Interpretation of US Stock New Stocks | Introducing high-end clients led to a decrease in net profit for the current period, where will Ludao Group (LUD.US) go in the future?

The path of the Lud Group's (LUD.US) listing in the United States can be described as "full of twists and turns." On March 4, 2024, Lud Group submitted its public version of the prospectus (F-1 document) to the SEC for the first time. Subsequently, the prospectus was updated several times, but on December 6 of the same year, the listing application was withdrawn and the F-1 document was resubmitted on the same day. As of February 19 this year, Lud Group had updated the prospectus for the third time after the second submission, with nearly a year passing in between. According to the prospectus, Lud Group produces various stainless steel and carbon steel flanges, fittings, steel pipes, valves, and other products. The company has applied to list on the NYSE under the code "LUD" and plans to issue 2.5 million common shares at a price of $4 per share in this IPO, aiming to raise $10 million. In terms of performance, Lud Group has started to show signs of weakness. In the middle of 2023, Lud Group's revenue was $51.4281 million, an increase of about 3.2% year-on-year, with a net profit of $3.0326 million during the period (excluding the impact of foreign exchange changes), a decrease of 1.1% year-on-year. In the first half of 2024, Lud Group's revenue slightly decreased by 0.7% to $24.9214 million, with a net profit of $0.9529 million during the period, a significant decrease of 55.85% year-on-year. Domestic market revenue accounts for nearly 90% Lud Group's development history can be traced back to 2004 when the company was registered and established in Hong Kong, engaged in the trading business of steel flanges and fittings. By 2005, Lud Group had expanded beyond trading and started to further expand upstream by constructing its own factory in Shandong Province, China, to manufacture flanges and fittings. As of now, Lud Group's main business includes two major segments: manufacturing and selling stainless steel and carbon steel flanges and fittings products, as well as trading steel pipes, valves, and other steel pipe products. In 2023, sales of self-produced products accounted for 89.4% of the revenue, while the trading income accounted for 10.6%, making self-manufactured products the core of the revenue. In terms of product types, Lud Group currently offers approximately 12,000 products to customers, including carbon steel flanges, stainless steel flanges, carbon steel fittings, and stainless steel fittings. The diversified product range can meet the needs of customers in various industries. Regarding customer types, Lud Group's sales network includes customers from China, South America, Australia, Europe, Asia (excluding China), and North America, who are manufacturers and traders in the chemical, petrochemical, maritime, and manufacturing industries. According to the prospectus, Lud Group's revenue mainly comes from the domestic market, accounting for 88% of the revenue in 2023, followed by South America market at 5.3%, Australia market at 2.7%, and other markets and regions each accounting for less than 2%. This shows that Lud Group still has a long way to go in expanding internationally. Lud Group's revenue in 2023 increased by about 3.2% to $51.4281 million, mainly due to a 7.8% increase in revenue from the domestic market, driving the overall revenue growth. The gross profit margin during the same period was 21.18%, a slight increase from 20.63% in 2022, while the net profit margin was 5.9%, a slight decrease from 6.15% in 2022, resulting in a 1.1% decrease in net profit. In the first half of 2024, revenue decreased slightly by 0.7% to $24.9214 million mainly due to a decrease in revenue from the Chinese market. However, the gross profit was $7.0212 million during the period, a 21.91% year-on-year increase, with a gross profit margin of 28.2%, a 5-percentage-point increase from the same period in 2023, mainly due to the growth in sales revenue from a high-end customer during the period. The customer purchased high-quality flanges and fittings for the construction of Floating Production Storage and Offloading (FPSO) vessels, bringing higher profit margins to Lud Group. However, despite the significant increase in gross profit of 21.91%, Lud Group's net profit in the first half of 2024 plummeted by 55.85% year-on-year to $0.9529 million, mainly due to a sharp increase in total operating expenses to $5.9236 million, compared to $3.0128 million in the same period of 2023. The most significant increase in operating expenses was in sales expenses, which increased from $1.2756 million to $3.6912 million, nearly tripled. This was mainly due to the large commissions paid by high-end customers focusing on the construction of FPSO vessels. Therefore, the most critical factor affecting Lud Group's performance is still the demand situation in the Chinese market. Although the company has developed high-end customers to improve gross profit margins, the sharp increase in commission expenses resulted in a significant drop in net profit, reflecting the high level of competition in the market. Internationalization and high-endization are key to future development China's flanges and steel pipe fittings market has many participants, including state-owned enterprises, large enterprises, foreign enterprises, and large-scale small and medium-sized enterprises. State-owned enterprises and large enterprises have advantages in the high-end market (such as nuclear power and aerospace) based on scale and technological accumulation, foreign enterprises (such as European, American, and Japanese brands) create competitive pressure in the high-end market through technological advantages and brand influence, and small and medium-sized enterprises dominate the mid-to-low-end market due to flexibility and cost control capabilities. However, in terms of market concentration, although there are industrial giants in the industry, the overall concentration is relatively low, with the combined market share of the top few enterprises not exceeding 30%, and the abundance of small and medium-sized enterprises leading to fierce market competition. From an industry perspective, there are issues of overcapacity and homogenized competition in the domestic flanges and steel pipe fittings market, especially in the low-end product segment, where price wars are common. For example, in the steel pipe fittings market, small and medium-sized enterprises compete for orders through low-price strategies, leading to overall low profit margins in the industry. Currently, the entire flanges and steel pipe fittings market is facing new challenges. With the tightening of environmental policies, industry restructuring is accelerating, and large enterprises can significantly enhance their product competitiveness through green production and intelligent manufacturing, while small and medium-sized enterprises face the risk of elimination. Companies in the industry are increasing their efforts towards product high-endization and internationalization.And accelerating integration of the industrial chain to enhance its own competitive advantage, this is both a challenge and an opportunity for players in the industry.From the situation of Ludj Group, its internationalization is still in the initial stage, with domestic market revenue accounting for nearly 90%, indicating that there is still a long way to go to build the international market as a new growth curve for the company. In terms of high-end, Ludj Group's gross profit margin in the first half of 2024 rose to 28.2%, an improvement from the first half of 2023, showing that the company's high-end strategy has achieved some results, but there is still a lot of room for improvement. The gross profit margin of high-end flange products is usually at a high level, ranging from 30% to 50%, or even higher. Especially high-end flange products used in special fields (such as nuclear power, aerospace, etc.) often have higher profit margins due to their high technical and quality requirements. It can be confirmed that the significant achievements in internationalization and high-endization will be the key to how far Ludj Group can go in the future. This is also the challenge it needs to face. However, in addition to this, Ludj Group also faces other potential risks, such as relatively high customer concentration. According to the prospectus, in 2023, revenue from the top two customers of Ludj Group accounted for 47.1%, with the revenue share from the largest customer as high as 30.8%. By the first half of 2024, revenue from the top three customers of Ludj Group accounted for 53.4%, showing a relatively high concentration. If demand from top customers weakens or is lost, it may have a direct impact on Ludj Group's business operations. Furthermore, the high accounts receivable is also a key focus for investors. As of June 30, 2024, Ludj Group's total assets were $46.3627 million, total liabilities were $31.2287 million, and the debt ratio was 67.36%, at a relatively normal level of debt. However, out of the nearly $40 million in current assets, accounts receivable amount to over $21 million, accounting for over 50% of current assets. High accounts receivable may pose risks of bad debts, and if the payment terms are too long, it will to some extent slow down the company's cash flow efficiency, thereby affecting the speed of enterprise expansion and development.