Interpreting new stocks in the US stock market | With an annual revenue of nearly 4 billion RMB and a gross margin of only 0.6%, it is difficult for the performance growth of Netsun Tech (NPT.US) to achieve a high valuation.

After the steel industry's one-stop B2B integrated service provider Zhaogang Network launched its Hong Kong listing in 2023, Netplast Technology, a one-stop B2B supply chain management platform for the plastic and chemical industry, recently began its journey to listing in the US. It was learned that on August 14, Netplast Technology submitted its public version of the prospectus (F-1 document) to the SEC for the first time, applying to list on the Nasdaq under the code "NPT" and planning to raise up to $17 million. However, the specific number of shares issued and price range have not been disclosed. It is worth noting that as early as March 26, 2024, Netplast Technology submitted a confidential application to the SEC. According to the prospectus, Netplast Technology is a leading supply chain management service provider in the eastern region of China, providing one-stop services including procurement, shipping and logistics, payments, and fulfillment for customers in the Chinese plastics and chemical industry. Netplast Technology is committed to becoming the largest one-stop supply chain management platform for plastic and chemical raw materials in China. In terms of performance, Netplast Technology has achieved rapid growth in the past one to two years. In the 2022 and 2023 fiscal years (12 months ended June 30), Netplast Technology's revenue was $489 million and $553 million respectively, with net profits of -$602,300 and $2.088 million during the same period, successfully turning losses into profits. As of the first half of the 2024 fiscal year (6 months ended December 31, 2023), Netplast Technology's revenue was $325 million, a year-on-year increase of 68.6%, and net profit was $3.3238 million, a year-on-year increase of 443.6%, accelerating growth further. In the current macroeconomic weakness, how can Netplast Technology continue to accelerate its growth? With its impressive performance, can Netplast Technology capture the hearts of Wall Street? The prospectus of the company can reveal the answers. 1964 suppliers provide over 3424 SKUs Domestic small and medium-sized enterprises often face pain points such as unstable supply chains, price and quality fluctuations, and complex processes when purchasing plastic and chemical products. In order to make procurement more reliable and efficient for enterprises, Netplast Technology has built a one-stop plastic and chemical raw material supply chain management platform and provides customers with one-stop solution services. Customers can access Netplast Technology's supply chain platform through the official website, app, and mini program. On this platform, Netplast Technology provides services including product search and matching, product recommendations, marketing and promotion, order management, ordering and payment, delivery, and the entire process. At the time of product delivery, customers can choose from various modes such as direct shipment from suppliers, platform shipment, or customer pick-up. After years of accumulation, Netplast Technology's one-stop supply chain management platform has established a thriving ecosystem. Specifically, the platform sells three categories of products, namely basic chemicals, plastic pellets, and other products including black metals and cotton. As of December 31, 2023, the three categories cover a total of 3424 SKUs, provided by approximately 1964 suppliers. In terms of customer numbers, as of December 31, 2023, the number of registered customers on Netplast Technology's platform reached approximately 2823. These customers are mainly small and medium-sized enterprises operating in fields such as consumer electronics, IoT, automotive electronics, and industrial control in China. Currently, Netplast Technology's customers are spread across 20 provinces in China, with key customers mainly located in Shandong, Henan, Zhejiang, Guangdong, and Shanghai. The company plans to expand its business to a wider geographic area to cover more provinces. From a business model perspective, Netplast Technology is not a matching trading platform. Instead, it purchases products from suppliers, including manufacturers or distributors, and then sells them to customers. Therefore, Netplast Technology actually plays the role of a distributor, collecting product requirements from small and medium-sized enterprises through the platform, and then purchasing from suppliers in bulk, which is more cost-effective than individual procurement by small and medium-sized enterprises. After centrally purchasing the products, they are sold to small and medium-sized enterprise customers. Increased downstream demand drives performance growth Analysis of Netplast Technology's prospectus reveals that its recent continuous growth is directly related to the recovery of downstream demand. In the 2023 fiscal year, Netplast Technology's revenue increased by 12.9% to $553 million, mainly due to a significant increase in revenue from basic chemical products and other products. Specifically, during the reporting period, the end of the pandemic impact led to a recovery in national production and operations, driving a 71.7% increase in sales volume of basic chemical products to 352,200 tons in the 2023 fiscal year. Although the average selling price of basic chemical products decreased by 22.9% due to the impact of product mix, the significant increase in sales volume during the period still drove a 32.5% increase in revenue from basic chemical products. Revenue from other products increased significantly by 507.6% to $32.031 million, mainly due to a significant increase in sales of steel and cotton, which led to the proportion of revenue from other products rising from 1.1% to 5.8% of total revenue. It is evident that Netplast Technology is opening a new growth curve beyond chemicals and plastics. However, revenue from plastic pellets decreased by 55.5% due to a simultaneous decline in sales volume and price, dragging down overall revenue growth. Meanwhile, in the 2023 fiscal year, Netplast Technology's gross profit margin increased by 0.1 percentage points to 0.6%, and the company increased cost-cutting efforts to reduce total operating expenses by 42.2%. With the combined effect of multiple factors, Netplast Technology turned a profit in the 2023 fiscal year, recording a net profit of $2.0877 million, a significant increase of 446.6% year-on-year. In the first half of the 2024 fiscal year, the recovery of downstream demand became a key factor driving Netplast Technology's accelerated growth. During the reporting period, Netplast Technology's revenue surged by 68.6% to $325 million. Specifically, revenue from basic chemicals increased by 42.9%, revenue from plastic pellets increased by 204.6%, and revenue from other products skyrocketed by 31521.8% to $11.071 million. In summary, the report indicates that Netplast Technology's continuous growth, fueled by the recovery of downstream demand, has led to significant increases in revenue and profit in recent years.The growth in revenue of basic chemicals is mainly due to a 40% increase in sales volume to 447,000 tons, while the selling price per ton increased by 2.3% to $539. The increase in revenue of plastic pellets is attributed to a 239.8% surge in sales volume to 205,000 tons, despite a 10.3% decrease in average selling price, mainly due to lower raw material costs. The explosive growth in sales revenue of other products is mainly due to a low base in the same period, as well as Wensu Technology's continued expansion in its business scale in metals and cotton.While the income increased significantly, the gross profit margin of Wangsu Technology in the first half of the 2024 fiscal year remained stable at 0.68%, resulting in a 69.2% increase in gross profit to $2.2217 million, consistent with the revenue growth. However, due to the expansion of business scale, total operating expenses increased by 81.9%, leading to a decrease in the growth rate of operating income to 39%. The significant increase in net profit during the period was mainly due to a large amount of government subsidies under other income items. If the one-time non-operating factor of government subsidies is excluded, the net profit of Wangsu Technology in the reporting period increased by approximately 40%. Extending upstream integration is also difficult to obtain high valuation From the industry perspective, the plastics and chemical industry is a stable growth track in the long term. The downstream applications of both industries are extremely diverse, including various fields such as construction, packaging, transportation, electronics, medical, automotive, daily necessities, energy, agriculture, etc. The market demand will continue to increase with economic development, and the support of related policies also provides strong guarantee for the development of these two industries. In 2023, the Ministry of Industry and Information Technology and other seven departments jointly issued a notice on the "Chemical Industry Steady Growth Work Plan", aiming to ensure the stable growth of the chemical industry, with the target of an annual average growth rate of industry added value of about 5%. At the same time, the "Expansion of Domestic Demand Strategic Planning Outline (2022-2035)" and the equipment renewal policy with higher-than-expected promotion intensity this year will drive the growth of chemical and plastic demand. According to data from Sublime China Information, from 2023 to 2027, the demand for key plastics and chemical products in China is expected to continue to grow at an annual average rate of 10%, providing important development opportunities for the supply chain management industry, from which Wangsu Technology will also benefit. The operating model of Wangsu Technology is already very clear, which is to gather the demand of a large number of small and medium-sized enterprises for centralized procurement. Due to the method of matching supply with demand, it can achieve a higher efficiency turnover speed. Therefore, the key to the continuous growth of Wangsu Technology lies in continuously increasing the number of small and medium-sized enterprise customers, which can enhance the economies of scale. After accumulating a large number of users on the platform, Wangsu Technology has started to extend upstream. According to the prospectus, in April 2022, Wangsu Technology signed an agreement with the government of Taiqian County, Henan Province, for a 600,000-ton polystyrene and solid plasticization storage project, aiming to build a manufacturing plant in Taiqian with an annual output of 600,000 tons of polystyrene, at least 50,000 square meters of solid plasticization storage facilities, and supporting infrastructure including a 500-meter railway line. By now, most of the structural construction and on-site assembly of large equipment for the polystyrene plant has been completed, and Wangsu Technology expects to start production in the second half of 2024. The commissioning of this plant means that the integrated layout of Wangsu Technology has begun to show results, and the company's product prices are expected to become more competitive. However, the potential operational challenges facing Wangsu Technology are also very obvious. Firstly, Wangsu Technology plays a role more towards distributors in its ecosystem, so its profitability level is relatively low. In the first half of the 2023 fiscal year and the first half of the 2024 fiscal year, Wangsu Technology's gross profit margins were 0.6% and 0.68% respectively, less than 1%; and the net profit margin in the 2023 fiscal year was 0.38%, indicating that the profitability level is still fluctuating around the breakeven point. Secondly, the plastics and chemical industry is a very competitive market, with many competitors offering similar services to Wangsu Technology, including Polystyrene Hall, Xiangyu Group, Shanghai Sumi Information, etc. If industry competition intensifies, it may have an impact on Wangsu Technology's business operations. Furthermore, the concentration of Wangsu Technology's customers is trending upwards. In the first half of the 2024 fiscal year, the largest customer accounted for 16.2% of the company's total revenue, and the revenue share of the top ten customers increased from 43.9% to 48.1% during the period. The increasing concentration of customers brings potential operational risks. If the demand of large customers declines, it may affect the performance of Wangsu Technology. Most importantly, in terms of business models and profitability levels, the value of Wangsu Technology in the secondary market may be assessed as a distributor. Even though the company's construction of a factory to extend upstream has to some extent enhanced the market competitiveness and profitability levels of its products, it is difficult to change the overall valuation logic of Wangsu Technology, which does not fit the valuation model of internet companies. Therefore, the possibility of Wangsu Technology obtaining a high valuation is relatively low.