US Stock IPO Preview | Xinghui Printing: Bad debt provisions surged 4.6 times dragging profits into losses. How difficult is it for Hong Kong printers to make money?

Following the secret submission to the SEC on June 1, 2022, Samfine Creation Holdings Group Limited, the holding company of Shenzhen Xinghui Cloud Printing Technology Co., Ltd. from Guangdong, has recently disclosed its public prospectus again at the SEC. This indicates that Xinghui Printing's journey to listing in the United States has accelerated.

According to the prospectus, Xinghui Printing has applied to list on NASDAQ with the code "SFHG", planning to issue 2 million shares at a price of $4 to $5 per share, raising $9 million. The company had previously applied to issue 2.5 million shares at the same price, and based on the midpoint price, the funds raised will be 20% less than previously expected.

In terms of performance, during the period from 2022 to 2023 (referred to as the reporting period), Xinghui Printing's revenue was 129 million Hong Kong dollars, 117 million Hong Kong dollars, a year-on-year decrease of 9.3%; while the net profit for the same period was 3.652 million Hong Kong dollars, -3.387 million Hong Kong dollars, a year-on-year profit to loss conversion.

As revenue continues to decline and losses appear on the profit side, can Xinghui Printing's path to a US IPO proceed smoothly? What is the company's fundamental situation? Does it have growth potential? By reviewing the prospectus, we attempt to find answers to these questions.

Sharp Increase in Bad Debt Provisions Dragging Down Profits

The prospectus shows that Samfine Creation Holdings Group Limited was established in January 2022 as a holding company registered in the Cayman Islands specifically for the purpose of listing in the United States. Its main operating entity is Xinghui Printing located in Baoan, Shenzhen.

Established in 1993, Xinghui Printing has a history of 31 years and is an old Hong Kong-funded enterprise. Since its establishment, Xinghui Printing has provided a wide range of printing products, mainly including book printing (children's books, educational books, art books, notebooks, diaries, journals, etc.), novelty and packaging products (handmade products, book sets, pop-up books, stationery products, products with assembly components, other special products, shopping bags, packaging boxes, etc.). Xinghui Printing's production base is located in Shenzhen, with its main customers being bookstores in Hong Kong and around the world.

In terms of business segments, the company can be divided into sales of book products and sales of creative and packaging products, with the revenue ratio almost 1:1. During the reporting period, the revenue from book product sales was approximately 59.053 million yuan and 63.624 million yuan, a year-on-year growth of 7.7%, accounting for approximately 45.8% and 54.4% of total revenue, respectively. Meanwhile, the revenue from creative and packaging products during the same period was approximately 70.017 million yuan and 53.642 million yuan, a year-on-year decline of 23.4%, accounting for approximately 54.2% and 45.6% of total revenue, respectively The book product sales business is relatively stable, but the revenue of creative and packaging products has declined significantly, mainly due to the reduced demand for creative products.

Despite the decline in revenue, the company's gross profit margin has steadily improved, rising from 21.5% in 2022 to 26.7% in 2023, a year-on-year increase of 5.2 percentage points; gross profit increased from 27.72 million yuan in 2022 to 31.36 million yuan in 2023, a year-on-year increase of 13.1%. The increase in gross profit and gross profit margin is mainly due to the decrease in material costs.

While gross profit increased, net profit turned into a loss year-on-year, which is closely related to the significant increase in expenses.

During the reporting period, the company's marketing and sales expenses were 9.507 million yuan and 7.817 million yuan respectively, a year-on-year decrease of 17.8%; general and administrative expenses were approximately 17.134 million yuan and 25.491 million yuan respectively, a year-on-year increase of 48.8%.

Specifically, the company's general and administrative expenses include employee expenses, rent and office expenses, bad debt provisions/expected credit losses, inventory impairment, depreciation, legal and professional fees, research and development expenses, and other miscellaneous expenses.

The increase in research and development expenses and bad debt provisions related to accounts receivable write-offs led to a sharp increase in the company's general and administrative expenses. During the period, research and development expenses were approximately 0.709 million yuan and 5.996 million yuan respectively, a year-on-year increase of 745.2%; bad debt provisions were approximately 0.879 million yuan and 4.918 million yuan respectively, a year-on-year surge of 459.5%.

Zhītōng Cáijīng APP believes that Xīnghuī Printing's bad debt provision for accounts receivable surged, related to the growth of its accounts receivable. During the period, the company's accounts receivable were approximately 19.626 million yuan and 31.671 million yuan respectively, a year-on-year increase of 61.4%.

The high trade receivables put significant pressure on the company's funds, coupled with the increase in expenses, posing a major challenge to Xīnghuī Printing's operating cash flow. During the reporting period, the cash flow generated from operating activities was approximately 25.624 million yuan and -6.955 million yuan, showing a negative value.

Currently, Xīnghuī Printing has an urgent need for funds. As of the end of 2023, the company's trade payables and bills, other payables, and bank and other borrowings amounted to as high as 64.247 million yuan, accounting for approximately 91.3% of current liabilities. However, the company's cash and cash equivalents are in a shrinking state, approximately 25.44 million yuan and 17.349 million yuan respectively during the period, a year-on-year decline of 31.8% With such a cash reserve, Xinghui Printing's risk resistance is very weak.

The growth prospects of the top three customers account for nearly 90%

In fact, from the surge in accounts receivable and the sharp increase in bad debt provisions mentioned above, it can be seen that Xinghui Printing does not have strong bargaining power. Like many Hong Kong-funded enterprises, Xinghui Holdings mainly targets overseas markets, with Hong Kong-based traders as its direct customers and publishers from the United States and Europe as its end customers.

In the prospectus, Xinghui Holdings did not disclose detailed information about its main customers, but similar to many printing companies: a few major customers contribute most of its sales. In 2022, the top three customers accounted for 27.2%, 24.5%, and 22.7% of its total revenue respectively, totaling 74.4%; in 2023, the proportion of the top three customers reached 32.4%, 29.1%, and 24.0%, totaling 85.5%.

With the top three customers accounting for nearly 90% of revenue, on one hand, it contributes to the company's stable income, but it also has an adverse impact on its financial indicators.

Apart from relying on the top three customers, the business growth prospects of Xinghui Printing do not seem optimistic.

The prospectus shows that most printing companies in Hong Kong are small and medium-sized enterprises, printing a wide variety of items including books, small booklets, flyers, paper and paperboard labels, promotional items, product catalogs, calendars, postcards, and greeting cards. Most printing service providers have shifted production to mainland China and have established specially built factories to reduce operating costs. This development has changed work processes and logistics, significantly improving efficiency and output quality. However, printing companies still maintain offices in Hong Kong to handle overseas orders.

According to data from the Hong Kong Census and Statistics Department, the performance of the Hong Kong printing industry has not been good in recent years. In 2019 and 2020, due to the global economic downturn, social unrest in Hong Kong, and the impact of the COVID-19 pandemic, exports fell to approximately HKD 9.168 billion and HKD 7.987 billion respectively. In 2021, driven by the global economic recovery and improved logistics, export value saw a significant increase, rising to around HKD 8.975 billion, a 12.4% increase from 2020. However, this recovery was short-lived as export value declined again in 2022 and 2023, falling to approximately HKD 4.224 billion and HKD 4.039 billion respectively, indicating that the export environment in this industry continues to be challenging.

Specifically, the total export value of printed matter in Hong Kong mostly comes from re-exports from China. The total export value of printed matter in Hong Kong for the 10 months of 2020, 2021, and 2022 were approximately HKD 13.858 billion, HKD 15.769 billion, and HKD 8.579 billion respectively. Among them, 80.4%, 81.6%, and 79% are re-exported products from China.

According to the data from the National Bureau of Statistics of China, from 2016 to 2022, the total export value of printed matter, booklets, leaflets, and other printing materials, as well as children's drawings, paintings, or picture books, showed an overall upward trend. In 2022, the export value remained strong, slightly decreasing to approximately USD 4.318 billion, but still reflecting a stable demand for printing materials. In other words, the industry demand is stable, but there is also a certain growth ceiling. For Xinghui Printing to achieve sustained high growth, it must first establish a solid presence in the domestic market. Currently, the company's revenue scale is not high, and it is still in a declining trend.

The key point is that Xinghui Printing does not have ample cash flow to expand its existing business. However, the urgency of further development can be seen from the purposes of its fundraising. For example, the company plans to use about 35% to strengthen its printing business in Hong Kong and expand its market share in other international markets (especially the United States); about 35% will be used to purchase machinery, improve and upgrade the production equipment of its operating subsidiaries to enhance automation levels, all aimed at expanding the scale of its existing business and ensuring its performance growth.