US Stock IPO Preview | Will Dingxin Ecology's performance turn negative on the eve of listing in the US?

With the continuous recovery of the domestic economy and the tightening of the review standards for new stock listings in the A-share market, the trend of Chinese concept stocks listing in the US continues, with several popular Chinese concept stocks experiencing a rebound in September.

Amid the ongoing recovery of the domestic economy, an environmental protection company has initiated the process of listing in the US. Recently, Dingxin Ecology, an environmental technology company from Yantai, Shandong, has submitted its initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC). Dingxin Ecology's IPO price range is between $4 to $4.5 per share, with 1.5 million shares to be issued, aiming to raise up to $6.75 million. Based on the midpoint of the proposed price range, Dingxin Ecology's fully diluted market value would be $70.1 million.

Recently, Gary Dvorchak, Managing Director of Blueshirt Group Asia, a US-based investor relations and media consulting firm, pointed out in an interview that the valuations of Chinese concept stocks in the US stock market are still much lower than those of similar US domestic companies, which will continue to attract funds from well-known value investment funds and other institutions.

Amid the trend of listing in the US, what is the true "quality" of Dingxin Ecology?

Mid-term losses of nearly $20,000, concerns remain over customer concentration

Public information shows that Dingxin Ecology specializes in providing integrated solutions for wastewater treatment (by purifying industrial wastewater), ecological river restoration, river ecosystem management (by improving water quality), and microbial products primarily used for pollution removal and water quality improvement.

According to the prospectus, the company provides integrated wastewater treatment solutions to a wide range of customers, including industries such as construction, agricultural food processing, and automobile manufacturing. In the 2023 fiscal year, revenue from wastewater treatment services accounted for approximately 25.49%, revenue from river water quality management services accounted for approximately 46.39%, and sales revenue from microbial products accounted for approximately 28.03%.

In the past 2022 fiscal year, 2023 fiscal year (fiscal year ending on October 31 each year), and the first six months of the 2024 fiscal year (ending on April 30, 2024), Dingxin Ecology's revenues were $3.5937 million, $9.4473 million, and $2.2238 million respectively, with corresponding net profits of $0.3724 million, $1.8596 million, and -$0.0158 million. The net profit turned into a loss in the first half of the year, indicating significant volatility in performance.

It has been learned that, in addition to poor performance, another issue the company faces is customer concentration. In the six months ending on April 30, 2024, the company's top five customers accounted for approximately 100% of the total revenue. In the 2022 and 2023 fiscal years ending on October 31, the top five customers accounted for 99.82% and 96.94% of the revenue, respectively The company acknowledges that if it loses its main customers or if the business volume of its main customers significantly decreases, the company's performance and financial condition may be significantly adversely affected.

According to the preliminary disclosure in the prospectus, Dingxin Ecology plans to use the funds raised through this IPO mainly to expand its research and development investment in the environmental protection field, expand its market, and upgrade related technologies. In the future, the company will continue to expand the national river ecological restoration, water quality management, and sewage treatment service market, standardize and industrialize service and product technologies, and expand its business to other regions nationwide as needed.

Policy drives industry development, water sector performance under pressure

In August 2024, the State Council and other departments issued the "Opinions on Accelerating the Comprehensive Green Transformation of Economic and Social Development," which clearly outlines quantitative targets for 2030: by 2030, the scale of the energy conservation and environmental protection industry will reach around 15 trillion yuan; the proportion of non-fossil energy consumption will increase to around 25%, pumped storage capacity will exceed 120 million kilowatts; the carbon emission intensity of operational transport units will decrease by around 9.5% compared to 2020; the annual utilization of bulk solid waste will reach around 45 billion tons, with the main resource output rate increasing by around 45% compared to 2020, and so on.

Specifically in the field of water treatment, in the first half of the year, the country introduced multiple policies related to water treatment, such as the "Guiding Opinions on Further Promoting Rural Domestic Sewage Treatment" and the "Notice on Strengthening the Construction and Operation Maintenance of Urban Domestic Sewage Pipe Networks," further promoting rural domestic sewage treatment, urban renewal, and strengthening pipe network construction.

The data from Head Leopard Research Institute shows that from 2017 to 2023, China's industrial wastewater treatment capacity increased from 180 million tons per day to 189 million tons per day, with a compound annual growth rate of 0.8%. With the development of China's industry and the improvement of the industrial wastewater treatment ratio (the ratio of treated wastewater volume to total wastewater discharge), it is expected that the capacity for industrial wastewater treatment will steadily increase in the future. By 2024, China's industrial wastewater treatment capacity is expected to reach 193 million tons per day, and it is projected to reach 208 million tons per day by 2028, with a compound annual growth rate of 2.6% from 2023 to 2027.

According to the information from Zhitong Finance APP, since 2020, the market size of China's industrial wastewater treatment industry has been continuously increasing, with the market size expected to grow from 82.32 billion yuan in 2024 to 108.64 billion yuan in 2028. With the rapid development of the environmental protection industry, the demand for market-oriented services in the sewage treatment industry will gradually expand, sewage treatment standards will continue to improve, old sewage treatment plant technological upgrades and supervision will become stricter, and the improvement of industry operation quality will become a new growth engine for the industry However, from the perspective of the interim report performance, the overall performance of listed companies in the water and water treatment sector in the first half of the year was poor. According to statistics from Huafu Securities, among the 52 A-share companies in the water and water treatment sector (including water operation and sewage treatment), 17 companies achieved year-on-year growth in net profit attributable to the parent company, 3 reversed losses to profits, 22 experienced year-on-year declines, 5 incurred losses, and another 5 sustained losses. In the second quarter, 16 companies achieved year-on-year growth in net profit attributable to the parent company, 19 experienced year-on-year declines, 8 incurred losses, and 9 sustained losses.

In terms of competitive landscape, there are currently many participants in the domestic sewage treatment industry. However, the main participants in the market have significant differences in sewage treatment project locations and design scales. For example, rural sewage treatment is mostly decentralized, with individual project engineering relatively smaller compared to urban sewage treatment. Among them, Beijing Enterprises Water Group, Beijing Enterprises Environment Group, and Beijing Originwater Technology Co., Ltd. have sewage treatment design capacities exceeding 10 million tons per day, placing them in the top tier of the industry. The second tier, with design scales between 4 to 10 million tons per day, includes companies such as Beijing Enterprises Clean Energy Group, Chongqing Water Group, Beijing Enterprises Clean Energy Group, and Beijing Enterprises Clean Energy Group.

In terms of revenue scale, Dingxin Ecology's revenue scale for the 2023 fiscal year is $9.4473 million, ranking lower among listed companies in the same industry.

Amid the overall downward trend in performance, many environmental protection companies are seeking new paths. For example, Beijing Originwater Technology Co., Ltd. is expanding into new material fields such as sewage resource utilization, high-quality drinking water, seawater desalination, industrial zero discharge, and lithium extraction from salt lakes, in addition to its core business. Beijing Enterprises Environment Group is vigorously expanding recycled water utilization, actively entering the fields of secondary water supply, direct drinking water, bottled drinking water, as well as industrial sub-markets such as kitchen waste disposal and waste oil resource utilization.

Overall, both from the industry and its own fundamentals, Dingxin Ecology not only has a relatively small business scale but also faces significant performance risks due to its single business structure and concentration of major clients. If Dingxin Ecology wants to convince market investors to "vote" with real money, it may still have a long way to go