US Stock IPO Preview | China Industrial Technology: Annual Revenue of USD 29.06 million, but facing tight cash flow

Another member joins the "big army" to list in the United States.

On June 20th, Shenzhen-based Zhongjinke Industrial Co., Ltd. (hereinafter referred to as "Zhongjinke Industrial") submitted a registration form to the SEC (U.S. Securities and Exchange Commission) for Nasdaq IPO, with the stock code "ZJK". The company had previously submitted a confidential form to the SEC on September 26, 2023, and received a notice of overseas listing filing from the CSRC on January 24, 2024.

Established in 2011, the company is a precision metal component manufacturing enterprise, mainly engaged in the manufacturing and sales of precision fasteners, structural components, and other precision metal components, such as standard screws, precision screws and nuts, high-strength bolts and nuts, turning and CNC machining parts, and other precision fastener products.

Although its main business revolves around small "screws," Zhongjinke Industrial's products are used in new energy vehicles and smart electronic devices, such as smartphones, smartwatches, drones, and 5G communication base stations in high-tech fields, indicating considerable market potential overall.

So, can Zhongjinke Industrial tell its "screw" story well on the path to listing in the U.S.?

Performance: "Small and Beautiful," Cash Flow Tightening

From a fundamental performance perspective, Zhongjinke Industrial's revenue and net profit are not large in scale, but the overall performance is relatively stable, presenting a "small and beautiful" quality.

Specifically, in terms of revenue, in 2022 and 2023, Zhongjinke Industrial achieved revenues of $24.79 million and $29.06 million, with a year-on-year growth of 17.22%. The company stated in its prospectus that the revenue growth was mainly due to an increase in product sales volume. By slightly reducing the average selling price of rotating parts and screws, the company attracted more customers, leading to a 32.24% and 27.44% increase in sales volume of rotating parts and screws, respectively, resulting in a total revenue increase of $3.67 million.

In terms of profit, in 2022 and 2023, the company achieved gross profits of $9.01 million and $11.02 million, with a year-on-year growth of nearly 22.27%, mainly due to an increase in sales volume of parts and stamping parts; net profits were $7.2788 million and $7.6898 million, with a year-on-year growth of 5.61%.

It is worth mentioning that Zhongjinke Industrial's profit level is also on a stable growth trend: from 2022 to 2023, the company's gross profit margin was 36.36% and 37.93%, with a year-on-year growth of 1.57 percentage points, further confirming the profitability of "screws."

With the momentum of stable growth in revenue and net profit, Zhongjinke Industrial's cash flow has also started to surge.

In 2023, the net cash provided by operating activities of the company was $4.1164 million, compared to only $0.8146 million in the same period of 2022, a year-on-year increase of 405%; cash and cash equivalents increased from $1.5163 million in 2022 to $3.9018 million in 2023, a growth rate of 157% However, it is also worth noting that the company's other long-term debts, bank borrowings, business and financing leases, and related party loans total up to $1.1112 million. For Zhongjinke Industry, which has relatively small overall revenue and cash flow scale, there is indeed some liquidity pressure.

Zhongjinke Industry also openly admitted in its prospectus, "The company is a heavy industry that requires approximately $5 million in capital to build new factories, purchase production equipment, and testing equipment. Since its establishment, the company has mainly relied on its own revenue generation and financing from internal sources. With the continuous development of its business, expansion of production scale, and increase in orders, if there are no external sources of funds, the company may not be able to meet the needs of its own business development plans."

Therefore, it is not difficult to understand the intention of Zhongjinke Industry's listing in the United States for "blood transfusion."

Screws Conceal "Big Market" ≠ Lack of Competitive Pressure

Even small "screws" have a big market.

According to the Securities Times app, precision metal parts are universal in mechanical parts, with characteristics such as high processing accuracy, small dimensional tolerances, high surface finish, high precision, good dimensional stability, fatigue resistance, and anti-attenuation. Fasteners are the most widely used mechanical basic components in various fields and play an important role in industrial production.

At the same time, the application of fasteners is also very extensive, ranging from consumer electronics, automobiles, semiconductors, medical and other civilian fields to aerospace, high-speed trains and railway transportation, industrial robots, and other high-end manufacturing fields. The fields where Zhongjinke Industry's products are applied, such as consumer electronics, new energy vehicles, smart watches, unmanned aerial vehicles, 5G communication base stations, all have considerable market space, which undoubtedly presents significant development opportunities for the company.

For example, 5G base stations. Fasteners and precision metal structural parts are also widely used in antennas, fixtures, brackets, and other components of communication base stations. Since 2019, China has gradually promoted the large-scale application of 5G and the construction of 5G base stations, establishing the world's largest 5G network. By the end of 2023, the total number of 5G base stations in China reached 3.777 million, accounting for nearly one-third of the total number of mobile phone base stations, with an average of 24.5 5G base stations per 10,000 people, an increase of 7.6 from the end of last year.

Or new energy vehicles. Although automotive fasteners account for only 3-5% of the total value of a car, they represent 35-40% of the total quantity of automotive parts and 70% of the total quantity of automotive assemblies. According to the China Association of Automobile Manufacturers, from 2011 to 2022, the sales of new energy vehicles in China increased from 8,000 vehicles to 8.878 million vehicles. By 2023, the production and sales of new energy vehicles in China reached 9.677 million and 9.495 million vehicles respectively, an increase of 35.8% and 37.9% from 2022, with a market share of 31.6% in 2023.

It is not difficult to see the market development space for precision fasteners, with new energy vehicles, 5G communication base stations, and unmanned aerial vehicles being the most popular technological fields in recent years, indicating significant industry development potential However, due to the relatively low entry barriers for screws, nuts, and bolts compared to other high-tech industries, the competition is also very intense.

In its prospectus, Zhongjin Technology Industry pointed out that the domestic and international markets for screws, nuts, bolts, and related products are highly competitive. The company's current or potential competitors include major fastener manufacturers in China and overseas. Some of the company's competitors may have greater brand recognition, larger customer or supplier bases, longer operating histories, and more marketing resources. Compared to these companies, the company is still relatively small in scale with a lower market share. In order to enhance its competitiveness, the company plans to further expand its scale and strengthen its research and development. Additionally, this competitive pressure may have significant and adverse effects on the company's business, financial condition, and operating results.

In addition to intense competition, Zhongjin Technology Industry also suffers from a significant "customer dependency syndrome." According to the prospectus, by the end of 2023, the revenue from the company's two largest customers accounted for 52% and 24% of the total revenue for that period, respectively. The proportion of revenue from these two major customers is relatively high. When a large portion of total revenue is concentrated in a limited number of customers, inherent risks exist. Any changes or reductions in the purchasing patterns of these major customers could lead to greater volatility in the company's business and operating results.

Taking into account factors such as "tight cash flow," "customer dependency syndrome," "intense competitive pressure," and "small market share," it may be difficult to tell a positive story for Zhongjin Technology Industry's "listing in the United States."