Analysis of U.S. stock IPO: Significant improvement in performance hides "water", outdoor equipment company WXM.US adjusts fundraising amount due to multiple potential operational challenges.

Shanyou HVAC (WXM.US) going public in the US may "encounter cold reception". On November 8, 2023, Shanyou HVAC submitted its initial public offering (IPO) registration statement (F-1 filing) to the SEC for listing on the Nasdaq. Subsequently, on April 11th of this year, Shanyou HVAC updated its IPO registration statement, disclosing the offering range and fundraising scale. At this time, Shanyou HVAC planned to issue 1.6 million shares of common stock at a price range of $4-$4.75 per share, raising up to $7.6 million. However, just two months later, Shanyou HVAC lowered its fundraising amount. In the third update to the registration statement on June 25th, Shanyou HVAC reduced the number of shares to be issued to 1.4 million, while keeping the offering price range unchanged. This means that Shanyou HVAC's IPO fundraising amount will now dip to $6.65 million. Lowering the fundraising amount is often a sign that a company is not well-received by the capital market. However, in terms of performance, Shanyou HVAC has shown a clear upward trend. For the 2023 fiscal year (ending September 30), Shanyou HVAC's revenue was $15.3094 million, a 35.5% increase year-over-year. At the same time, the net profit turned from a loss of $4.222 million in the 2022 fiscal year to a profit of $1.5093 million. Why is Shanyou HVAC lowering its fundraising amount despite significantly improved performance? Is there another secret behind Shanyou HVAC's positive performance? By examining the company's IPO prospectus, we can uncover the truth. The "padding" behind the significant improvement in performance Established in 2009, Shanyou HVAC is mainly engaged in the supply, installation, decoration, and maintenance services of HVAC systems and floor heating systems. By 2017, Shanyou HVAC expanded its business scope to include heating and water purification solutions. Currently, Shanyou HVAC's services include sales, installation, and maintenance of HVAC systems, floor heating systems, and water purification systems. According to the prospectus, Shanyou HVAC's business is mainly concentrated in Sichuan Province, where it provides HVAC system supply, installation, and decoration services to large commercial projects such as office buildings, hotels, manufacturing factories, airports, and hospitals. Projects such as Chengdu Vanke Charm City, Chengdu IFS Square, Chengdu Silver Stone Plaza, Chengdu Metro Line 10, and Panzhihua Golden Sea Hotel have all used products and services from Shanyou HVAC. Currently, Shanyou HVAC mainly focuses on providing services to commercial real estate development clients who provide high-end fully furnished residences. In terms of performance, Shanyou HVAC's 2023 fiscal year revenue growth of 35.3% was mainly driven by a 27.5% increase in project revenue to $8.7928 million and a 47.6% increase in product revenue to $6.1506 million. Specifically, the growth in project revenue was mainly attributed to the elimination of the impact of the epidemic, which led to the normalization of economic activities and the implementation of building delivery policies, resulting in an increase in the number and scale of projects during the reporting period. The growth in product revenue was mainly due to Shanyou HVAC's cooperation with customers outside the real estate industry to supply HVAC systems for new manufacturing plants, thereby increasing product sales revenue. In terms of gross margin, Shanyou HVAC's gross margin for the 2023 fiscal year was 20.2%, a significant improvement from 12.5% in the 2022 fiscal year, mainly due to a substantial increase in project business gross margin. According to the prospectus, the gross margin of the project business rose from 9.9% in the 2022 fiscal year to 24.5%. The significant increase in the gross margin of the project business is mainly attributed to three factors: first, some real estate customers experienced liquidity issues, leading to uncertainty in collecting contract payments. As a result, the company fully recognized costs in the 2022 fiscal year, resulting in project losses, but after receiving contract payments in the 2023 fiscal year, they were recognized as revenue, leading to an increase in profitability for the period due to the front-loading of costs. Secondly, in the settlement negotiations in 2023, a supplier agreed to reduce the purchase price of equipment and materials throughout the project period, leading to a significant reduction in actual costs. Thirdly, there was an increase in the number of contracts with high gross margins. Looking at the reasons behind the significant increase in the gross margin of the project business, there is no obvious sustainability. This is mainly due to the front-loading of costs and a supplier reducing the purchase price for individual projects. It is worth noting that the gross margin of the product business decreased from 16.6% in the 2022 fiscal year to 14.7% in the 2023 fiscal year due to Shanyou HVAC reducing contract prices to expand its customer base in the industrial sector. Similarly, the gross margin of the service business also decreased from 16.2% in the 2022 fiscal year to 7.9% in the 2023 fiscal year, mainly because Shanyou HVAC reduced contract prices with some budget-constrained customers. Therefore, the gross margin of Shanyou HVAC in the 2023 fiscal year does not truly reflect its profit level. Thanks to the growth in revenue and the improvement in gross margin, Shanyou HVAC's gross profit in the 2023 fiscal year increased by 117.9% to $3.0877 million. Coupled with the company's reduction in operating expenses, general and administrative expenses were significantly reduced by 30%, Shanyou HVAC was able to turnaround its loss into a profit of $1.5093 million in the 2023 fiscal year. It can be seen that behind the significant improvement in Shanyou HVAC's performance in the 2023 fiscal year, there is actually some "padding". This is the result of the low base caused by the impact of the epidemic in the 2022 fiscal year, the abnormally high gross margin, and the significant reduction in operating expenses, and the future development of Shanyou HVAC still faces challenges. Short-term market demand may be difficult to stabilize It is well known that products such as HVAC, floor heating, and water purification systems are highly related to the real estate industry. However, the current real estate industry is still in a period of adjustment. According to data from the National Bureau of Statistics, in the first half of 2024, China's real estate development investment amounted to 5.2529 trillion yuan, a year-on-year decrease of 10.1% (calculated on a comparable basis); of which, residential investment was 3.9883 trillion yuan, a decrease of 10.4%. Real estate development enterprises' construction area of houses was 696.818 million square meters, a year-on-year decrease of 12.0%, with residential construction area decreasing by 12.5%. From another perspective, in the first half of 2024, the sales area of new commercial housing in China was 4.7916 billion square meters, a year-on-year decrease of 19.0%, with residential sales area decreasing by 21.9%. The decrease in the sales area of new commercial housing was mainly due to multiple factors such as a decline in demand, tightened financing, and regulatory measures, which led to a decline in housing completion and sales. In conclusion, Shanyou HVAC's performance improvement in the 2023 fiscal year has a certain degree of "padding", which is the result of a low base caused by the impact of the epidemic, abnormally high gross margin, and substantial reduction in operating expenses in the 2022 fiscal year. The future development of Shanyou HVAC still faces challenges, as the short-term market demand may be difficult to stabilize in the current real estate market environment.The total sales volume was 471.33 billion Yuan, a decrease of 25.0%, with residential sales down by 26.9%.From the above data, it is not difficult to see that the current real estate market is still in a relatively sluggish phase. Although many relevant policies encouraging the development of the real estate industry have been introduced, there is currently no clear feedback on the data. This means that before the real estate industry warms up, businesses like Shanyou HVAC that are highly linked to the real estate industry may continue to face pressure. In fact, Shanyou HVAC has made various adjustments to cope with the impact of the sluggish real estate industry on company operations. Firstly, the company has focused its business on high-end residences that are less affected by the industry, and secondly, it has expanded into commercial real estate and industrial projects outside of residential properties. However, Shanyou HVAC still derives a significant portion of its income from the real estate business. According to the prospectus, in the fiscal years 2022 and 2023, the revenue from the installation services of HVAC systems in real estate development projects accounted for 55% and 50% respectively, which is still at a high level. It is worth noting that expanding into other areas may result in a decrease in profitability. For example, in the fiscal year 2023, Shanyou HVAC signed low-priced contracts with industrial clients, leading to a decrease in the gross profit margin of the product business. The key to Shanyou HVAC's future growth lies in whether it can achieve accelerated expansion into other non-real estate sectors. Furthermore, Shanyou HVAC's heavy reliance on a few major customers poses significant risks to its business operations and financial performance. In the fiscal years ending on September 30, 2023 and September 30, 2022, the top three customers of Shanyou HVAC accounted for 49.2% and 74.7% of the company's total revenue, respectively. Although the revenue share of the top three customers in fiscal year 2023 has significantly decreased, it still remains at a high level. If these major customers are lost, it will have a significant impact on Shanyou HVAC's performance. Additionally, the HVAC industry is a fiercely competitive market with a high degree of dispersion and numerous players. If market competition intensifies, it may impact Shanyou HVAC's market share and profitability. In conclusion, the significant improvement in Shanyou HVAC's performance does not reflect its true profitability level. The company's future development still faces challenges such as low industry demand, intense competition, over-reliance on certain customers, and significant operational uncertainties. Therefore, even if the company's performance greatly improves, a lower fundraising amount is not difficult to understand.