Jinsheng New Materials files for a ChiNext IPO

Two years after an unsuccessful main-board IPO, Zhejiang Jinsheng New Materials Co., Ltd. has cut its fundraising target and turned to ChiNext.

This time the company dropped a planned RMB 25.22 million R&D centre project and reduced the total raise from RMB 328 million to 293 million, a cut of 10.7%.

According to the Changjiang Business Daily, profitability has fluctuated widely in recent years, which may be the biggest obstacle to the IPO: from 2015 to 2018 net profit attributable to shareholders grew -8.5%, 132.94%, -18.65% and 24.82% year on year, alternating between growth and decline.

Overseas sales accounted for more than 60% of revenue in each reporting period, mostly settled in US dollars, so exchange-rate movements affect results.

The company also faces concentration risk among suppliers and customers: the top five customers accounted for around 50% of sales and the top five suppliers for more than 40% of purchases.

Jinsheng designs, makes and sells plastic packaging containers for cosmetics. Founders Ruan Rongtao and Gao Lijun directly hold 30.82% and, through Jinsheng Investment, a further 7%, together controlling 46.82% and acting as controlling shareholders; three concert parties each hold 3%. Investors Shanghai Liyi and Shanghai Kefeng hold 25% and 7.84%, and individual Hong Yu 8.29%.

Across the two prospectuses, revenue from 2014 to 2018 was RMB 235, 258, 289, 300 and 360 million, with net profit of RMB 24.73, 22.62, 52.70, 42.87 and 53.51 million; overall growth over the period was 53.7% and 116.36%. In the first half of 2019 revenue was RMB 171 million and net profit RMB 32.06 million, 47.54% and 59.92% of the previous full year.

The product mix is narrow: cream jars and lotion bottles accounted for 90.67%, 90.23%, 89.55% and 91.8% of main-business revenue from 2016 to the first half of 2019. Gross margin ranged from 31.28% to 37.54% over the same period, and operating cash flow swung between RMB 35.07 and 65.00 million.

With exports above 60% of sales, exchange rates matter. Overseas revenue from 2016 to the first half of 2019 was RMB 181, 175, 203 and 109 million, or 62.46%, 58.45%, 56.62% and 64.25% of main-business revenue. The dollar strengthened in 2016 and 2018, producing exchange gains; the renminbi appreciated in 2017, producing a large loss; in the first half of 2019 the rate first fell then rose, with a small loss.

Foreign exchange results from 2016 to the first half of 2019 were RMB -2.74, 2.79, -1.42 and 0.08 million, equal to 1059.88%, 78.32%, 154.13% and -35.16% of financial expenses. Besides lower investment income and raw material volatility, the larger 2017 exchange loss explains why revenue rose while profit did not.

Major customers include well-known overseas cosmetics companies: the top five accounted for RMB 159, 149, 173 and 91 million, or 55.01%, 49.58%, 47.99% and 53.22% of sales, including Estée Lauder, APR Packaging Inc. and APC Packaging LLC. Because leading brands are concentrated and apply strict supplier qualification, volumes usually grow once a supplier is approved — common practice in the industry.

Suppliers are concentrated too: purchases from the top five were RMB 49.36, 67.88, 82.66 and 31.50 million, or 40.48%, 48.02%, 46.57% and 50.49%.