US Stock IPO Outlook|Tiancheng Zhilian: Profit Decline in the Construction Logistics Industry Cannot be Hidden, or Expected to Benefit from China's Infrastructure "Going Abroad"

During the era of enormous historical and policy dividends, the cross-border e-commerce and logistics industry has attracted a large amount of capital. According to incomplete statistics from the Xiaosheng Research Institute, from 2008 to April 2024, a total of 197 capital events occurred in the field of cross-border e-commerce logistics, with 30 capital events occurring in 2023. However, from the current market perspective, the cross-border logistics industry is still in a relatively dispersed pattern. With the entry of capital, more and more companies are trying to strengthen their business capabilities and expand their service radius through investment and mergers, and initial public offerings. Tiancheng Zhilian is one of them. On September 5th, the Chinese domestic and cross-border logistics provider Eastern International (hereinafter referred to as Tiancheng Zhilian) submitted an initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to list on NASDAQ with the stock code ELOG, raising up to $7 million. The company plans to issue 1.6 million shares at a price range of $4 to $5 per share. Based on the midpoint of the proposed range, Tiancheng Zhilian's market value will reach $54 million. Tiancheng Zhilian, its subsidiary Suzhou Tiancheng Zhilian Logistics Co., Ltd. (referred to as "Suzhou Tiancheng Zhilian"), formerly known as Suzhou Longlichidongyang Logistics Co., Ltd., was listed on the New Third Board on May 17, 2017, with the stock abbreviation Dongyuan Logistics. It was delisted on February 15, 2023, with a stock price of 2 RMB, and a market value of 98 million RMB. Revenue of about $40 million Difficult to hide profit decline The prospectus shows that Tiancheng Zhilian is headquartered in Hangzhou and provides services including domestic and international transportation, warehousing, urban distribution, and international freight forwarding. The company mainly services the new energy sector (wind turbine, photovoltaic, renewable energy storage, etc.), chemical equipment, and infrastructure construction (including road and bridge, tunnel construction), covering China and Southeast Asia. Currently, the company owns 20 trucks and has established cooperation relationships with other truck owners and drivers, providing domestic long-distance transportation and less-than-truckload services for over 2,000 trucks. The company also has 4 warehouses/logistics centers in three different provinces, with a total area of over 30,000 square meters, providing general and specialized storage, distribution, and value-added services for customers. Since its establishment, the number of Tiancheng Zhilian's high-quality customers has steadily increased, with its main business showing a stable growth trend. The company is committed to establishing long-term cooperative relationships with listed companies, multinational companies, and well-known brands, including Goldwind, CSSC Haizhuang Windpower Co., Ltd., Shanghai Huane, Jiangxi Electric Power Group, Guizhou Electric Power Group, Hydroelectric Fourth Bureau, Trina Solar, JD LOGISTICS, Wuhu Ande Zhilian, Aisen (China), Goodbaby, Marco, China Post, and Longrich, among others. As the number of customers gradually increases, the company's revenue shows a growing trend. In the fiscal years 2023 to 2024 (hereinafter referred to as the reporting period), Tiancheng Zhilian's revenue was $24.16 million and $40.44 million, representing a year-on-year growth of 67.4%. Looking at the business segments, Tiancheng Zhilian's transportation service revenue in the period was $21.085 million and $37.579 million, a year-on-year increase of 78.2%; while the revenue from warehouse leasing services was approximately $3.077 million and $2.865 million, a year-on-year decrease of 6.9%. The reason for the sharp increase in transportation service revenue was the significant increase in orders to 2,947 in 2024, a year-on-year increase of 260%; project logistics revenue reached $23.438 million, a year-on-year increase of 265.3%. In addition, the company's general logistics revenue decreased slightly by 3.6% to $14.14 million year-on-year. In addition to revenue growth, Tiancheng Zhilian's profits have declined. During the period, the company's gross profit margins were 14.4% and 12.4%, a year-on-year decrease of 2 percentage points; the corresponding net profits were $1.19 million and $1.08 million, a year-on-year decrease of 8.9%, highlighting the phenomenon of increasing revenue but not increasing profits. It is worth noting that due to the company's reliance on a few customers, its accounts receivable are high. During the reporting period, two customers accounted for approximately 38% and 58% of total revenue respectively, with corresponding accounts receivable of $37.177 million and $43.596 million. As customer dependence deepens, the company's accounts receivable continue to grow, even leading to negative net cash flows from operating activities of -$0.5 million and -$0.63 million. Multi-billion-dollar market in the engineering project logistics industry Increasingly fierce international competition Driven by the overall development of the logistics industry in China, the engineering project logistics sector is also showing a rapid growth trend. Some professional logistics companies or comprehensive logistics companies in China have entered the project logistics business. The rapid development of the construction industry, including the energy sector, industrial production lines, infrastructure, special safety, traditional chemicals, and alternative energy sectors, especially the wind energy and CECEP Solar Energy sectors in China, has played a positive role in promoting the steady development of the project logistics industry.Enterprises are following the "China Infrastructure" and "Made in China" waves to go global, while helping Chinese companies expand their international market and cultivating and strengthening their own core competitiveness.Tiancheng Zhilian has an earlier international layout and has gradually grown in scale. Since 2019, the company has started to provide cross-border logistics services, mainly focusing on inland transportation and railway transportation between mainland China and Southeast Asian countries, such as bulk commodities, electronic products, tires, new energy equipment, and other machinery. For example, in 2022, the company completed the transportation of 707 40-foot containers, 914 20-foot containers, and 244 open containers of rubber, iron ore, barley, and cassava starch from Laos to China. In addition, Tiancheng Zhilian also provides services to Europe by sending washing machines through the China-Europe Railway Express. According to the prospectus, the funds raised this time will be used for business expansion, strengthening the company's international competitiveness in the engineering logistics industry, to enjoy the increasingly growing market dividends. For example, about 20% will be used for developing project logistics businesses in Southeast Asia; about 20% will be invested in equipment and machinery as well as other capital expenditures; about 10% will be used for developing logistics management systems and internal training for employees to improve management and technical skills; about 10% will be used for potential acquisitions of high-quality logistics teams or companies; about 40% will be used for working capital and other general corporate purposes. In summary, Tiancheng Zhilian is still in a high-growth stage, but the phenomenon of increasing revenue without increasing profit has appeared. In addition, the company's two major customers contribute to nearly sixty percent of revenue, becoming a hidden concern for its healthy development. However, as the international competitiveness of the engineering logistics industry gradually strengthens, the company's advantage of being a pioneer in layout is expected to realize growth dividends.