Analysis of US Stock IPOs | Fundamental deterioration, cold reception for US listing, FuXing Group significantly reduces fundraising amount

With many well-known brand clients including Anta, Seven Wolves, Li-Ning, 361 Degrees, Samsonite, and Arctic China, the Fu Xing Group, with a total of over 1600 customers, faced a cold reception when attempting to go public in the United States.

On April 2nd, as the fourth largest zipper manufacturer in mainland China, the Fu Xing Group submitted its public version of the prospectus to the SEC for the first time, applying to list on NASDAQ with the code "FFFZ". At this time, it planned to issue 2 million common shares at a price of $4-4.5 per share, aiming to raise up to $9 million. Based on the midpoint of the proposed price range, Fu Xing Group's market value would reach approximately $82 million.

By September 9th, Fu Xing Group had updated its prospectus for the third time, but the company's valuation saw a dramatic decline. In the latest prospectus, Fu Xing Group stated that it would issue 1 million ADS at a price of $4-6 per ADS, reducing the maximum fundraising amount to $6 million. After the issuance of 1 million ADS, the corresponding public shareholding ratio would be as high as 53.76%, meaning that at the midpoint price of $5, Fu Xing Group's market value had significantly dropped to around $9.3 million.

From an initial valuation of $82 million to approximately $9.3 million, why did Fu Xing Group's valuation change so drastically? Furthermore, what signal does the fact that 53.76% of the shares issued in its U.S. listing represent convey?

Decline in Revenue and Profit, High Dependence on Subsidies

Established in 1993, Fu Xing Group has been deeply involved in the zipper industry for over thirty years. After years of development, it has built a complete business structure from zipper production to processing and sales. According to the Euromonitor report (2023 edition), based on sales in 2021, Fu Xing Group has become the fourth largest zipper manufacturer in mainland China.

In terms of business types, Fu Xing Group mainly has three major sources of revenue: zipper products, trade of textile raw materials, and zipper processing services. In the 2024 fiscal year (12 months ending March 31), the revenue from these three main businesses accounted for 54.1%, 37.9%, and 8% respectively.

Clearly, zipper products are the core business of Fu Xing Group, mainly consisting of zipper sliders and zipper chains, widely used in clothing, shoes, camping equipment, luggage such as handbags, briefcases, suitcases, and laptop bags, as well as indoor decorative furniture like bedding and sofa covers.

From a customer perspective, with years of market reputation, Fu Xing Group has accumulated a wide customer base, with a total of over 1600 customers, including many well-known brands such as Anta, Seven Wolves, Li-Ning, 361 Degrees, Samsonite, and Arctic China.

In terms of market regions, Fu Xing Group's revenue mainly comes from mainland China, with 62.1% of revenue in the 2024 fiscal year (12 months ending March 31) coming from mainland China, while the remaining 37.9% comes from Hong Kong, where traders distribute its products globally.

In terms of performance, Fu Xing Group's performance in the 2024 fiscal year was poor. During the reporting period, its revenue declined by 12% to $106 million, and net profit decreased by 34% to $1.056 million, showing a situation of declining revenue and profit Specifically, the decline in revenue is mainly due to the global economic slowdown, declining customer demand, and the worsening competition in the domestic zipper market, leading to the simultaneous contraction of the three major business segments of Fuxing Group. Among them, revenue from zipper products decreased by 11%, revenue from textile raw materials trading decreased by 14.2%, and revenue from zipper processing services decreased by 7.4%.

In terms of market regions, revenue from the mainland China market decreased by 10.6% year-on-year, while revenue from Hong Kong decreased by 14.2%. Obviously, overseas demand is declining faster than domestic demand.

Although revenue declined, Fuxing Group's gross profit margin remained stable at 6.1% during the reporting period. At the same time, the company increased efforts to reduce operating expenses, resulting in a 13% decrease in total operating expenses. This led to a significant year-on-year increase of 116% in Fuxing Group's operating income to $292,000. However, due to a 36% decline in other income, Fuxing Group's net profit for the period decreased by 34%.

It appears that Fuxing Group's profitability level is not actually high, and other income is one of the core forces supporting Fuxing Group's net profit. During the reporting period, Fuxing Group's other income was $7.205 million, most of which came from government subsidies. This means that Fuxing Group's profitability is closely related to government subsidy income.

Looking at the balance sheet, as the company's business continues to struggle, Fuxing Group has reduced its debt levels. In the 2023 fiscal year, Fuxing Group's debt-to-asset ratio was 36.67%, while in the 2024 fiscal year, this indicator dropped by over 4 percentage points to 32.18%, placing the overall debt ratio at a relatively reasonable level.

Multiple Challenges Putting Fundamental Pressures

From the perspective of market demand, Fuxing Group's business operations will continue to be affected by persistently low demand. Although the Euromonitor report (2023 edition) indicates that the global apparel market experienced fluctuations over the past five years (2018 to 2022) with a slight contraction, and is expected to show a significant recovery trend from 2023 to 2027 with a compound annual growth rate of 4.9%, the current industry situation suggests that Euromonitor has overestimated the resilience of global economic development, and the global apparel market industry has not yet recovered, with a trend of further declining demand In such a market environment, it often brings more severe challenges to zipper companies, as the competition in the zipper industry is particularly fierce. According to statistics from the China Zipper Association, there are approximately 2,000 zipper manufacturers in mainland China. Due to the lack of obvious competitive barriers, once market demand is weak, competition among companies can quickly deteriorate, and there may even be a possibility of price wars.

In the performance of the 2024 fiscal year, Fuxing Group has clearly stated the deterioration of the domestic zipper market. The company's net profit is closely related to government subsidies, which also proves the severity of industry competition. As the fourth largest zipper manufacturer in China, Fuxing Group still faces the challenge of worsening demand and intensified market competition.

Furthermore, high customer concentration is also one of the potential challenges for Fuxing Group. According to the prospectus, in the 2023 fiscal year, the revenue from the top three customers of Fuxing Group accounted for 16%, 14%, and 15% respectively. In the 2024 fiscal year, the proportion of revenue from the top four major customers to the total revenue of the company was 16%, 13%, 11%, and 11%, totaling as high as 51%. With high customer concentration, the loss of a single customer will have a significant impact on the performance of Fuxing Group.

Overall, apart from having a certain advantage in market position, Fuxing Group faces significant pressure in terms of its fundamentals. It not only needs to confront operational challenges such as weak demand, intensified competition, and high customer concentration but also the profit level overly dependent on subsidies is a negative factor. Only when global economic recovery brings about a warming demand, can the fundamentals of Fuxing Group possibly see improvement.

It is worth noting that Fuxing Group actually went public on the Singapore mainboard as early as 2007, with the code "AWK". This US IPO is Fuxing Group's second time entering the capital market. Data shows that as of September 6th, Fuxing Group's market value in Singapore is approximately $8 million