower gross margin levels.

In 2022, Liyuanheng made a surprise investment in Huixingzhizao. According to the prospectus, in November 2022, Liyuanheng subscribed to 2.5 million shares of Huixingzhizao at a price of 6.8 yuan per share, with a total investment of 17 million yuan. Currently, Liyuanheng still holds a 3.67% stake.

As of the date of signing the prospectus, the controlling shareholder and actual controller of the company is Zhong Hui, who directly holds 46.16% of the shares. On June 13, 2023, Zhong Hui, along with shareholders Zhong Shixin, Zhong Shuangyan, and Chunnuanhuakai Investment Development Enterprise, signed a "Joint Action Agreement". Therefore, Zhong Hui controls 58.75% of the company's shares.

There is a difference in the recognition of project income, and the high accounts receivable poses a risk to liquidity.

In the three rounds of inquiries, the regulators focused on many questions about the transactions between Huixing Zhizao and Liyuanheng, such as inconsistent disclosure of procurement and sales data and the adjustment of recognition time for multiple projects.

According to the inquiry letter, from 2020 to 2022 and January to June 2023, Huixing Zhizao adjusted the recognition of income for 30 projects across years. Among them, the income adjustment for the "Qinghai longer corridor conveyor line" project with Liyuanheng was changed to 2022, involving a total contract amount of 42.4398 million yuan.

From 2020 to 2022, Huixing Zhizao achieved sales revenue from Liyuanheng of 0.0403 million yuan, 1.7626 million yuan, and 96.0047 million yuan, while Liyuanheng disclosed procurement amounts of 0.1703 million yuan, 26.3915 million yuan, and 70.8473 million yuan in the annual report. There is a difference of -0.13 million yuan, -24.6289 million yuan, and 25.1574 million yuan between the two.

In response to this, Huixing Zhizao stated in the reply to the inquiry letter that it was mainly because Liyuanheng confirmed the purchase of the "Qinghai longer corridor conveyor line project" in 2021, but Huixing Zhizao adjusted the accounting error correction and changed the recognition of revenue to June 2022 after confirming the income in December 2021 based on the abnormal equipment acceptance agreement.

Huixing Zhizao confirmed the revenue based on the acceptance note, and the time difference resulted in inconsistent disclosure of the amount. Huixing Zhizao stated that there is no adjustment of manipulating operating performance by advancing or delaying the recognition of revenue.

The related transactions between Liyuanheng and Huixing Zhizao objectively boosted the company's revenue, but some of the revenue has not yet generated cash inflows to Huixing Zhizao, resulting in a high accounts receivable balance. According to the inquiry letter, from the end of 2020 to the end of each period in 2023, the total amount of accounts receivable, bills receivable, and financing of Huixing Zhizao amounted to 0.043 billion yuan, 0.067 billion yuan, 0.169 billion yuan, and 0.212 billion yuan, respectively. The proportion of accounts receivable to operating income was 34.85%, 32.15%, 46.31%, and 43.8% respectively. As of the first half of 2023, Liyuanheng had the highest accounts receivable of 38.761 million yuan, accounting for 16.77% of the ending balance of accounts receivable.

Huixing Zhizao stated that the use of digital debt certificates (an innovative financing tool that converts accounts receivable into digital debt certificates and records and circulates them on the blockchain) by customers such as Liyuanheng and BYD usually leads to a significant increase in the company's accounts receivable.

The significant growth of accounts receivable further affects the net cash flow from operating activities generated by Huixing Intelligent Manufacturing. From 2020 to 2023, the net cash flow from operating activities generated by the company was -1.2395 million yuan, -1.7454 million yuan, -64.9922 million yuan, and -99.5727 million yuan, indicating that the company faces liquidity risk.

Huixing Intelligent Manufacturing stated that the company's accounts receivable continues to increase. During the reporting period, the company will discount some of the received digital accounts receivable debt instruments to banks for cash flow. However, the company's debt financing capacity is limited, and if it cannot effectively improve the operating cash flow situation in the future, it will face the risk of insufficient working capital.

In this IPO, Huixing Intelligent Manufacturing plans to issue 26.1188 million shares, and plans to use all the raised funds of 0.165 billion yuan for the first phase of the Intelligent Equipment Production Base construction project of Huixing Intelligent Equipment Manufacturing and Expansion.