The conch material Technology takes another step towards landing on the Hong Kong stock market.

On December 27th, according to the Hong Kong Stock Exchange's official website, Anhui CONCH Materials Technology Co., Ltd. (referred to as "CONCH Materials Technology") has passed the hearing at the Hong Kong Stock Exchange, with China Securities Co.,Ltd. as its exclusive sponsor. With this, the cement additive supplier that is making a second attempt is one step closer to going public. The company had first submitted its listing application to the Hong Kong Stock Exchange Main Board on December 28, 2023, and submitted its prospectus again on September 19 this year.

It is reported that CONCH Materials Technology is a supplier of fine chemical materials that produces and sells cement additives, concrete additives, and their related upstream raw materials, with major products including cement additives, concrete additives, and their related upstream raw materials.

In terms of market position, based on the sales of cement grinding aids in 2023, the top five market participants in China account for about 49.6%, with the company ranking first and a market share of about 34.6%. Additionally, in terms of sales of cement additives in 2023, the top five market participants in China account for about 41.2%, with the company ranking first in China and a market share of about 28.3%.

Given such market position, what is the true strength of CONCH Materials Technology?

Stable revenue growth VS Debt to asset ratio over 90%.

CONCH Materials Technology originated from the CONCH Group, a Fortune China 500 company, and was subsequently formed through the acquisition of ShanDong Hongyi, Meishan CONCH, and Xiangyang CONCH in 2018. The CONCH Group owns the first A+H listed company in the Cement Industry, CONCH CEMENT (600585.SH, 0914.HK).

Attached to CONCH CEMENT, the business of CONCH Materials Technology is clearly related to the "Cement market conditions."

In recent years, due to the economic downturn in the Real Estate Industry, there has been an overall negative growth trend, and the market size of Cement production in China has also shrunk. From 2019 to 2023, the compound annual growth rate of the market size of Cement production in China was -3.5%. Moreover, the Cement Industry as a whole also shows characteristics of "price fluctuations at low levels and continuous industry losses." According to data monitored by Digital Cement Network, the average Fill Price in the national Cement market in the first half of the year was 367 yuan/ton, down 54 yuan/ton year on year, a decrease of 13%. In addition, in the first half of this year, many listed Cement companies generally reported losses or significant declines in profits.

However, perhaps due to the backing of CONCH CEMENT, even though the sales conditions in the Cement Industry have been sluggish in recent years, the revenue and gross profit of CONCH Materials have shown stable growth.

According to the prospectus, from 2021 to the first half of 2024, the company achieved revenues of 1.538 billion yuan, 1.84 billion yuan, 2.396 billion yuan, and 1.103 billion yuan, with a compound annual growth rate of 24.82%. The gross profits achieved were approximately 0.338 billion, 0.364 billion, 0.459 billion, and 0.209 billion, with a compound annual growth rate of 16.52%.

In contrast to the steadily growing revenue and gross profit, the Net income of CONCH Materials Technology has been more volatile— from 2021 to the first half of 2024, the company achieved Net income of 0.127 billion yuan, 92.4 million yuan, 0.144 billion yuan, and 60.2 million yuan, with a year-on-year decline of 27.56% in 2022, mainly due to increased administrative expenses, rising average loans, and borrowing leading to increased financing costs.

(Data source: CONCH Materials prospectus)

Along with the fluctuations in net income, CONCH CEMENT also experiences instability in cash flow. During the reporting period, the cash flows generated from operations were approximately 0.29 billion yuan, -97.3 million yuan, 0.187 billion yuan, and 44.4 million yuan respectively. At the end of each period, cash and cash equivalents were about 0.214 billion yuan, 0.132 billion yuan, 0.166 billion yuan, and 0.144 billion yuan.

In addition, the debt level of CONCH CEMENT is also concerning. From 2021 to 2023, the net current liabilities recorded by the company were 7.7 million yuan, 0.192 billion yuan, and 16.5 million yuan respectively. It was not until the first half of 2024 that net current assets of 0.117 billion yuan were finally recorded. During the period, the company's asset-liability ratio also remained high, at 134.4%, 170.7%, 99.9%, and 95%.

As can be seen, although CONCH CEMENT has emerged from the industry's downturn and maintained steady revenue growth, the company faces noticeable short-term financial pressure in terms of cash flow and debt levels.

The industry's trend is "weak," potentially suffering from "dependency syndrome" on related parties.

Cement, as an important Building Material, is widely used in the construction of houses, roads, bridges, and other infrastructures. Its Industry Chain also covers various stages such as limestone mining, crushing, grinding, and packaging, which are closely interconnected, forming a complete Industry Chain.

Among them, cement additives mainly refer to the additives added to cement during the production process, including cement grinding aids, flue gas desulfurizers, denitrification agents, coal-saving agents, and raw meal sulfur-fixing agents. Due to decreased demand in the cement market and reduced output, from 2019 to 2023, China's production of cement additives decreased from 1,002.0 thousand tons to 969.3 thousand tons, with a compound annual growth rate of -0.8%. By 2028, China's production of cement additives is expected to rebound to 1,123.5 thousand tons, with a compound annual growth rate of 3.0%.

However, despite the weak trend in the cement additives industry in recent years, CONCH CEMENT continues to follow the right development strategy and achieve "independent" performance.

On one hand, the company's annual/semi-annual capacity of concrete additives expanded due to the commissioning of new production plants, thereby enlarging the company's geographical coverage; on the other hand, relying on strong brand effects, the company established stable relationships with strategic customers, which allowed it to maintain revenue growth even during the economic downturn in the Real Estate sector; in addition, the company adopted competitive pricing strategies, while average prices in the industry remained relatively stable or slightly declined during the past record period.

Indeed, although CONCH CEMENT TECHNOLOGY has experienced positive growth in revenue in recent years, this does not mean the company is free from developmental concerns.

Among these, the most obvious developmental concern is the over-reliance on the related party CONCH CEMENT.

Specifically, during the reporting period, the revenue from the top five customers accounted for approximately 66.8%, 54.3%, 49.7%, and 44.4% of total revenue, respectively, with the largest customer, CONCH Group, accounting for approximately 52.5%, 41.6%, 31.8%, and 30.7%. Additionally, as of the last practicable date, CONCH CEMENT Group is held by one of the controlling shareholders of CONCH CEMENT TECHNOLOGY, CONCH Group, at around 36.4%.

From the above data, it is not difficult to see that this relational tie, while serving as a source of income for CONCH CEMENT TECHNOLOGY to a certain extent, may also bring certain operational risks, such as the risks associated with high reliance on a single customer and issues regarding the fairness of related party transactions.

This point is evidently understood by CONCH CEMENT TECHNOLOGY as well. The company explicitly states in its risk warnings that it faces "credit risk related to trade receivables." According to the prospectus, during the reporting period, the company's trade receivables consistently increased, amounting to approximately 0.301 billion yuan, 0.557 billion yuan, 0.756 billion yuan, and 0.787 billion yuan, accounting for about 19.6%, 30.3%, 31.6%, and 71.4% of total revenue, respectively. At the same time, the average turnover days of trade receivables were 68.8 days, 73.0 days, 82.2 days, and 99.7 days, showing a continuous extension of turnover days. In short, the continually high accounts receivable may exacerbate the company's operational risks and financial costs.

In summary, although CONCH CEMENT TECHNOLOGY is backed by CONCH CEMENT, this does not imply that "leaning against a large tree provides good shade." The shortcomings in operating performance such as "profit volatility" and "debt-to-asset ratio exceeding 90%", along with the concerns regarding the declining trend of the industry in recent years, have increased its IPO "resistance." Therefore, this also means that CONCH CEMENT TECHNOLOGY still needs to present stronger data to demonstrate the development strength of the company as a leading enterprise.