Preview of US stock market new stocks | With the rapid development of the machine vision industry, can Sorwell, whose gross profit margin is declining, rely on the "favorable wind"?

Since the release of ChatGPT in 2022, generative artificial intelligence (AIGC) and large language models (LLM) have made significant breakthroughs, once again sparking a hot trend in AI deployment globally. The concept of "AI+" as an extension of professional applications of artificial intelligence into different industries has become a catalyst for new technologies, models, and ecosystems, bringing broader market opportunities to the industry. The industry is experiencing a hot trend in deployment, and related AI+ companies are becoming more active in the secondary market. On December 26th, China-based machine vision product and solution provider SureWill announced the terms of its initial public offering (IPO) on the US stock market. The company, headquartered in Shenzhen, China, plans to issue 2 million shares at a price of $4 to $5 per share, raising approximately $9 million. Based on the midpoint of the proposed price range, SureWill's market value will reach approximately $234 million. On May 10th of this year, the company first submitted a public version of its prospectus to the SEC, and then updated the prospectus on September 4th and October 8th, continuously pushing the company's journey to go public in the US. Now, with the terms of its initial public offering, SureWill is clearly one step closer to entering the secondary market. With the AI trend in full swing, can SureWill seize the opportunity to achieve a high valuation in the US stock market and drive up its stock price? Revenue and net profit both increased significantly, while the gross profit margin continued to decline Since its founding in 2007, SureWill has been deeply involved in the field of machine vision for seventeen years, accumulating core technologies such as image information collection, analysis, processing and recognition, AI behavior recognition, machine vision industrial automation, license plate recognition systems, facial recognition, and video analysis. From the product structure perspective, SureWill can provide customers with four major product categories: industrial machine vision, artificial intelligence (facial recognition and AI behavior analysis), electronic customs clearance, and intelligent traffic. The solutions made through these products can cover multiple scenarios such as smart industry, intelligent traffic, government offices and schools, ports and docks, and smart communities. In recent years, riding the wave of the AI trend, SureWill has developed rapidly, with its performance showing strong growth. According to the prospectus data, the company's revenue for the fiscal year 2022 (12 months ended March 31), fiscal year 2023, and fiscal year 2024 was $0.9493 million, $13.0706 million, and $36.5987 million respectively, showing a significant increase in revenue. The net profit for the same period was -$0.3911 million, $1.61 million, and $2.8178 million, achieving a substantial growth after turning losses into profits. From the above financial data, the performance of the company in fiscal year 2024 is particularly impressive, with electronic product revenue increasing by 195%, software product revenue increasing by 211%, and both businesses working together to drive total revenue up by 180%. This has also led to a 75% increase in net profit during the period. However, it is worth noting that while revenue and net profit are showing strong growth, the gross profit margin of SureWill has been continuously declining. The gross profit margin for fiscal years 2022 to 2024 was 50%, 26%, and 24% respectively. SureWill stated that the decline in gross profit margin was due to the continuous increase in the proportion of revenue from electronic products with relatively low gross margins. Due to the decline in gross profit margin and the increase in the proportion of total operating expenses, the net profit margin of SureWill in fiscal year 2024 fell to 8%, a decrease of 4 percentage points compared to fiscal year 2023. This is also the main reason for the significantly lower net profit growth rate compared to the revenue growth rate. It is worth noting that in fiscal year 2024 (12 months ended March 31), the company's selling expenses were $323,000, an increase of 28% year-on-year, general administrative expenses were $2.3699 million, an increase of 189% year-on-year, and research and development expenses were $2.2861 million, an increase of 408% year-on-year. It is easy to see that with the significant increase in operating expenses, the company's gross profit margin has also been eroded to a certain extent. Furthermore, with the decline in gross profit margin, SureWill's operating funds are in a tight state. In fiscal year 2024, the company had only $206,200 in cash and cash equivalents, and in fiscal years 2023 and 2024, the net cash flows from operating activities were negative, with outflows of $1.9042 million and $1.4292 million respectively. Based on the above, it is clear that while SureWill is riding the wave of AI, with its core financial indicators of revenue and net profit showing strong growth, the tight cash flow situation and declining gross profit margin levels indicate the current operational pressure facing the company. Despite rapid industry development, three major concerns still linger Machine vision represents a dynamically developing branch of artificial intelligence. China's AI industry encompasses a wide range of components, including AI application software, hardware, and related services. This comprehensive landscape also includes AI chips, commercial intelligence Siasun Robot & Automation, basic artificial intelligence data services, AI-focused data governance, machine vision, intelligent speech, human-computer interaction, machine learning, knowledge graphs, and natural language processing. In 2022, this industry experienced significant growth, with a scale of $195.8 billion. The compound annual growth rate from 2016 to 2022 was 7.8%. Currently, a large number of leading Chinese technology companies are actively deploying and implementing AI initiatives. It is expected that by 2025, the artificial intelligence industry in China will reach an astonishing scale of $396.2 billion. Looking at the machine vision market in detail, according to a report by Moore, the vibrant development of the logistics warehousing and emerging new energy industries in China has stimulated the increase in demand for visual inspection products, leading to a significant increase in demand for visual inspection products. From 2021 to 2023, the revenue growth rates in the machine vision market were 46.79%, 22.23%, and 33.57% respectively, showing large fluctuations but overall maintaining high growth. Additionally, the agency also predicts that the revenue growth rates for China's machine vision market in 2024 and 2025 will be 25.31% and 23.49% respectively, continuing to grow rapidly, with the market size reaching $349 million by 2025.Billion yuan, with the two-dimensional visual market expected to exceed 29.2 billion yuan, and the three-dimensional visual market expected to exceed 5.8 billion yuan.From the development trend of the above-mentioned industries, it is not difficult to see that SoWeL has achieved a substantial growth in performance in the past one to two years, which may be related to the explosive growth of the industry. However, from the perspective of competitive landscape and competitive strength, SoWeL also faces numerous potential operational challenges. On one hand, the industry in which SoWeL operates is highly competitive. According to Moore's report, a considerable part of the machine vision enterprises in China are concentrated in the Pearl River Delta and Yangtze River Delta regions, with Guangdong and Jiangsu being prominent centers. By the end of 2022, there were 2837 machine vision enterprises in Guangdong and 736 in Jiangsu, making the industry highly dispersed and competitive. There are also multinational companies and rapidly growing domestic brands such as Hangzhou Hikvision Digital Technology and LUSTER LightTech participating in the competition. If SoWeL cannot effectively compete with current or future competitors, its business, operations, and financial condition may be significantly and adversely affected. On the other hand, SoWeL also faces the risk of "customer dependency syndrome". As disclosed in the prospectus, SoWeL has a relatively high customer concentration. In the 2023 fiscal year, the revenue from the top five customers of SoWeL accounted for a total of 66.8%, and by the 2024 fiscal year, although this indicator decreased to 50.3%, it still remained at a high level of concentration. With a high level of customer concentration, if a major customer is lost and SoWeL fails to develop new customers in a timely manner as a supplement, the company's business expansion will be impacted. Furthermore, in terms of core competitiveness, as machine vision is a technology-driven enterprise, research and development strength directly reflects the company's core competitiveness. However, according to the data disclosed in the prospectus, its research and development team consists of only 6 members, and the research and development expenditure as a percentage of revenue in the 2023 and 2024 fiscal years were 4% and 6% respectively. Such a low level of research and development investment in the industry reflects the need for SoWeL to strengthen its research and development investment and improve its competitive strength. In conclusion, riding on the wave of AI, SoWeL has indeed achieved rapid growth in core financial indicators, which may be a major advantage for the company's IPO journey. However, it is important to note that operational risks such as cash flow constraint, continuous decline in gross profit margin, high customer concentration, and intensifying competition are major disadvantages that may lead to an overvaluation of the company. If the company wants to truly capitalize on the momentum, it will need to build its "hard power" from multiple perspectives.