U.S. Stock IPO Outlook | How will Xinxu Copper Industry, with annual revenue exceeding 1 billion RMB and a gross profit margin of only 1.2%, break the deadlock given its highly concentrated customer base?

After submitting the public version of the prospectus (F-1 document) to the SEC for the first time on April 1, Xinxu Copper Industry updated the prospectus on August 12 to continue its journey towards listing in the United States.

According to the prospectus, Xinxu Copper Industry applied for a listing on NASDAQ under the code "XXC," aiming to raise $15 million in this IPO, but the scale of share issuance and the issue price have not yet been disclosed.

However, from the performance perspective, Xinxu Copper Industry's results are disappointing. Data shows that the revenue for the fiscal year 2023 (the 12 months ending June 30) was $171 million, a year-on-year increase of 59%, but the net profit turned into a loss, recording a loss of $273,100, compared to a profit of $1.113 million in the fiscal year 2022.

In the first half of the fiscal year 2024 (the 6 months ending December 31, 2023), Xinxu Copper Industry's performance further declined, with revenue dropping 54.28% to $49.2583 million, and a net loss of $301,300, while the net profit for the first half of the fiscal year 2023 was $519,800.

Why is Xinxu Copper Industry's performance continuously declining, and will this affect the company's IPO valuation? The prospectus provides insights.

Low Proportion of Own Brands, Resale Product Revenue Exceeds 80%

Xinxu Copper Industry mainly engages in the research and development, manufacturing, processing, sales, and distribution of copper and copper alloy products. Its products mainly include T2 copper rods, T2 tin-plated copper rods, T2 copper bars, and electrolytic copper, among others. Xinxu produces finished and semi-finished copper products using copper cathodes and scrap copper wire as raw materials through metal casting, extrusion, and drawing processes.

Xinxu Copper Industry's products have a wide range of applications, including electronic and electrical components, telecommunications, automotive, air conditioning, shipping, metallurgy, electromechanical, transportation, construction and housing, power distribution, solar energy, and other industries.

According to the prospectus, Xinxu Copper Industry has approximately 43,330 square meters of operational area in Wuhu City, Anhui Province, China, and employs about 200 staff. As of August 9, Xinxu Copper Industry has five operational manufacturing workshops covering an area of approximately 21,860 square meters, equipped with six production lines, with an annual production capacity of about 20,000 tons.

In terms of customers, Xinxu Copper Industry expands its customer base through direct sales. As of August 9 this year, it has approximately 257 customers covering 15 provinces and municipalities in China, including Beijing, Shanghai, Anhui, Zhejiang, Jiangsu, and Guangdong.

From the revenue structure, Xinxu Copper Industry's income mainly comes from three parts: first, sales of its own "Xinxu" brand copper products; second, resale of copper raw materials (mainly electrolytic copper); and third, service fees for processing customized copper products for customers. In the fiscal year 2023, the revenue from its own brand accounted for 14.09%, while the revenue from the resale of copper raw materials accounted for 85.9%. Clearly, Xinxu Copper Industry's current revenue structure is still primarily based on resale, with a relatively small proportion of its own brand products.

The 59% revenue growth to $171 million in fiscal year 2023 for Xinxu Copper Industry was mainly due to the historically low market prices of electrolytic copper during the reporting period, which led to a large number of electrolytic copper purchase orders from customers, resulting in an 83.59% increase in revenue from the company's copper material resale business, thereby driving the overall revenue growth During the period, the sales revenue of self-owned brand products decreased by 15.3%, mainly due to Xinxu reducing customer supply of certain high-margin products and terminating business dealings with customers with poor credit conditions. The company will focus on developing and selling copper busbar and copper distribution components widely used in electric vehicle battery packs.

In the fiscal year 2023, revenue surged significantly, but net profit turned from profit to loss, mainly due to the low gross margin level of electrolytic copper, which dragged down the overall profitability of the company, and the rise in copper prices led to an increase in raw material costs. Under the combined effect of these two factors, Xinxu Copper's gross margin for the fiscal year 2023 fell from 3% to 1.2%, with a year-on-year decline of 37%. Coupled with the increase in operating expenses and rising interest expenses, this further suppressed Xinxu Copper's profitability.

Entering the first half of the fiscal year 2024, the revenue from Xinxu Copper's self-owned brand products and resold electrolytic copper products significantly declined due to insufficient market demand, resulting in a "halving" of total revenue during the period. Additionally, the decline in gross margin and a 62.75% increase in total operating expenses led to a larger loss for the company.

From the balance sheet perspective, Xinxu Copper is at a relatively high level of debt ratio. According to the prospectus, as of December 31, 2023, Xinxu Copper's total assets were USD 24.1569 million, total liabilities were USD 21.4744 million, and the debt-to-asset ratio was 88.89%.

Intense Market Competition Poses Challenges, High Customer Concentration Hides Risks

From an industry perspective, in the long term, benefiting from the power industry, new energy fields (such as photovoltaics and wind power), the popularization of 5G technology, the rapid development of the electric vehicle market, and demand from various industries such as construction and transportation, China's demand for copper materials is expected to grow steadily.

However, from the competitive landscape, the copper processing industry is a fiercely competitive market. According to data from the Chinese enterprise database Qichamao, copper processing enterprises in China are mainly distributed in East China and South China, with the highest number of enterprises in Zhejiang Province. As of September 2022, there were 1,010 copper processing-related enterprises in Zhejiang Province, while Jiangsu Province had 876, ranking second.

Moreover, the market competition landscape of the industry shows a diversified characteristic, with numerous enterprises in the industry, including large state-owned enterprises, private enterprises, and foreign-funded enterprises, each possessing different competitive advantages in copper mining, smelting, and processing. Among the representative enterprises, Jiangxi Copper, Hailiang Co., Ltd., Bowei Alloys, and Jintian Co., Ltd. have relatively comprehensive product layouts, while most other enterprises specialize in specific products It is worth noting that the entire copper processing industry in our country is also showing a differentiated situation, where the supply of high-end copper products is relatively tight, especially those with special properties or used in cutting-edge technologies, which often need to rely on imports to meet demand. On the other hand, some low-end copper products are facing overcapacity issues, with fierce market competition and compressed profit margins. Therefore, the technological and product upgrading to high-end is key for copper processing enterprises to establish competitive advantages.

From the current product types and revenue structure of Xinxu Copper Industry, its main source of income is the resale of electrolytic copper, which has a relatively low value content and faces intense market competition, resulting in a relatively low gross profit margin that is difficult to withstand fluctuations in raw material prices, leading to significant volatility in Xinxu Copper Industry's profits.

In addition, Xinxu Copper Industry has a high concentration of customers. According to the prospectus, in the six months ending December 31, 2023, the revenue shares of Xinxu Copper Industry's top three customers were 51.12%, 13.82%, and 13.24%, totaling as high as 78.18%. Over-reliance on major customers can lead to relatively low bargaining power for Xinxu Copper Industry, and if customer demand weakens, it will also impact Xinxu Copper Industry's business operations.

Therefore, it appears that if Xinxu Copper Industry wants to achieve a high valuation in the capital market, its technology and products need to transition and upgrade to high-end, while increasing the number of customers to reduce customer concentration and mitigate potential operational risks