US Stock IPO Preview | Sterd: Solid Waste Management Equipment Sales Halved, Customers' Mixed "Joy" and "Worry"

Recently, the high-end solid waste treatment equipment manufacturer, Sride, changing its listing destination to the Chicago Board Options Exchange (CBOE) has attracted market attention.

Public information shows that Sride originally planned to IPO on the NASDAQ, but recently announced the withdrawal of the IPO plan and resubmitted a new F-1 document, planning to list on the CBOE BZX Exchange (stock market of the Chicago Futures Exchange) with the stock code "HAHA". The company plans to raise only $6 million on the BZX market, which is lower than the previously expected $15 million to be raised on the NASDAQ.

Is Sride's change related to its latest performance? Delving into its fundamentals, we seem to see the value of its business development.

Equipment sales volume halved, revenue and net profit declined

The prospectus shows that Sride Environmental Protection is a waste management equipment and recycling equipment manufacturer, focusing on the research and development and production of customized industrial shredders, material sorting machines, and production lines, dedicated to providing customers with solid waste shredders and overall solid waste solutions to enhance customer operational efficiency. It is a pioneer in the solid waste processing equipment industry integrating research and development, production, sales, and service. As of December 31, 2023, the company has provided products to 220 customers in total. Among them, 184 customers are in the industrial waste industry (industrial hazardous waste, medical waste, and factory dumping waste), accounting for approximately 83.6% of its total customers.

In terms of performance, for the period from 2022 to 2023 (referred to as the reporting period below), the company's revenue was $30.616 million and $21.142 million, respectively, a year-on-year decrease of 30.9%; the corresponding net profits were $0.99 million and $0.605 million, respectively, a year-on-year decrease of 38.9%. Both revenue and net profit declined significantly, with the net profit even declining faster than revenue.

Looking at the business segments, the sales revenue of solid waste management equipment during the period was $29.368 million and $20.088 million, a decrease of 32%, accounting for approximately 96% and 95% of total revenue, respectively; warranty service revenue was approximately $1.248 million and $1.054 million, a decrease of 16%, accounting for approximately 4% and 5% of total revenue, respectively. In short, product sales contribute nearly 90% of total revenue, but the significant decline in this business segment has dragged down revenue performance.

The significant decline in the company's main business comes from a sharp decrease in the number of equipment sales. In 2023, the company sold 129 units, a decrease of 136 units compared to the previous year's 265 units. Even with an increase in average selling price, halving the sales quantity does not compensate for the revenue loss From the perspective of profitability, the company's gross profit for the period was approximately 8.778 million yuan and 6.313 million yuan, a year-on-year decrease of 28%. It is gratifying that the company significantly reduced expenses, with total operating expenses in 2023 decreasing by 19% year-on-year, mainly benefiting from a 24% decrease in research and development expenses and a 92% decrease in credit loss provisions.

In theory, with both revenue and expenses declining, the net profit performance should be better than the revenue side. Why is the net profit declining faster than revenue? A detailed examination of its financial report reveals that the company's other income has increased significantly, from 340,000 yuan in 2022 to 874,000 yuan in 2023, a sharp increase of 157%. In other words, if it weren't for the significant increase in other income, the company's revenue performance would likely be even worse.

Of note, in 2023, revenue from new customers accounted for approximately 92% of its equipment sales revenue. This also indicates that without a stable customer base, the company's revenue foundation is not solid, and operational risks deserve attention.

During the period, the number of company customers decreased by 19, with customers becoming more concentrated, mainly in the industrial waste industry. In both 2022 and 2023, the company's largest customer changed. In 2022, the largest customer was Huaxin Environmental Engineering Co., Ltd., contributing 7.2% of revenue; in 2023, it was Lhasa Hong Stone Materials Co., Ltd., contributing approximately 13.1% of revenue.

Large customers are not fixed, and on the positive side, not being dependent on customers leads to a relatively healthy cash flow. During the period, accounts receivable were relatively small, operating cash flow increased significantly, at -72,000 yuan and 991,000 yuan respectively; cash and cash equivalents were approximately -828,000 yuan and 2.389 million yuan respectively. It can be seen that the company's business growth has been converted into tangible cash, significantly increasing cash reserves.

How to seize industry growth dividends by reducing research and development expenses?

Although the business scale is small, Stride's growth trend in its track is relatively certain.

From a policy perspective, in recent years, the Chinese government has attached great importance to the development of the solid waste treatment industry, issuing a series of supportive policies. From the top-level design of the dual-carbon strategy to the unwavering ecological civilization construction in the "14th Five-Year Plan," and the implementation of "zero waste city" construction, various policies have provided strong guarantees for the rapid development of the industry. Driven by various policies, China's solid waste treatment industry has overall entered the fast lane of development.

According to data from the international market research company Grand View Research, the global industrial recycling equipment market was estimated at 852 million US dollars in 2019 and is expected to reach 1.3 billion US dollars by 2027, with a compound annual growth rate of 5.8%. By 2025, the market in the Asia-Pacific region is expected to exceed 450 million US dollars, with China being the main source of revenue According to the data from the international market research company IBISWorld, the solid waste recycling industry in China has developed rapidly in the past five years. It is expected that in the next five years until 2022, industry revenue will grow at an annualized rate of 9.6% to reach $25.2 billion.

As the solid waste treatment industry enters a rapid development cycle, the industry chain ecology is increasingly improving, and the participation of industry capital and private capital has significantly increased, with a substantial increase in solid waste enterprises. For example, companies like GreenMax, Hanlan Environment, China Everbright Group Limited, Fuchunjiang Environment, and Teda Environmental Protection. However, the industry has not yet seen an oligopoly monopoly pattern, and market competition is particularly fierce. In order for Sride to achieve overtaking on the curve, it needs to continuously strengthen its business strength.

According to the Securities Times app, the solid waste management industry is a technology-intensive industry with high technological barriers. Therefore, racing companies need to continuously incubate new technological breakthroughs to support business development.

Sride's ability to expand its market in this industry is due to its advanced technological concepts. Specifically, the company integrates cutting-edge solid waste crushing, screening, and sorting technology concepts from Germany. Starting from multiple dimensions such as material size, production capacity efficiency, and industrial processes, it continuously updates, iterates, refines, and supplies efficient, easy-to-operate, and stable performance single-shaft, double-shaft, four-shaft, coarse crushers, mobile crushers, as well as screening, sorting, and other equipment to global customers.

Whether Sride's technological advantages can continue to be consolidated and develop new products according to market trends still requires its research and development investment to maintain. However, the company's research and development investment is showing a downward trend. During the period, the company's R&D expenses were 2.1 million yuan and 1.6 million yuan respectively, a year-on-year decrease of approximately 24%.

The prospectus shows that the company faces fierce competition in the industrial shredder manufacturing market and has domestic and international competitors. Domestic competitors include but are not limited to SID Machinery (Beijing) Co., Ltd., Genox Recycling Technology Co., Ltd., Huanchuang Technology, and others. With fierce competition in both domestic and international markets, if Sride's technological barriers are not solid enough and its business is already declining, how can it seize the industry's growth dividends?