On the first day of listing, CONCH MAT TECH (02560) plunged by 47.67%. Why is it difficult to protect the stock price with the cornerstone "full coverage" national distribution?

Since December 2024, the sentiment in the Hong Kong new stock market has been warming up. Among the 10 new stocks listed in the month, only DMALL (02586) fell below the issue price on the first day of listing, with a first-day break rate of only 10%. Entering 2025, the market sentiment continued to improve, with BRAINAURORA-B (06681) listed on January 8 and CONTIOCEAN (02613) listed on January 9 both closing higher on the first day of listing. However, even in such a market sentiment, CONCH MAT TECH (02560) completed its debut in the capital markets in a sharp decline. Observing CONCH MAT TECH, which had already fallen by 31.33% in the grey market stage, officially started trading on January 9 with an opening price plummeting by 40%. Although there was a slight increase in the first minute of trading, selling pressure surged thereafter, directly smashing the stock price to 1.64 Hong Kong dollars, a decrease of 45.33% from the issue price of 3 Hong Kong dollars. Afterward, CONCH MAT TECH's stock price remained in a sideways movement, but by the afternoon, funds began a new round of trading, with a trend of fluctuating decline in the afternoon, ultimately closing in a "large bearish" manner at the day's lowest point, with a closing price of 1.57 Hong Kong dollars, a steep decline of 47.67% from the issue price. The total trading volume for the day was 86.8073 million Hong Kong dollars, and investors who participated in the new IPO were already in a state of lament. In fact, if one had a deep understanding of CONCH MAT TECH's fundamentals and valuation, then the performance on its first day of listing would not have been unexpected. Cornerstone investors bought all the shares for IPO, and retail investors exited reluctantly. For its listing, CONCH MAT TECH was well-prepared. The six cornerstone investors bought all the international placement shares directly, which was a less common scene but did not yield significant results in terms of stock price performance. According to the prospectus, CONCH MAT TECH issued a total of 144,974,000 H shares in this IPO, accounting for 25% of the company's total share capital and raised a net amount of about 400 million Hong Kong dollars. The public offering was oversubscribed by 25.83 times, triggering a clawback mechanism, and the proportion of public offering shares to global offering shares was increased from 10% to 30%, meaning 43,493,000 H shares were publicly offered. In the international placement, CONCH MAT TECH issued 101,481,000 H shares, accounting for 70% of the global offering shares. The underwriters in the international placement can be said to be entirely cornerstone investors. According to the announcement of the distribution results, the cornerstone investors of CONCH MAT TECH were Gotion High-tech, Anhui Shengchang Chemical, Wuhu Atech Bio-Tech, SCGC Capital, Guangdong Longtitude Technology, Shenzhen Gaodeng Computer Technology, and their subscription shares accounted for 12.1%, 16.1%, 12.19%, 10.83%, 4.66%, and 14.04% of the offering shares, totaling 69.92%, which was close to the international placement share of 70%. Undoubtedly, by the end of the first day of listing for CONCH MAT TECH, the six cornerstone investors had suffered significant losses. The total value of the shares they subscribed for, which were over 300 million Hong Kong dollars, has now been nearly halved. However, even more devastated might be the various pre-IPO investors. According to the prospectus, CONCH MAT TECH introduced 6 investors on January 13, 2023, before the IPO. These investors collectively subscribed for about 73.36 million shares at a price of 2.77 RMB per share, totaling over 200 million RMB. From a cost perspective, the subscription price of 2.77 RMB was close to the issue price of 3 Hong Kong dollars for CONCH MAT TECH. However, after waiting a year, the IPO apparently did not bring enough surprises to the investors. Surprisingly, among the 6 investors mentioned above, Ke-Gai Ce-Yuan Limited Partnership Enterprise and Anhui Zhong-An Limited Partnership Enterprise chose to exit before the IPO. On August 16, 2023, Ke-Gai Ce-Yuan Limited Partnership Enterprise sold its 4.15% stake to CONCH MAT TECH's controlling shareholder Hai Luo Ke-Chuang for a total price of 52.1496 million RMB, a 4.35% premium over the cost of 49.9762 million RMB. On October 16, 2023, Anhui Zhong-An Limited Partnership Enterprise sold its 2.3% equity to Hai Luo Ke-Chuang for a total price of 29.948 million RMB, an 8.28% premium over the cost price of 27.657 million RMB. Thus, apart from Ke-Gai Ce-Yuan Limited Partnership Enterprise and Anhui Zhong-An Limited Partnership Enterprise, who timely exited, all other investors introduced by CONCH MAT TECH since 2023 were deep in the red. As the international placement was basically "rounded up" by cornerstone investors who have a lock-up period of 6 months, the plunge on the first day of listing for CONCH MAT TECH was actually caused by the public offering shares being sold off by retail investors. Considering the fundamentals of CONCH MAT TECH, it may be hopeless for the pre-IPO and cornerstone investors to escape from the predicament. Facing multiple potential challenges in business operations, the overvaluation became the catalyst for the steep decline. CONCH MAT TECH was originally established by the Fortune China 500 company Hai Luo Group, and was created through the acquisitions of Shandong Hongyi, Meishan Hai Luo, and Xiangyang Hai Luo in 2018. Hai Luo Group has the first A+H listed company in the cement industry, Anhui Conch Cement (600585.SH, 0914.HK), and CONCH MAT TECH has developed based on Anhui Conch Cement. According to the prospectus, CONCH MAT TECH is a fine chemical materials supplier specializing in the production and sale of cement additives, concrete additives, and related upstream raw materials. The company's products primarily include [...].Various types of cement additives and concrete additives, intermediate products in the production of cement additives (namely ethanolamine) and intermediate products in the production of concrete additives (namely polyether monomers and polycarboxylic acid mother liquor).In terms of market position, according to the sales volume of cement grinding aids in 2023, the top five market participants in China account for approximately 49.6%, with CONCH MAT TECH ranking first with a market share of about 34.6%. Additionally, based on the sales volume of cement additives in 2023, the top five market participants in China account for approximately 41.2%, with CONCH MAT TECH ranking first in China with a market share of around 28.3%. Clearly, CONCH MAT TECH is a leading company in both the cement grinding aids and cement additives markets, and the company has achieved growth against the trend in recent years. Due to the sustained downturn in the real estate industry, the cement market has continued to shrink in recent years, with a compound annual growth rate of -3.5% from 2019 to 2023, and according to data from the National Bureau of Statistics, national cement production decreased by 10.1% from January to November 2024, reaching 1.67068 billion tons. In comparison to the continuous contraction of the national cement market, CONCH MAT TECH has achieved steady revenue growth. Data shows that from 2021 to 2023, CONCH MAT TECH's revenue was RMB 1.538 billion, RMB 1.84 billion, and RMB 2.396 billion respectively, with a compound annual growth rate of 24.82%. In the first half of 2024, its total revenue increased by 6.56% to RMB 1.103 billion. The main reason for the steady increase in total revenue is the rapid increase in revenue from third-party customers for CONCH MAT TECH. According to the prospectus, revenue from related parties for CONCH MAT TECH has shown a clear downward trend year by year, but revenue from third parties has increased from 44.7% in 2021 to 67.5% in 2023, making third-party clients the core driving force for the company's continuous revenue growth. However, in comparison to the continued growth in revenue, the profit performance of CONCH MAT TECH is relatively lackluster. According to the prospectus, from 2021 to the first half of 2024, CONCH MAT TECH's net profits were RMB 127 million, RMB 92.4 million, RMB 144 million and RMB 60.2 million, showing significant fluctuations, with corresponding net profit margins of 8.25%, 5.02%, 6.01%, and 5.46%, overall trending downwards. In addition to profit growth being hindered, CONCH MAT TECH still faces several potential operational challenges or risks. One is that market demand may continue to shrink. It is estimated that in 2025, with the real estate market not yet stabilized and limited infrastructure driving force, cement demand may continue to decline, with long-term demand possibly remaining at a low level of 1.5-1.7 billion tons. Although CONCH MAT TECH can achieve dual-wheel drive through related parties + third parties, the difficulty of expanding business will increase as industry demand declines. Another factor is the high proportion of third-party customers, which may impact the profit level of CONCH MAT TECH. According to the prospectus, from 2021 to the first half of 2024, the gross profit margins for related party customers of CONCH MAT TECH were 32.7%, 36.5%, 42.1%, and 45.4%; whereas during the same period, the gross profit margins for sales to third-party customers were 23.1%, 31.7%, 34.0%, and 40.2%. It is evident that when expanding third-party customers, CONCH MAT TECH is sacrificing product profit margins, reflecting intense market competition. Currently, there is clear overcapacity pressure in the entire cement industry, and if competition continues to intensify in the future, it will inevitably cause significant difficulties for CONCH MAT TECH in expanding third-party customers. Furthermore, customer concentration remains relatively high. According to the prospectus, from 2021 to the first half of 2024, the revenue from the top five customers of CONCH MAT TECH accounted for 66.8%, 54.3%, 49.7%, and 44.4% respectively, with the largest customer, China Conch Group, accounting for approximately 52.5%, 41.6%, 31.8%, and 30.7%. Although customer concentration has been decreasing, it is currently still at a relatively high level, which could lead to issues such as large fluctuations in performance, concentration of financial and credit risks. Additionally, the continuous increase in accounts receivable poses impairment risks. According to the prospectus, from 2021 to the first half of 2024, CONCH MAT TECH's trade receivables continued to increase, reaching approximately RMB 301 million, RMB 557 million, RMB 756 million, and RMB 787 million, accounting for about 19.6%, 30.3%, 31.6%, and 71.4% of total revenue, with average turnover days of trade receivables of 68.8 days, 73.0 days, 82.2 days, and 99.7 days, with the turnover days continuously extending. The continuous increase in accounts receivable may exacerbate the company's operational and financial risks, and if accounts are not collected in a timely manner, resulting provisions could impact the company's net profit releases, while the continuous extension of turnover days could increase the company's financial pressure. Furthermore, the valuation is considered high. After CONCH MAT TECH's IPO, its total share capital is close to 580 million shares, with an IPO market value of approximately HKD 1.74 billion at an issue price of HKD 3 per share. However, its net profit in 2023 was only RMB 144 million, resulting in a PE multiple of approximately 11.4 times in 2023. From a PB valuation perspective, as of June 30, 2024, CONCH MAT TECH's total assets were RMB 2.416 billion, total liabilities were RMB 1.407 billion, net assets were RMB 1 billion, and the IPO market value corresponded to a PB valuation of 1.64 times. Compared to listed cement stocks on the Hong Kong Stock Exchange, most PB valuations are below 0.5 times, with even the leading cement company Anhui Conch Cement having a PB ratio of only 0.509 times."Hola, cmo ests?" "Hello, how are you?"In general, CONCH MAT TECH achieved a counter-trend growth in revenue through the rapid expansion of third-party customers. However, its profit release is not significant, and the company will still face potential operational challenges in the future, including the continuous contraction of industry demand, increasing market competition, high customer concentration, and high accounts receivable. At the same time, the relatively high PB valuation compared to its peers may also become a "barometer" of CONCH MAT TECH's secondary market performance.