Analysis of US Stock IPOs | As the fundraising amount continues to be lowered, the shareholders of Chuangzhi Global Holdings plan to cash out

Chuangzhi Global (CGTH.US) faces a cold reception in its U.S. listing.

Since submitting its initial public offering prospectus (F-1 document) to the SEC on July 19, 2023, Chuangzhi Global has updated its prospectus 13 times within a year. The continuous shrinking of the fundraising scale or the lack of capital enthusiasm is evident.

In the initial F-1 document, Chuangzhi Global stated that it would issue 4-5 million shares of common stock at a price of $4-5 per share, raising up to $20 million. Subsequently, the number of shares to be issued was reduced to 2 million, raising up to $10 million. In the most recent updates to the prospectus, Chuangzhi Global once again lowered the number of shares to be issued to 1.25 million, raising up to $6.25 million, a nearly 70% decrease from the initial fundraising target.

In stark contrast to the continuous reduction in fundraising scale, the controlling shareholder of Chuangzhi Global plans to sell 3 million shares of common stock, a clear cash-out behavior. Clearly, after the lackluster IPO reception, the controlling shareholder of Chuangzhi Global is eager to cash out.

Looking back at Chinese concept stocks that disclosed share sales before listing, their performance post-listing has been disappointing. Does this mean that Chuangzhi Global's stock price may languish after listing? By considering the company's fundamentals, perhaps a clearer answer can be obtained.

"Increased Revenue but Not Increased Profit" Dilemma in 2023 Fiscal Year

Established in 2016, Chuangzhi Global is a Hong Kong-based electronics recycling company. After years of accumulation, the company has developed three main business segments: wholesale of second-hand consumer electronics, retail of second-hand consumer electronics, and equipment leasing.

The wholesale of second-hand consumer electronics refers to Chuangzhi Global purchasing and recycling consumer electronics (mainly smartphones, tablets, and laptops) from suppliers in the United States, Japan, and other developed countries, and then wholesaling these devices to customers in Southeast Asia and other regions.

The retail of second-hand consumer electronics involves Chuangzhi Global purchasing popular second-hand electronic products from suppliers, showcasing them on the company's website, where customers can browse and place orders online. This is a business targeting end consumers. The equipment leasing business involves Chuangzhi Global publishing information about consumer electronics available for rent on the company's website for end consumers to lease products.

However, wholesale remains Chuangzhi Global's core business. In the 2023 fiscal year (12 months ending September 30), wholesale accounted for 99.8% of Chuangzhi Global's total revenue, while retail revenue accounted for only 0.2%, and equipment leasing revenue was just starting to generate. Clearly, retail and equipment leasing businesses are still in the early stages of development.

In terms of product categories, revenue from Chuangzhi Global's wholesale business mainly comes from smartphones, accounting for 81.8% of revenue in the 2023 fiscal year, followed by laptops and others at 10.9%, and tablets at 7.3% The proportion of revenue from smartphones significantly increased by 2022, reaching 45.5% in 2022.

From a performance perspective, the performance of Chuangzhi Global is not optimistic. Although in the 2023 fiscal year, revenue from smartphones surged by 224.11% to $41.1046 million, and revenue from laptops and other sources increased by 10.99% to $5.5256 million, jointly driving the company's total revenue up by 80.5% to $50.2789 million, costs were not effectively controlled. This led to a decrease in the gross profit margin to 9.88% in the 2023 fiscal year, down more than 6 percentage points from 15.97% in the 2022 fiscal year, affecting the gross profit to only increase by 11.7% to $4.9695 million.

Furthermore, a significant increase of 209.9% in general and administrative expenses further impacted the company's profitability. As a result, Chuangzhi Technology's net profit for the 2023 fiscal year decreased by 7.4% to $3.1553 million, with a net profit margin of 6.28%, compared to 12.23% in the 2022 fiscal year, nearly halved.

In the first half of the 2024 fiscal year (ending March 31), in order to change the situation of "increased revenue but not profit" in the 2023 fiscal year, Chuangzhi Technology strategically chose orders with higher profits. This led to a significant decline in revenue from smartphones, dragging the total revenue of the company down by 26.3% to $20.5335 million.

Chuangzhi Technology's strategic choice indeed achieved results, with the gross profit margin in the first half of 2024 reaching 13.08%, an increase of over 4 percentage points, driving a 0.2% increase in gross profit. However, due to a 91.4% increase in general and administrative expenses, the company's net profit for the period decreased by 20.5% to $1.5299 million. Nevertheless, the net profit margin for the period slightly increased to 7.45%, compared to 6.9% in the same period.

Clearly, controlling product costs and operational efficiency have become the two key factors affecting the performance of Chuangzhi Global. Although Chuangzhi Global achieved an improvement in profitability by strategically abandoning low-margin orders in the first half of the 2024 fiscal year, the low operational efficiency continued to lead to a continuous decline in the company's net profit. Behind this, perhaps it reveals the many potential challenges that Chuangzhi Global needs to face.

Highly Concentrated Suppliers and Customers, Heavily Dependent on a Single Brand

In terms of market competition, Hong Kong's second-hand consumer electronics recycling market is a fiercely competitive and highly fragmented market, with approximately 1,000 wholesalers engaged in the procurement, grading, refurbishment, and resale of second-hand consumer electronic devices In the face of so many competitors, wholesalers' competitive advantages lie in scale and operational efficiency. Scale advantages allow wholesalers to have lower costs, while operational efficiency is the key to improving profitability. Whether Creativity Technology can "break out" from the fiercely competitive market in the future will depend on the degree to which it shapes its competitiveness in these two dimensions.

At the same time, over-reliance on suppliers and customers is also a major potential risk facing Creativity Global. According to the prospectus, in the fiscal years 2022, 2023, and the first half of 2024, purchases from the top five suppliers accounted for 81.2%, 80.1%, and 88.2% of Creativity Global's total procurement, respectively. Relying too much on a few suppliers can give the company a cost advantage in product acquisition, but it can also increase the potential risks of product procurement. If a supplier encounters operational issues, Creativity Global will also be affected.

On the customer side, in the fiscal years 2022, 2023, and the first half of 2024, revenue from the top five customers accounted for 75.6%, 41.8%, and 92.9% of Creativity Global's total revenue, respectively. The dependence on the top five customers decreased in the fiscal year 2023, but by the first half of 2024, the dependence increased significantly, with the largest customer contributing as much as 45.9% of the revenue, raising the risk of customer concentration.

Furthermore, Creativity Global's business is overly dependent on Apple products. In the fiscal year 2024, including iPhones, iPads, MacBooks, Apple Watches, and other Apple products contributed 99.8% of Creativity Global's revenue. A single brand dependency can cause significant operational impact for wholesalers when there are significant price fluctuations in the related brand's products. If Apple's production or supply chain is disrupted, or if there are significant product quality issues, Creativity Global's business and operational performance will be adversely affected.

On the positive side, the second-hand recycling market in Hong Kong is still steadily developing. According to a Frost & Sullivan report, the wholesale value of recycled consumer devices in Hong Kong increased from HKD 21.8 billion (approximately USD 2.78 billion) in 2017 to HKD 34.3 billion (approximately USD 4.37 billion) in 2021, with a compound annual growth rate of 12.0%. Benefiting from market growth driven by economic expansion, increasing consumer demand for low-cost goods, and growing consumer acceptance of recycled consumer electronics, Frost & Sullivan predicts that by 2026, the wholesale value of second-hand electronic devices in Hong Kong will reach HKD 55.9 billion, with a compound annual growth rate of 10.2% from 2022 to 2026.

Undoubtedly, Creativity Global's future development will benefit from the growth of the second-hand recycling market in Hong Kong. However, whether it can shape advantages in scale and operational efficiency still requires further observation. Although the company has developed retail and leasing businesses, the current effects are minimal. It needs to prove to the market its potential in creating new growth curves in order to open up the company's growth space and increase its valuation. Clearly, if Creativity Global wants to gain favor from investors, it needs to demonstrate more strength