A New Beginning for Chinese Concept Stocks: First U.S.-bound Project Xin Jun Cashmere IPO Approved

After the implementation of the overseas listing filing system, China has finally welcomed its first US-listed company that has been approved by the China Securities Regulatory Commission (CSRC).

On July 26th, the CSRC official website showed that Majestic Ideal Holdings Limited (referred to as "New Cashmere"), which plans to list on NASDAQ, has been approved through the filing process.

"Within 15 working days after your company completes the overseas issuance and listing, you should report the issuance and listing situation through the CSRC's filing management information system. Your company should strictly comply with relevant laws, regulations, and rules both domestically and overseas during the overseas issuance and listing process," the CSRC pointed out.

As a result, New Cashmere has become the first US IPO company to be approved by the CSRC through the filing process.

The other US-listed companies still in the queue undoubtedly breathed a sigh of relief. As of July 26th, 22 companies (excluding New Cashmere) planning to list in the US are waiting for the CSRC's filing notice.

However, New Cashmere's performance scale is still relatively limited.

For the fiscal years 2021 and 2022, New Cashmere's revenue was 100 million yuan and 115 million yuan, respectively, with net profits of 5 million yuan and 7 million yuan during the same period. (Note: Unless otherwise specified, all figures are in RMB.)

A New Stage for Chinese Concept Stocks

In late March of this year, the CSRC officially implemented a series of supporting policies, including the "Trial Measures for the Issuance and Listing of Securities by Domestic Enterprises Overseas" (referred to as the "Filing New Regulations"), which changed the management of domestic enterprises' overseas listings from administrative licensing to filing management. VIE companies, represented by agreement control, have also been included in the regulation, ending the institutional vacuum they were in.

Companies whose filing procedures have not been approved may encounter obstacles in their overseas listing process, which has attracted attention from the industry.

According to public data compiled by TradeWind01, as of July 20th, a total of 86 companies have submitted applications for overseas listing filing to the CSRC, with 63 companies listing in Hong Kong and 23 companies in the United States.

However, until last night (July 26th), only 14 Chinese companies planning to or already listed on the Hong Kong Stock Exchange have received the CSRC's filing notice. The longest duration was Jiangsu Quansheng Pharmaceutical Co., Ltd., which took 90 days from submitting the filing materials on April 20th to obtaining approval on July 19th.

In terms of practical operations, how Chinese companies planning to list in the US will eventually obtain regulatory filing approval is still being observed.

Now, the CSRC has finally issued the first filing notice to Chinese companies planning to list in the US.

On July 26th, the CSRC official website showed that New Cashmere, which plans to list on NASDAQ, has been approved through the filing process.

"Within 15 working days after your company completes the overseas issuance and listing, you should report the issuance and listing situation through the CSRC's filing management information system. Your company should strictly comply with relevant laws, regulations, and rules both domestically and overseas during the overseas issuance and listing process," the CSRC pointed out.

New Cashmere has thus become the first US-listed company approved by the CSRC through the filing process. This undoubtedly brings a "peace of mind" to Chinese companies that are still waiting for the results of their registration with the China Securities Regulatory Commission (CSRC) in order to be listed on the NASDAQ/New York Stock Exchange.

As of July 26th, a total of 22 companies, including Shanghai Shuban Technology Co., Ltd. and Luo Keshi Technology (Beijing) Co., Ltd., are still waiting for the CSRC's registration notice for their US listing (excluding Xin Junyang Cashmere).

Many industry insiders believe that more companies will be approved for US listing in the future.

"This has dispelled everyone's worries. The registration system has normalized the process of IPOs for US listings. There should be more companies receiving registration notices in the future. It also indicates that the VIE structure, which has been in a regulatory gray area, now has a smooth path to listing in the US. This is of great significance," said an investment banker in Beijing.

Moreover, Xin Junyang Cashmere's US listing also provides more options for domestic companies considering IPOs.

At the beginning of this year, a list of industry restrictions for A-share IPOs, known as the "red-yellow light" list, was widely circulated in the industry. The rumor suggested that industries such as clothing and home furnishings, which belong to the "yellow light" category, may face obstacles in domestic IPOs.

"There is also a 'yellow light industry' that includes clothing, home furnishings, home decoration, and consumer electronics, but it's not a blanket restriction. It seems that large-scale leading companies in these industries can still go public," the rumor said.

As a supply chain company in the clothing industry, Xin Junyang Cashmere mainly produces yarn and garments, which fall under the characteristics of the "yellow light" industry.

Furthermore, Xin Junyang Cashmere's performance is relatively limited. Its revenue for the fiscal years 2021 and 2022 is 100 million yuan and 115 million yuan, respectively, with net profits of 5 million yuan and 7 million yuan during the same period.

From the successful registration of Xin Junyang Cashmere, it can be seen that companies that do not meet the conditions for A-share IPOs still have other capitalization options.

The "Pinduoduo" of Cashmere

Cashmere, known as the "fiber diamond" and "soft gold," is gradually becoming a fashion trend. Domestic cashmere brands such as Erdos (600295.SH) have entered the public's view.

According to data from market research firm Million Insights, the global cashmere clothing market was valued at $2.66 billion in 2018 and is expected to reach $3.5 billion by 2025.

The cashmere clothing industry chain covers various aspects such as raw materials, design, production, and sales.

As a supply chain company, Xin Junyang Cashmere mainly provides one-stop services for apparel companies, including raw material procurement such as yarn, design, and garment production.

In other words, Xin Junyang Cashmere, as an intermediary, does not undertake the manufacturing tasks but provides services based on the needs of various stages. It can offer cost-effective raw material procurement services such as yarn and also provide design services, which are then completed by contract manufacturers. "Our customers are spread across different stages of the clothing supply chain, including brand owners, textile manufacturers, clothing procurement agents, and online fashion and clothing retailers. We provide a full range of services in the clothing supply chain, including market trend analysis, product design and development, raw material procurement, production and quality control, and logistics management," said New Jun Cashmere.

In the industry's view, New Jun Cashmere's core competitiveness lies in its pricing.

"The middlemen make the price difference, and the core competitiveness is actually the price. Because downstream clothing brand companies may have many different products, if the proportion of cashmere is relatively low, it may be more costly to find suppliers specifically for this category," said a supply chain professional in Shenzhen. "So companies like New Jun Cashmere can help middle and downstream companies procure raw materials. Bulk purchases of cashmere products definitely have advantages over small-scale purchases by downstream companies, and they make money from the added procurement costs."

The prospectus shows that New Jun Cashmere mainly adopts a cost-plus pricing strategy based on factors such as the nature of the raw materials, the complexity of the design, and the quotes from third-party suppliers.

From the perspective of revenue structure, New Jun Cashmere does rely more on the raw material procurement business.

In the fiscal year 2021 and 2022, yarn revenue was 89 million yuan and 109 million yuan, accounting for 89% and 94.78% respectively, while the total sales of finished garments during the same period were only 16 million yuan.

The difference in gross profit margin between yarn and finished garments is small. In the fiscal year 2022, the gross profit margin of yarn was 12.40%, which was 1.40 percentage points higher than that of finished garments.

Because of this, New Jun Cashmere's profit margin based on "winning by price" is also relatively limited. In the fiscal year 2022, it was only 6.09%.

Some industry insiders also believe that this is the norm for such companies.

"The profit margin of supply chain companies is generally not too high because they act as intermediaries to negotiate prices with upstream suppliers. If the profit margin and gross profit margin are both high, then it is not normal. This industry mainly relies on scale to win, that is, by expanding the size, it will have stronger bargaining power," said a supply chain professional in Shenzhen to TradeWind01.

However, New Jun Cashmere's performance scale urgently needs to be improved. In the fiscal year 2022, the total revenue and net profit were only 115 million yuan and 7 million yuan respectively.