New Stock Preview | Core product prices and quantities are falling simultaneously + Debt ratio reaches 84%, cannot stop Rongda Hezhong's distribution exceeding net profit.

According to the disclosure on January 16th by the Hong Kong Stock Exchange, Rongda Hezhong (Xiamen) Technology Group Co., Ltd. (hereinafter referred to as Rongda Hezhong) has submitted an application for listing on the main board of the Hong Kong Stock Exchange, with Yuexiu Financing as its exclusive sponsor. This is another application after its initial submission expired on April 19, 2024. It is understood that this is not the first time Rongda Hezhong has attempted to go public on the Hong Kong Stock Exchange. Previously, the company had signed an agreement with Sinolink Co., Ltd. to conduct an initial public offering of shares and list domestically, and on July 1, 2021, obtained guidance filing registration from the Xiamen Regulatory Bureau of the China Securities Regulatory Commission, but later voluntarily terminated the process. In the announcement of the withdrawal, Rongda Hezhong cited reasons including considering the capital market environment and discussions with Sinolink, leading to the automatic withdrawal of the A-share listing application. Old Ninth in the Domestic Printer Market Performance Unable to Conceal Yearly Declines The prospectus shows that Rongda Hezhong is a global provider of automatic identification and data collection (AIDC) devices and solutions, engaged in the design, development, manufacturing, and marketing of printing equipment, scales, POS terminals, PDAs. The company offers over 100 standard models of products, widely used in various industries including but not limited to retail, education, catering, logistics, warehousing, manufacturing, hotels, medical, and environmental industries. During the past years, Rongda Hezhong sold its products to not less than 30 provinces, municipalities, and autonomous regions in China, including but not limited to Beijing, Fujian, Jiangsu, Zhejiang, Sichuan, and Guangdong, as well as over 140 countries, including but not limited to the United States, Malaysia, Spain, France, Argentina, Brazil, and the United Arab Emirates. According to Frost & Sullivan data, based on income in 2022, Rongda Hezhong ranks ninth in China's specialized printer market, with a market share of 1.8%, making it the second-largest specialized printer supplier in Fujian province. Despite being the ninth in the Chinese printer market, Rongda Hezhong's performance has been declining every year. In the first nine months from 2022 to 2024 (hereinafter referred to as the reporting period), the company's revenue was approximately 393 million yuan, 349 million yuan, and 253 million yuan respectively, with a year-on-year growth rate of -11.32% in 2023; Meanwhile, the profits for the same period were approximately 37.447 million yuan, 27.603 million yuan, and 22.435 million yuan respectively, with a year-on-year growth rate of -26.29% in 2023. In terms of product categories, the company's sales include printing equipment, scales, POS terminals, PDAs, as well as printer cores and control boards, and other accessory products. Among them, printing equipment is the company's main source of revenue. During the reporting period, the company provided various thermal specialty printers to customers, including document printers, barcode label printers, and panel printers. This business brought in revenue of 304 million yuan, 261 million yuan, and 172 million yuan, with revenue shares of 77.4%, 74.9%, and 68.1% respectively. It is noted that the decline in revenue from the main products is due to fluctuations in sales volume. During the period, the sales volume of printers were 1.631 million units, 1.241 million units, and 940,000 units respectively, with an average selling price fluctuating at 187 yuan, 210 yuan, and 183 yuan. Additionally, despite the gradual increase in product prices, the gross profit margin did not increase accordingly. In the reporting period, the gross profit margin of printing equipment was 22.2%, 22.6%, 21.3% consecutively, showing a downward trend in the competitiveness of the main products. In fact, except for the increase in revenue from scales, the revenues from the other three product categories have all declined. In response to this, Rongda Hezhong stated that the decline in revenue from the sale of printing equipment was mainly due to a reduction of 33.5 million yuan in sales to customer C (one of the top five customers) from the fiscal year 2022, as customer C traditionally places bulk orders for printing equipment every four to five years. Simultaneously, the decline in revenue from sales of POS terminals, PDAs, accessories, and other purchased products was mainly affected by the decline in sales to overseas customers. Currently, the company's revenue split between domestic and foreign markets is almost fifty-fifty. For example, in 2023, the company's revenue split in the Chinese market was 54.5%, with over forty percent of remaining revenue coming from overseas markets. The company stated that in the future, the export of products to overseas markets will continue to account for a large portion of its income. However, the high proportion of overseas sales also exposes the company to significant risks and uncertainties. The company mentioned that the sales of its exported products may be affected by unfavorable changes in global trade policies and trade protectionism beyond the company's control, such as sanctions, trade barriers, and boycotts. If major markets like Europe and the United States introduce such measures, the company's sales and financial performance could be negatively impacted. The decline in revenue from the aforementioned products also demonstrates the instability of its overseas customer operations. Debt-to-Asset Ratio as High as 84% Dividend Amount Exceeding Net Profit It is worth noting that Rongda Hezhong's current ratio was 1.4 times, 1.5 times, and 1.1 times respectively, while the quick ratio was 0.9 times, 0.9 times, and 0.7 times respectively, and the debt-to-asset ratio was 63.2%, 47.5%, and 83.6% respectively. From the fact that Rongda Hezhong's quick ratio has always been below 1, the debt-to-asset ratio has soared to nearly 84%, and the net cash flow from operating activities, it is evident that the company's cash flow situation is not optimistic. As of September 30, 2024, Rongda Hezhong held cash and cash equivalents of 4.83 million yuan, while the company's bank borrowings exceeded one hundred million yuan. For a company of that size, the company's cash and cash equivalents are in a very tight situation, and there might even be a risk of a rupture. However, this does not seem to affect Rongda Hezhong's generous dividend distribution. During the period, the company distributed dividends to shareholders totaling 5 million yuan, 35 million yuan, and 31.5 million yuan, accounting for 13.3%, 126.8%, and 71.2% of the current period's profit respectively. It is noteworthy that the dividend payout for the 2023 fiscal year exceeded the net profit of that year, amounting to 276.03 million yuan. Currently, Rongda Hezhong is a family business. Data shows that among the two founding brothers, older brother Xu Kaiming serves as the executive director, chairman of the board, president, and general manager of the company; while younger brother Xu Kaihe is an executive director and senior vice president of the company.As a result, 93.05% of the equity of Rongda Hezhong is directly and indirectly owned by two brothers, who jointly own Rongda Hezhong through companies such as Xiamen Rongxin Investment Co., Ltd. (formerly known as Xiamen Rongxin Management Consulting Co., Ltd.) and Xiamen Gaoli Hezhong Investment Partnership Enterprise (Limited Partnership) (formerly known as Xiamen Gaoli Hezhong Consulting Management Partnership Enterprise (Limited Partnership)). The majority of the above-mentioned dividends also ended up in their hands.Industry demand is improving Market competition is dispersed From the perspective of industry development, with the increasing popularity of cashless payment systems and the advancement of artificial intelligence and machine learning, the global smart device market is expected to further develop, with a compound annual growth rate of 10.9% from 2024 to 2028, reaching approximately $106.7 billion in 2028. Due to retailers' desire to streamline operations and improve customer experience, the application of Point of Sale (POS) systems and mobile POS solutions is becoming increasingly widespread, which in turn increases the demand for specialized printers (including receipt printers). The market size of specialized printers in terms of output value is expected to increase from approximately $1.7 billion in 2018 to approximately $2 billion in 2023, with a compound annual growth rate of 3.3%. Advances in printing technology (such as the development of thermal and inkjet printing) and the popularity of online ordering and delivery will be the driving force behind the continued growth of the market. The market size of specialized printers in terms of output value is expected to reach approximately $2.6 billion by 2028, with a compound annual growth rate of 4.3% from 2024 to 2028. The total market size of AIDC devices in China in terms of output value is expected to steadily increase at a compound annual growth rate of 9.7% from 2024 to 2028. The competitive landscape of the global AIDC device market is relatively dispersed, with China as a major market in the Asia-Pacific region, accounting for approximately 16.6% of the global market share in 2023, with over 2,500 operators in the Chinese market. Looking at specific segments, the competition in the Chinese specialized printer market is relatively fierce, with the top 10 operators accounting for 28.0% of the entire market by revenue. In 2023, despite being ranked ninth domestically, the company only held a 1.8% market share in the overall Chinese specialized printer market. Overall, although the AIDC device market is vast, the competitiveness of main products is declining, and a liquidity crisis is looming. How Conqueror Union can expand its market share while regaining growth in performance is the problem the company is currently facing. In addition, facing fluctuating profits and large dividends exceeding current net profit, will Conqueror Union be able to gain favor from the Hong Kong Stock Exchange?