Analysis of US Stock IPOs | With annual revenue close to 4 billion RMB and a gross profit margin of only 0.6%, the performance growth of Netplas Technology faces challenges in obtaining a high valuation

Following the Hong Kong listing of the one-stop B2B comprehensive service provider for the steel industry in 2023, Fang Gang Wang, the one-stop B2B supply chain management platform for the plastic and chemical industry, has recently embarked on the journey to go public in the United States.

According to the Zhitong Finance and Economics APP, on August 14th, Wang Su Technology submitted its public version of the prospectus (F-1 document) to the SEC for the first time, applying to list on the Nasdaq under the code "NPT" and planning to raise up to $17 million in funds. However, the specific number of shares to be issued and the price range have not been disclosed yet. It is worth noting that as early as March 26, 2024, Wang Su Technology had submitted a confidential application to the SEC.

According to the prospectus, Wang Su Technology is a leading supply chain management service provider in the East China region, offering one-stop services including procurement, shipping and logistics, payment, and fulfillment to customers in the Chinese plastic and chemical industry. Wang Su Technology is committed to becoming the largest one-stop supply chain management platform for plastic and chemical raw materials in China.

In terms of performance, Wang Su Technology has achieved rapid growth in the past one to two years. For the fiscal years 2022 and 2023 (12 months ending June 30), Wang Su Technology's revenues were $489 million and $553 million respectively, with net profits of -$602,300 and $2.0877 million for the same period, successfully turning losses into profits. By the first half of the 2024 fiscal year (6 months ending December 31, 2023), Wang Su Technology's revenue was $325 million, a year-on-year increase of 68.6%, and net profit was $3.3238 million, a significant increase of 443.6% year-on-year, further accelerating its growth.

In the current macroeconomic weakness, how can Wang Su Technology continue to accelerate its growth? With its impressive performance, can Wang Su Technology capture the hearts of Wall Street? Through the company's prospectus, one can explore the truth.

1964 Suppliers Provide Over 3424 SKUs

Domestic small and medium-sized enterprises often face pain points such as unstable supply chains, price and quality fluctuations, and cumbersome processes when purchasing plastic and chemical products. In order to make procurement more reliable and efficient for enterprises, Wang Su Technology has built a one-stop platform for plastic and chemical raw material supply chain management and provides customers with one-stop solution services.

Customers can access Wang Su Technology's supply chain platform through the official website, APP, and mini-program. On this platform, Wang Su Technology provides full-process services including product search and matching, product recommendations, marketing and promotion, order management, ordering and payment, and delivery. At the time of product delivery, customers can choose from various modes such as direct shipment from suppliers, platform shipment, or customer self-pickup.

After years of accumulation, Wang Su Technology's one-stop supply chain management platform has established a thriving ecosystem. Specifically, in terms of products, the platform sells three major categories of products, namely basic chemicals, plastic granules, and other products including ferrous metals and cotton. As of December 31, 2023, the three major categories of products covered by the platform have reached a total of 3424 SKUs, provided by approximately 1964 suppliers In terms of customer numbers, as of December 31, 2023, the number of registered customers on the Wangsu Technology platform has reached approximately 2,823. These customers are mainly small and medium-sized enterprises operating in the fields of consumer electronics, Internet of Things, automotive electronics, and industrial control in China. Currently, Wangsu Technology's customers are spread across 20 provinces in China, with key customers mainly located in Shandong, Henan, Zhejiang, Guangdong, and Shanghai. The company plans to expand its business to a wider geographical area to cover more provinces.

From a business model perspective, Wangsu Technology is not an intermediary trading platform. It purchases products from suppliers including manufacturers or distributors and then sells them to customers. Therefore, Wangsu Technology actually plays the role of a distributor. After collecting product demands from small and medium-sized enterprises through the platform, it centrally purchases from suppliers, which provides cost advantages compared to individual procurement by small and medium-sized enterprises. After centrally purchasing the corresponding products, they are then sold to small and medium-sized enterprise customers.

Recovery in downstream demand drives performance growth

By analyzing Wangsu Technology's prospectus, it is easy to see that its continuous growth in the past two years is directly related to the recovery in downstream demand. In the 2023 fiscal year, Wangsu Technology's revenue increased by 12.9% to $553 million, mainly due to significant growth in revenue from basic chemical products and other products.

Specifically, during the reporting period, the end of the impact of the epidemic led to a recovery in national production and operations, driving a 71.7% increase in sales volume of basic chemical products to 352,200 tons in the 2023 fiscal year for Wangsu Technology. Although the average selling price of basic chemical products decreased by 22.9% due to the impact of product mix, the significant increase in sales volume during the period still drove a 32.5% growth in revenue from basic chemical products.

Revenue from other products increased significantly by 507.6% to $32.0311 million, mainly benefiting from the significant increase in sales of steel and cotton, which raised the proportion of revenue from other products to total revenue from 1.1% to 5.8%. It can be seen that in addition to chemicals and plastics, Wangsu Technology is opening up a new growth curve. However, revenue from plastic pellets during the reporting period declined due to the simultaneous decrease in sales volume and price as market demand had not yet recovered, leading to a 55.5% decrease in revenue from this business, which had a certain drag on overall revenue growth.

While revenue grew, Wangsu Technology's gross profit margin for the 2023 fiscal year increased by 0.1 percentage point to 0.6%, and the company increased cost reduction and efficiency enhancement efforts, resulting in a 42.2% reduction in total operating expenses. With the combined effect of multiple factors, Wangsu Technology turned losses into profits in the 2023 fiscal year, recording a net profit of $2.0877 million, a significant increase of 446.6% year-on-year.

In the first half of the 2024 fiscal year, the full recovery of downstream demand became a key factor driving Wangsu Technology's accelerated growth. During the reporting period, Wangsu Technology's revenue surged by 68.6% to $325 million Among them, the revenue of basic chemicals increased by 42.9%, the revenue of plastic particles increased by 204.6%, and the revenue of other products surged by 31521.8% to $11.071 million.

Specifically, the growth in revenue of basic chemicals was mainly due to a significant increase in sales volume of about 40% to 447,000 tons, while the selling price per ton increased by 2.3% to $539. The reason for the increase in revenue of plastic particles was the explosive increase in sales volume by 239.8% to 205,000 tons, although the average selling price decreased by 10.3%, mainly due to a decrease in raw material costs. The explosive growth in sales revenue of other products was mainly due to the low base in the same period, as well as Wenshu Technology's continued expansion of its business scale in metals and cotton.

While experiencing significant revenue growth, Wenshu Technology maintained a stable gross profit margin of 0.68% in the first half of the 2024 fiscal year, resulting in a 69.2% increase in gross profit to $2.2217 million, consistent with the revenue growth rate. However, due to the expansion of business scale, total operating expenses increased by 81.9%, leading to a decrease in the growth rate of operating income to 39% for the period. The substantial increase in net profit during the period was mainly due to a large amount of government subsidies recorded under other income items. Excluding the one-time non-operating factor of government subsidies, the net profit of Wenshu Technology for the reporting period increased by approximately 40%.

It is also difficult to obtain a high valuation by extending upstream integration

From an industry perspective, the plastics and chemical industry is a stable growth track in the long term. The downstream application areas of both industries are extremely wide-ranging, covering many fields including construction, packaging, transportation, electronics, medical, automotive, daily necessities, energy, and agriculture. Market demand will continue to increase with economic development, and the support of relevant policies also provides strong guarantees for the development of these two industries.

In 2023, the Ministry of Industry and Information Technology and six other departments jointly issued a notice on the "Stable Growth Plan for the Petrochemical and Chemical Industry", aiming to ensure the stable growth of the chemical industry, with the goal of achieving an annual average growth rate of about 5% in industry value added. At the same time, the "Outline of the Strategic Plan for Expanding Domestic Demand (2022-2035)" and the equipment renewal policy that has exceeded expectations this year will drive the growth of chemical and plastic demand.

According to data from Zhuochuang Information, from 2023 to 2027, the demand for key plastic and chemical products in China is expected to continue to grow at an annual average rate of 10%, providing important development opportunities for the supply chain management industry, from which Wenshu Technology will also benefit The operating model of Wangsu Technology is very clear, which is to gather the demands of a large number of small and medium-sized enterprises for scale procurement from suppliers. By adopting a demand-driven procurement approach, it can achieve a higher turnover efficiency. Therefore, the key to the continuous growth of Wangsu Technology lies in continuously increasing the number of small and medium-sized enterprise customers, which can enhance economies of scale.

After accumulating a large number of users on the platform, Wangsu Technology has started to extend upstream. According to the prospectus, in April 2022, Wangsu Technology signed an agreement with the government of Taiqian County in Henan Province for a 600,000-ton polystyrene and solid plasticizing storage project. It plans to build a manufacturing plant in Taiqian with an annual output of 600,000 tons of polystyrene, solid plasticizing storage facilities of at least 50,000 square meters, and supporting infrastructure including a 500-meter railway line.

As of now, most of the structural construction and on-site assembly of large equipment for the polystyrene plant have been completed, and Wangsu Technology expects to start production in the second half of 2024. The operation of this plant signifies the initial success of Wangsu Technology's integrated layout, and the company's product prices are expected to become more competitive.

However, Wangsu Technology also faces significant potential operational challenges. Firstly, Wangsu Technology plays a role more inclined towards distributors in its ecosystem, resulting in relatively low profit levels. In the fiscal year 2023 and the first half of fiscal year 2024, Wangsu Technology's gross profit margins were 0.6% and 0.68% respectively, both below 1%; and the net profit margin for fiscal year 2023 was 0.38%, indicating profitability that is still fluctuating around the breakeven point.

Secondly, the plastics and chemical industry is a highly competitive market, with numerous competitors offering services similar to Wangsu Technology, such as Juyetang, Xiangyu Group, and Shanghai Sumi Information. If industry competition intensifies, it may impact Wangsu Technology's business operations.

Furthermore, there is an increasing trend in customer concentration for Wangsu Technology. In the first half of fiscal year 2024, the proportion of revenue from the largest customer to the total company revenue reached 16.2%, and the revenue share of the top ten customers increased from 43.9% to 48.1% within the period. The rising customer concentration poses potential operational risks, as a decline in demand from major customers could affect Wangsu Technology's performance.

Most importantly, from a business model and profitability perspective, the value of Wangsu Technology in the secondary market may be recognized as that of a distributor for valuation purposes. Even though the company's construction of a factory and upstream extension have to some extent enhanced the market competitiveness and profitability of its products, it is difficult to change the overall valuation logic of Wangsu Technology, which does not align with the valuation model of internet companies. Therefore, the likelihood of Wangsu Technology receiving a high valuation is relatively low