New Stock Preview | Conch Material Technology Second Submission: Leading supplier of cement admixtures, unable to escape the dilemma of "parasitic" mode

In the first half of this year, real estate development investment continued to decline and infrastructure investment growth continued to slow down, dragging down overall demand in the cement market. The cement industry as a whole is characterized by "continuously decreasing demand, low price fluctuations, and continuous losses." Several listed cement companies experienced losses or significant profit declines in the first half of 2024. Facing market difficulties, some industry enterprises are still seeking capital market opportunities against the trend. According to the Hong Kong Stock Exchange disclosure on September 19, Anhui Conch Material Technology Co., Ltd. ("Conch Material Technology") submitted an application for listing on the main board of the Hong Kong Stock Exchange, with China Securities Co., Ltd. as its exclusive sponsor. The company had previously submitted a listing application to the Hong Kong Stock Exchange main board on December 28, 2023. According to Frost & Sullivan data, based on cement admixture sales volume and revenue in the 2023 fiscal year, the company ranked first in China, with market shares of approximately 28.3% and 32.3% respectively (specifically, based on cement grinding aid sales volume and revenue in the 2023 fiscal year, the company ranked first in China with market shares of approximately 34.6% and 34.1%). As the leading supplier of cement admixtures, why did Conch Material Technology face obstacles in its Hong Kong IPO? Industry leaders struggle with profit fluctuations Operating cash flow on a rollercoaster According to the prospectus, Conch Material Technology is a fine chemical material supplier that produces and sells cement admixtures, concrete admixtures, and related upstream raw materials. The company's products mainly include various types of cement admixtures and concrete admixtures, intermediate products in the production of cement admixtures (i.e. alkanolamines), and intermediate products in the production of concrete admixtures (i.e. polyether monomers and polycarboxylic acid mother liquor). With the company's research and development efforts and capabilities, the company also provides technical support related to its products to customers. As of now, Conch Material Technology has 11 production factories at different locations in China with a total construction area of 124,000 square meters. The company, formerly a subsidiary of the Fortune China 500 company Conch Group (ranked 135th in 2024), was established through the acquisitions of Shandong Hongyi, Meishan Conch, and Xiangyang Conch in 2018. Conch Group owns Anhui Conch Cement (00914), the first A+H listed company in the cement industry. From a revenue perspective, most of Conch Material Technology's revenue comes from cement admixtures, with over 90% of revenue coming from cement admixtures and related intermediate products. In fact, the cement industry has not been prosperous in the past two years, with national cement demand continuing to decline in the first half of 2024. National cement production in the first half of the year was 850 million tons, a decrease of 10% year-on-year (comparable caliper), the lowest since the same period in 2011. In terms of prices, the national cement market prices also remained low in the first half of the year, showing an overall trend of "lingering at low levels, fluctuating slightly upwards." Monitoring data from China Cement Network shows that the average transaction price in the national cement market in the first half of the year was 367 yuan/ton, a decrease of 54 yuan/ton compared to the previous year, a decrease of 13%. However, backed by Conch Group and Anhui Conch Cement, Conch Material Technology has maintained a revenue growth trend despite the overall decline in cement sales. From 2021 to the first half of 2024 (hereinafter referred to as the "reporting period"), the company's revenue was 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%. However, the company's net profits during the same period were approximately 127 million yuan, 92 million yuan, 144 million yuan, and 60 million yuan, with significant fluctuations in profitability. From a margin perspective, during the reporting period, the company's gross margins were approximately 22.00%, 19.77%, 19.17%, and 18.95%, showing a clear downward trend; while net profit margins were approximately 8.25%, 5.02%, 6.01%, and 5.46%, with significant decreases. Due to the fluctuation in profitability, the company's operating cash flow has shown a rollercoaster trend. The company's operating cash flow during the reporting period was approximately 290 million yuan, -97.30 million yuan, 187 million yuan, and 44.40 million yuan. The cash and cash equivalents at the end of each period were approximately 214 million yuan, 132 million yuan, 166 million yuan, and 144 million yuan. Over-reliance on related parties "Sequelae" made clear The prospectus shows that Anhui Conch Cement is the company's largest customer each year, and as of the last feasible date, approximately 36.4% of the shares are held by one of its controlling shareholders, Conch Group. Since the second half of 2018, Conch Material Technology has been a supplier of admixture products to Anhui Conch Cement Group, and this business income has increased significantly during the reporting period. In the previous period, a large proportion of the company's revenue came from supplying admixture products to Anhui Conch Cement Group, and regardless of production volume and capacity, Anhui Conch Cement Group itself is one of the largest cement producers in China in 2022. In the 2021 fiscal year, 2022 fiscal year, 2023 fiscal year, and the first half of 2024, the income derived from Anhui Conch Cement accounted for approximately 52.5%, 41.6%, 31.8%, and 30.7% of the total revenue, respectively. The directors believe that in the near future, sales revenue from Anhui Conch Cement Group members will continue to account for a relatively large proportion of the total revenue. If in the future, Anhui Conch Cement Group reduces its procurement of the company's products, it may affect the company's operating performance. Observing the over-reliance on related parties, the "sequelae" of Conch Material Technology are becoming more evident. On the one hand, the company's trade accounts receivable continued to increase significantly, reaching approximately 301 million yuan, 557 million yuan, 756 million yuan, and 787 million yuan during the reporting period, accounting for approximately 19.6%, 30.3%, 31.6%, and 71.4% of total revenue, with the ratio continuously increasing. During the same period, trade accounts receivable.The average turnover days of funds are 68.8 days, 73.0 days, 82.2 days, and 99.7 days respectively, and the turnover days continue to increase. In short, the dilemma of high accounts receivable has led to the company's operational risks and financial costs constantly rising.On the other hand, excessive reliance on related parties also affects the company's ability to expand externally. During the period, the company continued to expand third-party customers at a low price. During the period, the gross profit margin of materials technology sold to related party customers was higher than that sold to third-party customers. During the reporting period, the gross profit margins of sales to related party customers were 32.7%, 36.5%, 42.1%, and 45.4%, respectively; while during the corresponding period, the gross profit margins of sales to third-party customers were 23.1%, 31.7%, 34.0%, and 40.2%. It can be seen that the company's business growth is based on sacrificing product profit margins. Anhui Conch Cement also stated that in order to expand the company's market share of concrete admixtures, the company sold concrete admixtures to third-party customers at a lower price. What materials technology needs to be alert to is that the current cement market sales are in a downturn. From January to June 2024, the national cement production was 850.47 million tons, a year-on-year decrease of 10%, and a decrease of 10.76% in all-caliber comparison, hitting a new low since 2011. Looking to the second half of the year, real estate investment remains draggy, with insufficient infrastructure support. It is expected that the cement demand will improve slightly in the second half of 2024 compared to the first half, but there will still be a significant year-on-year decline. Cement.net predicts that the annual cement production in 2024 will be around 1.83 billion tons, with a year-on-year decline of over 9%. Affected by the downturn in the industry, the company's major customer, Anhui Conch Cement, is not doing well in terms of operations. The company's profits have been declining for several years, from 330 billion yuan in 2021 to 106.9 billion yuan in 2023. Due to its own poor operation, Anhui Conch Cement has stopped increasing its procurement amount from materials technology in recent years. In the past performance period, the revenue generated from sales to Anhui Conch Cement Group was approximately 8.08 billion yuan, 7.65 billion yuan, 7.62 billion yuan, and 3.39 billion yuan, showing an overall downward trend. Therefore, in order to expand new customers, materials technology has to acquire new customers through low-priced means to seek market increments, but the result is a decline in the company's profit margin. Solving the above problems is the top priority for materials technology.