Interpreting the New Stocks in the US Stock Market | Decline in demand leads to weak performance, with the three major clients of Stark Industries (STAK.US) accounting for nearly 70% of revenue.

When it comes to Stark Industries, people may first think of Tony's military industrial enterprise in the "Iron Man" movie series. However, today's protagonist is not the same company, but a company from Changzhou, Jiangsu Province, also called Stark Industries, has embarked on a new journey to go public in the United States. It is understood that on November 15, 2024, Stark Industries first submitted a public version of the prospectus to the SEC, applying to list on Nasdaq with the code "STAK". Stark Industries plans to issue 1.25 million shares of common stock at a price of $4 per share, intending to raise $5 million. It is worth noting that as early as January 18, 2024, Stark Industries had submitted a confidential application to the SEC. According to the prospectus, Stark Industries focuses on the research, development, and sale of professional production and maintenance equipment for oil fields. However, its performance is not satisfactory. Data shows that Stark Industries had a revenue of $18.9188 million in the fiscal year of 2024 (12 months ending on June 30), a decrease of 10.53% year-on-year, and a net profit of $2.4418 million, a decrease of nearly 30% during the period. The decline in downstream demand is the main reason for the weak performance. Established in 2012, Stark Industries has been deeply involved in the industry of professional production and maintenance equipment for oil fields for many years. As of now, the company has formed four major business segments, namely sales of oil field specialized equipment, sales of oil field specialized vehicles, automation solutions, and sales of components and materials. Specifically, in terms of sales of oil field specialized equipment, Stark Industries' products include oil well repair equipment parts, fracturing equipment, well washing and wax removal equipment, oil production equipment, boiler equipment, and other specialized production and maintenance equipment for oil fields. As of March 31, 2024, Stark Industries had a total of 33 types of specialized production and maintenance equipment for oil fields, with retail prices ranging from 10,000 to 500,000 RMB, capable of meeting operational requirements of oil field operations under harsh conditions such as high temperature, low temperature, high pressure, high altitude, and dust. In terms of sales of oil field specialized vehicles, Stark Industries' main products include oil pump trucks, oil well maintenance vehicles, fracturing trucks, well washing and wax removal trucks, boiler trucks, and other maintenance vehicles. As of June 30, 2023, Stark Industries had seven categories of oil field specialized vehicles, including oil field operation vehicles, oil field fracturing vehicles, oil field cementing vehicles, oil field oil extraction vehicles, oil field boiler vehicles, oil field washing vehicles, and other vehicles. All vehicles were in the production stage, with over 80 models available, and retail prices ranging from 160,000 to 900,000 RMB. These vehicles and equipment play a crucial role in helping customers lower costs and improve efficiency in oil field exploration, production, transportation, and production processes. In terms of automation solution services, Stark Industries can provide enterprise customers with automation solution services, including software development, training, and debugging services for specialized production and maintenance equipment for oil fields. These services are highly interdependent and related to each other and can be integrated as inputs to provide comprehensive outputs, i.e., develop and perfect software or functions for enterprise customers. Prices vary depending on the complexity of customer needs and the duration of service provision. As for sales of components and materials, Stark Industries mainly sells products such as integrated circuits, box iron, and backlight boards. From the revenue structure perspective, sales of specialized equipment and vehicles for oil fields are the core business of Stark Industries. In the fiscal year of 2024, the revenue share of these two businesses was 46.93% and 28.58% respectively. The revenue shares of automation solution services and sales of components and materials were 9.32% and 15.18% respectively. According to the prospectus, the 10.53% decline in total revenue in the fiscal year of 2024 of Stark Industries was mainly due to the weak performance of these two core businesses. Specifically, sales revenue of specialized equipment for oil fields decreased by 36.22% year-on-year, and sales revenue of specialized vehicles for oil fields decreased by 15.01% year-on-year. The decline in revenue of these two major businesses was mainly due to a decrease in market demand. Stark Industries had to focus on selling high-value products, but this did not prevent the impact of declining sales volume. It is noteworthy that the average unit sales price of specialized oil field vehicles increased by 185.81% during the reporting period. Sales of automation solution services and components and materials achieved significant growth during the reporting period, with growth rates of 549.45% and 383.74% respectively. The reason behind this may be that when the market demand for specialized equipment or vehicles weakened, Stark Industries increased its efforts to expand the sales of automation solution services and components and materials in order to smooth out fluctuations in total revenue and achieve high-speed growth in these two businesses. However, Stark Industries also explicitly stated in the prospectus that the growth of these two businesses is not expected to be sustainable. While revenue declined, the gross profit margin of Stark Industries in the fiscal year of 2024 also decreased by 2 percentage points to 29.99%. This was mainly due to the increase in raw material costs for specialized equipment, leading to a decrease in the gross profit margin from 36.14% to 33.59%, dragging down overall gross profit margin performance. On top of this, interest expenses of Stark Industries increased by 141.4% in the fiscal year of 2024, while government subsidies decreased by 92.34%, further compressing the company's profitability. Therefore, the net profit of Stark Industries during the reporting period decreased by 29.44%. In conclusion, the key factors affecting the performance of Stark Industries in the fiscal year of 2024 were the decline in downstream market demand and the increase in raw material costs. In addition, the increase in interest expenses and the decrease in government subsidies also had some impact to a certain extent. Market competition continues to intensify, with the top three customers accounting for as much as 67% of revenue. At the industry level, there is still room for growth in China's oil field specialized equipment and vehicles market. Data shows that from 2019 to 2022, the market size of the mainland China oil field specialized vehicle industry increased from 26.06 billion RMB to 27.48 billion RMB, and it is expected to grow to 36.36 billion RMB by 2029, with an annual compound growth rate between 2% and 6%. As for specialized equipment for oil fields, from 2019 to 2022, the market size of the mainland China market increased from 10.737 billion RMB to 11.412 billion RMB, and it is expected to reach 13.636 billion RMB by 2029.By 2029, it is expected to increase to 15.332 billion yuan, with an annual compound growth rate between 3% and 6%.Although the low double-digit growth in the market for oilfield-specific equipment and vehicles signifies a steady expansion of the industry scale, as a traditional industry, the slow growth rate may lead to increasing competition. It is reported that the competition in the oilfield maintenance industry is fierce, with thousands of companies both domestically and internationally. Some of Stark Industries' potential competitors have special vehicle manufacturing licenses, allowing them to design and manufacture their own pumping units with a price advantage. Other potential competitors have a wider brand recognition and larger business scale. If competition continues to intensify in the future, it may affect Stark Industries' market share and profitability. It is worth noting that Stark Industries currently lacks a special vehicle production license, and mainly relies on a collaborative outsourcing model to provide final products to customers. Although this can reduce the initial investment in fixed assets, it also brings policy risks and business expansion bottlenecks. If the government does not allow outsourcing, it may severely limit the development of Stark Industries. The company's goal is to independently apply for the qualification for special vehicles, but it is uncertain whether it will succeed. In addition, due to the high cost of advanced heavy-duty automated equipment, small oilfield service companies have limited purchasing power. This results in enterprises with third-party supply chain financial services having more advantages and competitiveness when facing small oilfield service companies, while Stark Industries has not yet introduced third-party supply chain financial companies. Furthermore, the high concentration of customers is also a potential risk that Stark Industries needs to address. According to the prospectus, as of the fiscal year ended June 30, 2024, the top three customers of Stark Industries contributed approximately 67% of the revenue. High customer concentration can lead to significant fluctuations in performance. If key customers are lost, it may directly impact Stark Industries' operations. In general, due to insufficient downstream demand and rising raw materials costs for specialized equipment, Stark Industries experienced a significant decline in performance in the 2024 fiscal year. Additionally, the company is facing challenges such as increasing market competition, lacking a special vehicle production license, lack of supply chain financial services, and high customer concentration, among others. Stark Industries needs to demonstrate its strength with more impressive performance.