Recently, Hangzhou Sanai Environmental Technology Co., Ltd. (hereinafter referred to as: Sanai Environmental/Company) has received the third round of review inquiries from the Beijing Stock Exchange.

Sanai Environmental was established in 1997, listed on the National Equities Exchange and Quotations (NEEQ) in July 2015, and entered the innovation layer in May 2022.

At the end of 2023, the Beijing Stock Exchange officially accepted Sanai Environmental's initial public offering (IPO) application.

During the listing review process, the regulatory authorities have raised three rounds of inquiries to Sanai Environmental, focusing on key issues such as the sustainability of the company's performance growth, whether the related transactions with the supplier Delorson are fair, and whether revenue recognition is in compliance with regulations.

Currently, Sanai Environmental faces numerous risks, such as the Lin Jianping family, the actual controller, holding more than 99% of the shares, yet intending to raise funds to replenish liquidity after large dividends.

Advertisement

In addition, the company has a high concentration of customers and suppliers, especially Delorson, the third-largest supplier, controlled by Lin Jianping's brother.

At the same time, the company has a high proportion of inventory, and there may be a phenomenon of "overstated" capacity utilization.

So, can Sanai Environmental successfully list on the Beijing Stock Exchange?

The regulators further inquire about the stability and sustainability.

Sanai Environmental is a company specializing in the research and development, production, and sales of electrolytic cells, complete electrolytic systems, and their key components.

Its products are used in the non-ferrous metal industry and also serve various fields such as synthetic diamonds, chemical industry, and environmental protection, belonging to the specialized equipment manufacturing industry.

Looking at the overall performance from 2020 to the first half of 2023, Sanai Environmental's revenue and net profit have both achieved significant growth, with revenue being 84.22 million yuan, 102 million yuan, 125 million yuan, and 139 million yuan; net profit is 17.24 million yuan, 35.08 million yuan, 53.32 million yuan, and 32.80 million yuan.

During the same period, Sanai Environmental's gross margin was 38.95%, 44.92%, 36.95%, and 35.11%, and the asset-liability ratio (consolidated) was 59.03%, 57.34%, 61.15%, and 63.50%.

The gross margin fluctuated significantly during the reporting period, and the asset-liability ratio has increased.

It is worth noting that the third round of review inquiries still revolves around the issue of further explaining the stability and sustainability of operating performance.

In addition, according to the annual report disclosed by Sanai Environmental on the NEEQ, although the revenue and net profit attributable to the parent company in 2023 increased by 129% and 161% respectively, the net cash flow from operating activities has plummeted from 112 million yuan in 2022 to 48.93 million yuan, a drop of 56%.

This mismatch between profit growth and the sharp decline in cash flow has raised doubts in the market.

The third-largest supplier is the chairman's brother.

Sanai Environmental has a high concentration of both customers and suppliers.

From 2020 to the first half of 2023, the sales amount of the top five customers accounted for 88.43%, 82.16%, 67.50%, and 84.47% respectively; the procurement amount from the top five suppliers accounted for 58.79%, 50.18%, 51.48%, and 63.08% respectively.

It is particularly worth noting that there is a close family connection between Sanai Environmental and its third-largest supplier "Hangzhou Delorson", which is wholly owned by Lin Jianhong, the brother of Sanai Environmental's chairman Lin Jianping.

In 2023, Delorson's revenue was about 40 million yuan, of which Sanai Environmental contributed 23.8483 million yuan, accounting for most of Delorson's annual revenue.

In addition, the two companies share resources, and the contact information of Delorson's business information is the same as the phone number of Sanai Environmental's financial personnel, and there are multiple overlapping customers or suppliers.

This complex relationship has attracted the attention of the regulatory authorities.

In the first two rounds of inquiries, the Beijing Stock Exchange focused on whether the related transactions between the company and Delorson were reasonable and whether there was improper interest transfer.

Sanai Environmental replied that the unit price of the electrode plates purchased by the issuer from Delorson was the result of public bidding, and the winning price was within a reasonable range, with no obvious unfairness.

The family holds 99.17% of the shares, and after dividends, they raise funds to replenish liquidity.

In Sanai Environmental's listing plan, the company plans to raise 329 million yuan.

Among them, 191 million yuan will be used to build a production base for complete environmental electrolytic equipment, 63.1229 million yuan will be invested in the construction of the research and development center project, and 75 million yuan is planned to be used to replenish the company's working capital.

Combined with the company's high dividend policy in recent years and the highly concentrated equity situation, this plan to replenish working capital has attracted market attention.

The controlling shareholder of Sanai Environmental is Lin Jianping, and Lin Jianping and his wife Jiang Yuling jointly control 94.93% of the company's shares, and are the actual controllers of the company.

Lin Jianping's family members, including his sister Lin Jianwei and son Lin Yixuan, as well as his cousin Lan Xiaoyan, also hold shares in the company, making the Lin family collectively control 99.17% of the company's shares.

In the company's management, Lin Jianping serves as the chairman and general manager, Jiang Yuling serves as a director, deputy general manager, and secretary of the board of directors, and Lin Jianwei and Lan Xiaoyan also serve as directors.

During the reporting period, Sanai Environmental carried out four dividends, with a total amount of 64.68 million yuan, of which more than 99% of the dividends flowed to the Lin family, reflecting the high concentration of the company's profit distribution.

However, Sanai Environmental's cash balance has increased from 50.387 million yuan in 2020 to 133 million yuan as of June 30, 2023.

Against the background of sufficient and continuously increasing cash, the necessity of raising funds to replenish working capital after continuous dividends has attracted market attention.

High capacity utilization rate, high inventory.

In this IPO fundraising, Sanai Environmental plans to use most of the raised funds, that is, 190 million yuan (accounting for 57.6% of the total amount) to build a production base for complete environmental electrolytic equipment.

This investment move indicates a significant expansion of the company's production capacity.

From 2020 to the first half of 2023, Sanai Environmental's capacity utilization rate was 115%, 90.28%, 105.72%, and 61.76%, and the sales rate was 99.57%, 91.94%, 72.72%, and 255.18%.

The above data shows that the company's capacity utilization rate and sales rate are high, indicating good production and sales efficiency.

However, despite the high capacity utilization rate, Sanai Environmental's inventory level has remained at a high level.

From 2020 to the first half of 2023, the company's inventory amount was 45.24 million yuan, 87.13 million yuan, 119 million yuan, and 143 million yuan, accounting for 37.7%, 52.1%, 39.27%, and 39.28% of the current assets.

This means that the company's inventory accounts for nearly 40% of the current assets, which is in stark contrast to the high capacity utilization rate.

As for another important use of the IPO fundraising, Sanai Environmental plans to invest 63.1229 million yuan in the construction of the research and development center.

The company has repeatedly emphasized the focus on research and development in the prospectus, but the data shows that from 2020 to the first half of 2023, the proportion of the company's research and development expenses to operating income has shown a downward trend, which is 6.65%, 4.48%, 5.05%, and 3.38% respectively.

Although the company emphasizes the importance of research and development, the actual proportion of research and development investment is decreasing, which may cause the market to worry about the company's future innovation ability and sustained competitiveness.