Interpretation of New Stocks in the US Market | How can Tiancheng Zhilian, which has transitioned from the New Third Board to NASDAQ, break the deadlock with significant profit release obstacles?

With the ongoing surge of Chinese enterprises going global, the scale of China's cross-border logistics market has continued to grow in recent years. According to data from the China Research and Consulting Industry Institute, the scale of China's cross-border logistics market reached 2.36 trillion yuan in 2022, a year-on-year increase of 10.8%. It is expected that by 2024, the market scale will reach 2.71 trillion yuan.

This massive market, exceeding two trillion yuan and still growing, provides ample development space for many participants in the cross-border logistics industry. Tiancheng Zhilian Logistics Co., Ltd. (hereinafter referred to as "Tiancheng Zhilian"), based in Suzhou, is one of the companies that has risen alongside the cross-border logistics industry. Currently, Tiancheng Zhilian has embarked on the journey to go public in the United States.

According to Zhitong Finance APP, after submitting its public prospectus to the SEC for the first time on September 3, 2024, Tiancheng Zhilian's holding company, Dongfang International, updated its prospectus for the second time on December 31, accelerating its IPO process.

The latest prospectus shows that Tiancheng Zhilian is applying to list on NASDAQ under the code "ELOG," intending to issue 1.6 million shares of common stock at an offering price of $4 to $5 per share, aiming to raise up to $8 million.

It is noteworthy that Tiancheng Zhilian was formerly known as Suzhou Longliqi Dongyuan Logistics Co., Ltd., which was listed on the New Third Board on May 17, 2017, under the stock name Dongyuan Logistics, and later terminated its listing on February 15, 2023, with a market value of 98 million yuan at the time of delisting.

In terms of performance, Tiancheng Zhilian's results are not impressive. Data shows that in the fiscal year 2024 (the 12 months ending March 31), Tiancheng Zhilian's revenue grew by 67.4% to $40.4436 million, but its net profit fell by 8.9% to $1.0837 million, a typical case of "increased revenue without increased profit." In the first half of fiscal year 2025 (the 6 months ending September 30, 2024), Tiancheng Zhilian's revenue grew by 5.5% to $21.2721 million, while net profit increased by 3.8% to $540,000, indicating a halt in the decline of profits.

With this performance, can Tiancheng Zhilian achieve a higher valuation on NASDAQ than it did when listed on the New Third Board?

Profitability Release Significantly Hindered

As the domestic operating entity of Dongfang International, Tiancheng Zhilian's development history can be traced back to 2006. Since its establishment, Tiancheng Zhilian has provided logistics services to corporate clients. By 2019, Tiancheng Zhilian began to expand its cross-border logistics services, primarily focusing on inland transportation and rail transport between mainland China and Southeast Asian countries. To date, Tiancheng Zhilian's operational network covers major cities in mainland China, Hong Kong, Southeast Asia, and Central Asia.

In terms of service types, Tiancheng Zhilian's logistics services have become project logistics services and general logistics services. Among them, project logistics services mainly include logistics for construction projects and special cargo logistics for large or precision equipment. Construction project logistics encompasses a certain stage or the entire process of construction projects, including procurement, packaging, storage, loading and unloading, transportation, fixation, installation, and other related logistics services Tiancheng Zhilian mainly provides project logistics solution services for new energy projects (including wind power, photovoltaics, renewable energy storage, etc.), chemical equipment, engineering and infrastructure construction (including road bridges, tunnel construction), etc. Large and precision equipment special cargo logistics refers to the logistics services provided to manufacturers or purchasers of large and precision equipment specially customized for stamping machines, lathes, aircraft engines, etc.

General logistics services refer to the transportation, warehousing, loading and unloading, and distribution of ordinary products. Tiancheng Zhilian has subsidiaries and offices in Suzhou, Wuxi, Yancheng, Chengdu, Chongqing, Guangzhou, Shenzhen, Kunming, and Mohan, covering most major cities and regions in China, and can provide customers with full truckload or less-than-truckload delivery.

In terms of transportation capacity, Tiancheng Zhilian owns 20 trucks and has established cooperative relationships with over 2,000 truck owners and drivers, allowing it to outsource transportation tasks to these owners and drivers. Clearly, Tiancheng Zhilian's main transportation capacity is not its own vehicles; it adopts a transportation outsourcing model that enables light asset expansion.

To ensure the smooth transportation of products, Tiancheng Zhilian has four warehousing/logistics centers in three provinces in China, with a total area of over 30,000 square meters, providing customers with ordinary and special warehousing, distribution, and value-added services.

From the customer perspective, developing important large enterprise clients is the core strategy of Tiancheng Zhilian. Its main clients are multinational companies, large domestic enterprises, and listed companies, including industry leaders and well-known state-owned enterprises. These enterprises span multiple industries, including renewable energy, home appliances, health and beauty products, and construction. JinFeng Technology, China Shipbuilding Industry Corporation Marine Equipment Wind Power Co., Ltd., Shanghai Huaneng, Jiangxi Electric Power Group, Guizhou Electric Power Group, Water and Electricity Fourth Bureau, Trina Solar, JD Logistics, etc., are all clients of Tiancheng Zhilian.

In terms of revenue structure, Tiancheng Zhilian is mainly divided into transportation service revenue and warehousing subleasing service revenue, with transportation services being the core. In the fiscal year 2024, the revenue from transportation services accounted for 92.92% of Tiancheng Zhilian's total revenue.

According to the prospectus, Tiancheng Zhilian's total revenue in the fiscal year 2024 increased by 67.4% to USD 40.4436 million, mainly due to the strong recovery of transportation services. In the fiscal year 2023, due to the impact of the pandemic, Tiancheng Zhilian's project logistics business was affected, completing only 818 project logistics services throughout the year. Entering the fiscal year 2024, with the elimination of the pandemic's impact, Tiancheng Zhilian completed 2,947 project logistics services throughout the year, driving transportation service revenue to grow by 78.2% to USD 37.5785 million. However, warehousing subleasing service revenue decreased by 6.9%, which had a certain drag on the company's total revenue growth, mainly because a few clients did not renew contracts after the service period expired due to insufficient market demand.

The reason for the significant increase in revenue in the fiscal year 2024 while net profit declined is mainly due to two aspects. First, the gross profit margin during the period decreased by 2 percentage points to 12.4%, primarily because the gross profit margin of warehousing subleasing services fell from 31.4% to 15.3%, dragging down the overall gross profit margin level

The second reason is that compared to the fiscal year 2023, Tiancheng Zhilian's foreign exchange gains, gains from the disposal of assets and equipment, government subsidies, insurance compensation, and other net income in the fiscal year 2024 have all declined year-on-year, thereby affecting the release of net profit.

Entering the first half of the fiscal year 2025, Tiancheng Zhilian's revenue growth rate has significantly declined, with only a year-on-year increase of 5.5%, of which the core business transportation service revenue only grew by 2.5%. The growth in transportation service revenue is mainly due to the increase in general logistics revenue, while project logistics revenue has seen a year-on-year decline. The revenue from warehousing subleasing services surged by 38.7%, primarily due to the increased demand for general logistics services, necessitating supporting warehousing services.

Although Tiancheng Zhilian's total revenue in the first half of the fiscal year 2025 only grew by 5.5%, it effectively controlled costs by optimizing the price inquiry and comparison process during the reporting period, resulting in a nearly 4 percentage point increase in the gross margin of transportation services, which drove the company's gross margin during the reporting period from 11.1% to 14.2%, leading to a substantial gross profit increase of 35.7%.

However, due to multiple factors such as foreign exchange gains, interest expenses, and government subsidies significantly impacting Tiancheng Zhilian's profit release, the net profit during the period only grew by 3.8%. Although the profit side has stopped declining compared to the fiscal year 2024, issues related to the interference of foreign exchange gains, interest expenses, and government subsidies on Tiancheng Zhilian's profit side still persist.

High Customer Concentration and Accounts Receivable

From an industry perspective, the continuous growth of the logistics industry over the long term is a certain event. With the stable growth of the Chinese economy and the continuous expansion of resident consumption, the demand for logistics is also increasing. Data shows that from 2019 to 2023, the market size of general logistics in China grew from 294.98 billion to 357.11 billion yuan, with a compound annual growth rate of 4.88% In the coming years, with the continuous growth of China's GDP, the logistics industry is expected to grow steadily at a low single-digit rate.

Driven by the overall development of the logistics industry in China, project logistics, as a specialized sub-sector, is also showing a robust development trend. Data shows that from 2019 to 2023, the market size of project logistics in China increased from 26.88 billion yuan to 36.49 billion yuan, with a compound annual growth rate of nearly 8%. The development speed of the project logistics market is significantly faster than that of general logistics. Compared with foreign counterparts, Chinese project logistics companies still have considerable room for improvement in terms of operating scale, profit margins, management levels, service concepts, and awareness. Moreover, the Chinese economy remains a strong engine for global economic recovery, and the "Belt and Road" initiative has brought more opportunities for cross-border project logistics companies.

There is no doubt that the continuous growth of the logistics industry and the accelerated development of the project logistics service sub-sector will benefit Tiancheng Zhilian. However, it is worth noting that while benefiting from industrial development opportunities, Tiancheng Zhilian also faces numerous potential challenges.

The first is intense market competition. Whether in general logistics or project logistics, the industry suffers from severe supply homogeneity. Leading companies rely on economies of scale to maintain a solid market share, but competition among mid-tier and smaller companies is particularly fierce. Data shows that by the end of 2023, the number of companies in China's express delivery service industry approached 140,000. As of October 2023, the number of cross-border logistics companies in China reached 156,700, a significant increase from about 146,700 in 2022, indicating that competition will continue to intensify.

The second challenge is that the release of Tiancheng Zhilian's profits is still constrained by factors such as foreign exchange gains and interest expenses, which leads to the company's net profit growth rate in the fiscal years 2024 and the first half of 2025 being far lower than the growth rate of operating income. If this issue does not improve in the future, Tiancheng Zhilian's profitability will continue to be affected.

The third challenge is the relatively high customer concentration of Tiancheng Zhilian. According to the prospectus, in the fiscal year 2023, the revenue from the two major clients accounted for 23% and 15%, respectively, totaling 38%. By the fiscal year 2024, the proportion of revenue from these two major clients is expected to rise to 35% and 23%, respectively, totaling as high as 58%, further increasing customer concentration. Over-reliance on major clients can lead to significant revenue fluctuations, and the loss of major clients would have a substantial impact on the company's business operations Fourth, accounts receivable is relatively high. Generally speaking, if a company has a high customer concentration, it may be in a relatively weak bargaining position in transactions with customers, making it difficult to increase the average transaction value or resulting in longer payment terms. The large accounts receivable of Tiancheng Zhilian may be due to its excessively high customer concentration. According to the prospectus, as of September 30, 2024, Tiancheng Zhilian had accounts receivable of USD 1.982 million and total accounts receivable of USD 14 million, meaning that the total amount of accounts receivable and notes receivable reached nearly USD 16 million, while the company's total assets during the same period were USD 24.2171 million, accounting for as much as 66% of total assets and about 85% of current assets.

Such a high level of accounts receivable not only significantly increases the risk of bad debts but also slows down the cash recovery speed, which can affect the company's expansion and even potentially raise the company's debt-to-asset ratio in the long term.

In summary, after the impact of the pandemic has been eliminated, Tiancheng Zhilian has begun a noticeable recovery in business since the 2024 fiscal year. However, in the first half of the 2025 fiscal year, revenue growth has shown a significant decline, and the release of profits since the 2024 fiscal year has not been smooth, affecting net profit growth. Although the continuous development of the industry will bring growth opportunities, Tiancheng Zhilian still needs to face potential challenges and risks such as intense market competition, high customer concentration, and high accounts receivable