Longpan Tech's Mounting Performance Pressure: Rising Debt Ratio and Low Capacity Utilization
After submitting its application twice since last October, on October 17th, Jiangsu Longpan Technology Co., Ltd. (hereinafter referred to as Longpan Technology; 603906.SH, 02465.HK) passed the listing hearing on the Main Board of the Hong Kong Stock Exchange.
Soon after, Longpan Technology announced that the company's global offering of H-shares is based on an initial issuance of 100 million shares (subject to the exercise of the over-allotment option), of which, the initial arrangement for the Hong Kong public offering is 10 million shares (adjustable), accounting for approximately 10% of the total global offering; the international offering is 90 million shares (adjustable and subject to the exercise of the over-allotment option), accounting for approximately 90% of the total global offering. The price range for the company's H-share issuance is preliminarily set at 4.5 to 7.0 Hong Kong dollars, with an expected listing and commencement of trading on the Hong Kong Stock Exchange on October 30, 2024.
Revenue and net profit plummeted in 2023, and the gross margin also turned negative.
It is reported that the company has entered into a cornerstone investment agreement with a cornerstone investor (namely Harvest Oriental), according to which, the cornerstone investor has agreed, subject to certain conditions, to subscribe for or procure its designated entity to subscribe for 20 million shares at the issue price.
As of the closing on October 23rd, the share price of Longpan Technology's A-shares was 10.75 yuan per share. This means that compared to the current A-share price, the H-share issuance price is discounted by about 40% to 60%.
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Even so, in the H-share market where new stocks fluctuate particularly violently, this does not guarantee against a price drop or a significant decline. Taking China Resources Beverages (02460.HK), which was listed and traded on October 23rd, as an example, it did not experience a significant increase or decrease, with a share price increase of 15.03% on the day.
In contrast, Qiniu Intelligence (02567.HK), which was listed on October 16th, experienced a significant price drop on its first day, plummeting by 56.73%. An investor in the Hong Kong stock market believes that Longpan Technology's performance has been poor in recent years, especially with a significant decline in performance in 2023, which is likely to fail to attract investor enthusiasm. Compared to the future potential of new stocks like China Resources Beverages, Longpan Technology's overall narrative is also not very compelling.
According to an article titled "Longpan Technology's Performance Plunges: Gross Margin Turns Negative, Ren Zeping's 'Blue-chip Stocks' Fall Significantly," published by Harbor Business Observer on May 20th, from 2021 to 2023 (the reporting period), Longpan Technology's revenue was 4.054 billion, 14.072 billion, and 8.729 billion respectively; net profit was 433 million, 1.03 billion, and -1.514 billion yuan respectively; and net profit attributable to the parent company was 351 million, 753 million, and -1.233 billion yuan respectively. It is evident that in 2023, Longpan Technology's performance underwent a significant change, with a 38% decline in revenue and a net profit decrease of 263.8% year-on-year.
During the same period, Longpan Technology's gross margin was 27.30%, 17.61%, and -0.13% respectively; the net profit margin was 10.69%, 7.32%, and -17.35% respectively.
The company's explanation is that in 2023, the subsidy policy for new energy vehicles receded, raw material prices fluctuated significantly, the industry faced a slowdown in downstream demand growth and pressure from the industrial chain to destock, and the price of the company's main raw material, lithium carbonate, fell sharply, resulting in a large inventory write-down loss, which led to a net loss. In response, the company has actively taken a series of measures to ensure steady growth in the sales volume of its main products, even as the industry's profit margins are significantly compressed. In the future, as the price of lithium carbonate stabilizes, the company's profits are expected to gradually return to normal. The company continues to focus on R&D investment, solidifying its market share through the introduction of differentiated products, and will also increase its efforts in lean and refined management of production and operations, improving management efficiency and capacity utilization, and reducing production costs.As for the drastic decline in gross margin to negative, Longpan Technology pointed out that the gross margin of the company's lithium iron phosphate cathode materials fell in 2022, mainly due to the increase in the company's cost of sales exceeding revenue growth within the year. This was because lithium carbonate was purchased at high prices in the fourth quarter of 2022. The decline in raw material prices in 2023 led to a gross loss on the company's lithium iron phosphate cathode material products for the year, as the price of lithium iron phosphate cathode materials closely follows the current lithium carbonate price trend on the Shanghai Metals Market, resulting in the initial procurement cost of consumed raw materials being higher than the company's selling price for lithium iron phosphate cathode materials when lithium carbonate prices are in a downward cycle.
According to Longpan Technology's A-share semi-annual report, the operating income for the first half of 2024 was 3.569 billion yuan, a year-on-year decrease of 6.44%; the net profit attributable to the parent company was -221 million yuan, a year-on-year increase of 66.23%; the net profit attributable to the parent company after deducting non-recurring gains and losses was -296 million yuan, a year-on-year increase of 56.39%; the basic earnings per share were -0.39 yuan per share.
In other words, the revenue in the first half of the year has not yet reversed the downturn, and the net profit loss has narrowed. The company stated that in the first half of 2024, the pressure of cost reduction from downstream and intensified market competition, coupled with the impact of price reductions due to the decline in raw materials, led to a net profit loss.
As of the first half of 2024, the net assets of Longpan Technology attributable to the shareholders of the listed company were 3.038 billion yuan, a decrease of 12.01% compared to 3.452 billion yuan at the end of 2023.
Longpan Technology is mainly engaged in the research and development, production, and sales of lithium iron phosphate cathode materials and vehicle environmental protection fine chemicals. The company's most well-known product among consumers is undoubtedly lubricating oil. In addition to this, the company provides a comprehensive range of vehicle environmental protection fine chemicals to customers under the Longpan, Kelansu, and Dick brands.
The debt-to-asset ratio continues to rise, and the capacity utilization rate is not optimistic.
Furthermore, the external focus is also on the debt pressure of Longpan Technology. As of June 30, 2024, the company's total assets were 17.223 billion yuan, a decrease of 1.65% compared to the same period last year, of which monetary funds were 2.374 billion yuan, accounts receivable were 1.55 billion yuan, and inventory was 1.648 billion yuan. The company's total liabilities were 13.211 billion yuan, an increase of 4.34% compared to the same period last year, of which accounts payable were 2.17 billion yuan, and advance receipts were 44,000 yuan.
According to Wind data, as of the end of June 2024, among Longpan Technology's debts, short-term borrowings, long-term borrowings, and non-current liabilities due within one year were 4.788 billion yuan, 2.642 billion yuan, and 1.415 billion yuan, respectively. The scale of interest-bearing debt has reached 8.845 billion yuan, while the company's monetary funds and trading financial assets were 2.374 billion yuan and 841 million yuan, respectively, totaling 3.215 billion yuan, which is far lower than the interest-bearing debt.
From 2021 to 2023 and the first half of this year, Longpan Technology's debt-to-asset ratios were 58.80%, 61.82%, 75.73%, and 76.70%, respectively. Clearly, the rapidly rising debt-to-asset ratio is not good news for the company, and the company's current debt repayment pressure still needs to be alleviated.
Under the intensification of debt, the attempt to seek financing is quite strong. In fact, as early as August 2022, Longpan Technology proposed a 2.1 billion yuan convertible bond issuance plan, of which 1.35 billion yuan was used for the large-scale production project of new energy vehicle power and energy storage cathode materials, 300 million yuan for the lithium iron and supporting projects, and 450 million yuan for supplementing working capital and repaying bank loans. Subsequently, after two rounds of review inquiries by the exchange, the company announced the termination of the convertible bond issuance at the end of June 2023, and more than four months later, the company initiated a listing in Hong Kong.Market expectations suggest that the upcoming Hong Kong IPO for Longpan Technology is expected to raise no more than 700 million Hong Kong dollars. Regarding the use of funds, Longpan Technology has stated that approximately 40% will be used to cover partial expenses for the second phase of its factory in Indonesia; about 40% will be allocated to the partial expenses of a new lithium iron phosphate production line at its Xiangyang factory in Hubei Province; around 10% will be utilized to repay certain interest-bearing bank loans; and roughly 10% will be set aside for working capital and other general corporate purposes.
In its semi-annual report, Longpan Technology noted that in the lithium iron phosphate cathode material sector, the rapid development of the downstream lithium-ion battery industry, as well as the end-use new energy vehicle and energy storage industries, has driven rapid growth in the cathode material industry. The vast market space has, on one hand, attracted numerous cathode material production enterprises to increase production capacity and expand their scale. On the other hand, it has drawn a significant number of new market participants into the competition, leading to a rapid expansion of industry capacity and increasingly fierce competition. The industry is currently facing issues of periodic and structural overcapacity, which may have an adverse impact on the company's future operating performance.
It is noteworthy that from 2021 to 2023 and in the first half of this year, the utilization rates of Longpan Technology's lithium iron phosphate cathode material production capacity were 106.9%, 97.3%, 57.6%, and 71.3%, respectively. Clearly, this capacity utilization rate does not look optimistic from the perspective of 2023 to the present.
Longpan Technology believes that the 40,000-ton lithium carbonate project in Yichun Longpan Times has essentially been completed and has reached the intended usable state; the 30,000-ton lithium iron phosphate project in Indonesia has also entered the trial production and debugging phase, and is about to start mass production, marking the company as the first Chinese enterprise to establish a scaled lithium iron phosphate cathode material factory overseas.
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