Interpreting new US stocks | At a time when the amount of fundraising continues to be reduced, the controlling shareholder of Create Global (CGTH.US) plans to cash out.

Creativity Global (CGTH.US) has encountered obvious coldness in its U.S. listing. Since first submitting its public prospectus (F-1 filing) to the SEC on July 19, 2023, Creativity Global has updated its prospectus 13 times within a year, with the continuous shrinking of fundraising indicating that it is not popular among investors. In the initial F-1 filing, Creativity Global stated that it would issue 4-5 million shares of common stock at a price of $4-5 per share, raising a maximum of $20 million. Subsequently, it reduced the number of shares to 2 million, raising a maximum of $10 million. In the recent updates to the prospectus, Creativity Global further reduced the number of shares to 1.25 million, raising a maximum of $6.25 million, nearly a 70% decrease from the initial fundraising goal. In contrast to the continuous reduction in fundraising size, Creativity Global's controlling shareholder will resell 3 million shares of common stock, a clear cashing out behavior. Clearly, after a cold reception to its IPO, Creativity Global's controlling shareholder is eager to cash out. Looking back at Chinese concept stocks that disclosed reselling of shares before listing, their performance after listing has been disappointing. Does this mean that Creativity Global's stock price may be low after listing? By considering the company's fundamentals, perhaps a clearer answer can be obtained. "Dilemma of increasing revenue without increasing profit" in the 2023 financial year Founded in 2016, Creativity Global is an electronic product recycling company from Hong Kong. After several years of accumulation, the company has formed three main business segments - wholesale of used consumer electronic devices, retail of used consumer electronic devices, and device leasing. The wholesale business refers to Creativity Global purchasing and recycling consumer electronic devices (mainly smartphones, tablets, and laptops) from suppliers in the United States, Japan, and other developed countries, and then wholesaling these devices to customers in Southeast Asia and other regions. The retail business involves Creativity Global purchasing popular used electronic products from suppliers, showcasing them on the company's website, where customers can browse and place orders online, targeting end consumers. Device leasing involves Creativity Global publishing information about consumer electronic devices available for rent on its website for end consumers to rent. However, wholesale remains Creativity Global's core business, accounting for 99.8% of its total revenue in the 2023 financial year (12 months ended September 30), with retail revenue accounting for only 0.2% and device leasing just starting to generate revenue. Clearly, the retail and device leasing businesses are still in the early stages of development. In terms of product categories, revenue from the wholesale business mainly comes from smartphones, accounting for 81.8% in the 2023 financial year, followed by laptops and others at 10.9%, and tablets at 7.3%. Revenue from smartphones significantly increased compared to 2022, when it was 45.5%. In terms of performance, Creativity Global's performance is not optimistic. While revenue from smartphones surged 224.11% to $41.10 million and revenue from laptops and others grew 10.99% to $5.52 million in the 2023 financial year, resulting in a total revenue increase of 80.5% to $50.28 million, costs were not effectively controlled. This led to a decrease in gross profit margin to 9.88% in the 2023 financial year, down more than 6 percentage points from 15.97% in the 2022 financial year, affecting gross profit growth to only 11.7% to $4.97 million. Combined with a significant increase in general and administrative expenses of 209.9%, further impacting the company's profitability, Creativity Global's net profit in the 2023 financial year decreased by 7.4% to $3.155 million, with a net profit margin of 6.28%, down from 12.23% in the 2022 financial year, almost halved. In the first half of the 2024 financial year (6 months ended March 31), in order to change the situation of "increasing revenue without increasing profit" in the 2023 financial year, Creativity Global strategically chose higher-profit orders, resulting in a significant decline in revenue from smartphones, dragging down total revenue by 26.3% to $20.53 million. Creativity Global's strategic choice indeed had an effect, with the gross profit margin reaching 13.08% in the first half of 2024, a increase of over 4 percentage points, driving a 0.2% increase in gross profit. However, the significant increase in general and administrative expenses by 91.4% led to a 20.5% decline in net profit to $1.5299 million. However, the net profit margin slightly increased to 7.45%, compared to 6.9% in the same period. Clearly, controlling product costs and operational efficiency are the two key factors affecting Creativity Global's performance. In the first half of the 2024 financial year, although Creativity Global improved profitability by strategically abandoning low-margin orders, its net profit continued to decline due to poor operational efficiency. Behind this, perhaps there are many potential challenges that Creativity Global needs to face. Highly concentrated supplier and customer dependence on a single brand In terms of market competition, the second-hand consumer electronics recycling market in Hong Kong is fiercely competitive and highly fragmented, with approximately 1,000 wholesalers engaged in the purchase, grading, refurbishment, and resale of used consumer electronic devices. In such a competitive environment, the competitive advantage of wholesalers lies in scale and operational efficiency. Scale advantages allow wholesalers to have lower costs, while operational efficiency is crucial to enhancing profitability. Whether Creativity Global can "break through" from such a fiercely competitive market in the future will depend on its competitive strength in these two dimensions. At the same time, excessive dependence on a few suppliers and customers is also a major potential risk facing Creativity Global. According to the prospectus, in the 2022, 2023, and the first half of the 2024 financial year, the purchasing volume from the top five suppliers accounted for 81.2%, 80.1%, and 88.2% respectively, signaling an excessive reliance on a small number of suppliers, which can jeopardize the company's.The acquisition cost of the product is more advantageous, but correspondingly, it will also increase the potential risk of product procurement for the company. If a supplier encounters operational issues, Chuan Zhi Global will also be affected.And in terms of customers, in the fiscal years 2022, 2023, and the first half of 2024, the revenue from the top five customers of Chuang Zhi Global accounted for 75.6%, 41.8%, and 92.9% respectively. The dependence on the top five customers decreased in the fiscal year 2023, but by the first half of the fiscal year 2024, the dependence significantly increased, with the revenue contribution from the largest customer reaching as high as 45.9%, increasing the risk of customer concentration. Furthermore, Chuang Zhi Global's business is overly dependent on products from Apple Inc. In the fiscal year 2024, products from Apple Inc. including iPhone, iPad, MacBook, and Apple Watch contributed to 99.8% of Chuang Zhi Global's revenue. Relying too heavily on a single brand can cause significant disruptions to wholesalers' operations when there are major price fluctuations in the products of the related brand. If there is a disruption in Apple's production or supply chain, or if there are significant product quality issues, it will adversely affect Chuang Zhi Global's business and operational performance. On a positive note, the second-hand recycling market in Hong Kong is still steadily developing. According to Frost & Sullivan, the wholesale value of recycled consumer devices in Hong Kong increased from HK$21.8 billion (approximately US$2.78 billion) in 2017 to HK$34.3 billion (approximately US$4.37 billion) in 2021, with a compound annual growth rate of 12.0%. Benefitting from market growth driven by economic expansion, increasing consumer demand for low-cost goods, and growing acceptance of recycled consumer electronic devices by consumers, Frost & Sullivan predicts that the wholesale value of second-hand electronic devices in Hong Kong will reach HK$55.9 billion by 2026, with a compound annual growth rate of 10.2% from 2022 to 2026. Undoubtedly, Chuang Zhi Global's future development will benefit from the growth of the second-hand recycling market in Hong Kong. However, whether it can establish advantages in scale and operational efficiency remains to be further observed. Although the company has developed retail and leasing businesses, the results are currently minimal. In the future, the company needs to prove its potential in creating new growth curves to enhance its valuation while opening up growth space for the company. Clearly, if Chuang Zhi Global wants to gain favor from investors, it needs to demonstrate more strength.