In 2024, the first batch of on-site inspection lists for A-share IPOs was freshly released.

On January 4, the official website of the China Securities Association showed that the Science and Technology Innovation Board IPO project Zhengzhou Hengda Intelligent Control Technology Co., Ltd. (hereinafter referred to as “Hengda Intelligent Control”) and the Shanghai Stock Exchange main board IPO project Beijing Urban Construction Design and Development Group Co., Ltd. were all selected for on-site inspection.

Among them, Hengda Intelligent Control is one of the few IPOs accepted by the Science and Technology Innovation Board in September 2023 — in September 2023, the Science and Technology Innovation Board of the Shanghai Stock Exchange accepted only 2 IPOs.

As a subsidiary of Zheng Coal Machinery (601717.SH), Hengda Intelligent Control specializes in products related to intelligent coal mining control systems.

Hengda Intelligent Control's performance during the reporting period has reached a sufficient scale. Revenue from 2020 to 2022 was 1,454 billion yuan, 1,850 million yuan and 2,428 billion yuan respectively, while net profit attributable to mother for the same period was 420 million yuan, 523 million yuan and 733 million yuan, respectively.

However, frequent related transactions between Hengda Intelligent Control and Zheng Meiji also posed challenges to its IPO. For example, in 2022, revenue from Zheng Meiji and related parties reached 816 million yuan, accounting for 33.60%.

In this IPO, Hengda Intelligent Control plans to issue no more than 164 million shares and raise 2.5 billion yuan to invest in the construction and supplementary working capital of projects such as the “Coal Mine Intelligent Product Intelligent Manufacturing Demonstration Base”, “Coal Mine Intelligent Product R&D Experimental Center”, and “Intelligent Liquid Supply System Research and Industrialization”.

The market is waiting to see if Hengda Intelligent Control can successfully pass the on-site inspection.

Market independence to be solved

In recent years, intelligent coal mining has become one of the important topics in this industry.

In February 2020, the National Development and Reform Commission and other departments jointly issued the “Guiding Opinions on Accelerating Intelligent Coal Mine Development”, which clarifies the development goals of intelligent coal mines. It is planned that by 2025, large-scale coal mines and coal mines with severe disasters will basically achieve intelligent decision-making and automated collaborative operation, pioneering design, geological support and other systems, robot operations in key underground positions, and intelligent continuous operation and unmanned transportation in open-pit coal mines.

In this context, in April 2023, as a subsidiary of Tiandi Technology (600582.SH), a coal mining operator, Tianma Intelligent Control (688570.SH) landed on the Science and Technology Innovation Board and became one of the few companies in the capital market focusing on unmanned intelligent mining control products for coal mines.

Today, there are also companies engaged in the intelligent coal mining business that are knocking on the science and technology innovation board.

Hengda Intelligent Control, which submitted an IPO application to the Science and Technology Innovation Board in September 2023, provides coal companies with intelligent integrated mining systems such as electrohydraulic control systems, integrated control, hydraulic control, and liquid supply.

Among them, as an intelligent foundation for comprehensive mining work surface equipment, the electrohydraulic control system is the main source of revenue for Hengda Intelligent Control, generating revenue of 1,044 billion yuan in 2022, accounting for 43.27%.

According to the prospectus, in 2022, Hengda Intelligent Control's electro-hydraulic control and intelligent integrated control systems reached 38% and 40% of the domestic market respectively, ranking first in the domestic market.

Behind the impressive data, the “growth” of Hengda Intelligent Control may be inseparable from the help of its parent company Zheng Meiji.

As the controlling shareholder of Hengda Intelligent Control, Zheng Coal Machinery and its co-actor, Zhengzhou Fengheng Enterprise Management Partnership (Limited Partnership), hold a total of 86.23% of its shares.

From 2020 to the first quarter of 2023, Zheng Meiji and its related parties contributed 475 million yuan, 596 million yuan, 816 million yuan and 167 million yuan in revenue to Hengda Intelligent Control, accounting for 32.69%, 32.23%, 33.60% and 27.46% respectively, and has been the largest customer for a long time.

This means that the transaction between Zheng Meiji and Hengda Intelligent Control also constitutes a related transaction.

During the reporting period, about 30% of Hengda Intelligent Control's revenue came from parent company Zheng Meiji, posing a potential challenge to its independence in developing the market.

In response, Hengda Intelligent Control also acknowledged that if a risky incident occurs at Zheng Coal Machinery, it may also have a negative impact on its performance.

“If the company fails to expand third party customers in a timely manner, once the business conditions of relevant party customers such as Zheng Meiji have major adverse changes due to macroeconomics, industrial policy adjustments, declining industry sentiment, or market competition, etc., it will adversely affect the company's operations and performance.” Hengda Intelligent Control said.

Moreover, Henan Energy Group Co., Ltd. (“Henan Energy”), one of the top five customers of Hengda Intelligent Control during the reporting period, also had a strong relationship with Zheng Coal Machinery.

According to Tianyan Research, as the third largest shareholder of Zheng Coal Machinery, the controlling shareholder of Henan State-owned Capital Operation Group Co., Ltd. is the Henan Provincial State-owned Assets Administration Commission; the latter also holds 100% of Henan Energy's shares.

In the first quarter of 2020, 2021 and 2023, Henan Energy contributed 122 million yuan, 64 million yuan and 81 million yuan respectively to Hengda Intelligent Control, accounting for 8.37%, 3.47% and 13.37% respectively.

All of this has put Hengda Intelligent Control's ability to independently face the market to the test.

In fact, Zhengzhou Suda Industrial Machinery Service Co., Ltd. (hereinafter referred to as “Suda Shares”), a participating company of Zheng Coal Machinery, which is currently in the registration stage, also relied on Zheng Coal Machinery's exhibition business when it sprint to go public.

In June 2020, Suda Co., Ltd. submitted a GEM IPO application to the Shenzhen Stock Exchange for the first time. During the reporting period from 2017 to the first half of 2020, Suda Co., Ltd. received revenue of 103 million yuan, 90 million yuan, 116 million yuan and 84 million yuan respectively, accounting for 22.84%, 14.32%, 18.81% and 28.47% respectively.

At the IPO listing committee review meeting of Suda Co., Ltd., the Shenzhen Stock Exchange directly stated that its business was dependent on Zheng Meiji and questioned its ability to independently exhibit the business, and rejected the listing application for Suda Shares in this regard.

“Does the issuer have the ability to operate independently and continuously directly to the market. There are related sales and related procurement between the issuer and Zheng Meiji, and some businesses rely on Zheng Meiji.” The Shenzhen Stock Exchange pointed out, “The issuer did not fully explain whether the issuer still has the ability to independently obtain orders from the market after excluding the influence of Zheng Coal Machinery.”

Moreover, when Suda Co., Ltd. launched its second IPO in February 2023, its related transactions with Zheng Coal Machinery still received attention from the supervisory authorities during the inquiry process.

It is worth mentioning that Suda Co., Ltd. was also subject to on-site inspections by the supervisory authorities during its second IPO.

As a project also randomly selected by the China Securities Association, the market continues to pay attention to whether Hengda Intelligent Control can pass the IPO on-site inspection.

Is it good to stay cool with a big tree on your back?

From a revenue perspective, Hengda Intelligent Control's contribution to Zheng Meiji, whose revenue has already broken the scale of 10 billion dollars, is limited.

In 2022, Zheng Meiji's revenue reached 32.043 billion yuan. Based on Zheng Meiji's current direct shareholding ratio of 85.02% of Hengda Intelligent Control, Hengda Intelligent Control's revenue during the same period accounted for only 6.44% of the parent company.

However, if you look at the net profit from the perspective of returning to mother, Hengda Intelligent Control's contribution to Zheng Coal Machine is not low. In 2022, the net profit of Hengda Intelligent Control reached 733 million yuan, accounting for 24.55% of Zheng Coal Machinery during the same period.

In fact, Hengda Intelligent Control's net interest rate is also prominent among peers. In 2022, its net interest rate reached 30.19%, which is 11.13 percentage points higher than the average value of companies Tianma Intelligent Control, Central Control Technology (688777.SH), Weichuang Electric (688698.SH), and Hengli Hydraulic (601100.SH) during the same period.

However, from the perspective of gross margin, there is no big gap between Hengda Intelligent Control's products and peers. In 2022, its gross margin was 44.04%, 4.01 percentage points higher than the four comparable companies mentioned above.

Maybe it's better to lean on a big tree to cool off.

Compared with peers, Hengda Intelligent Control's sales expense ratio and management expense ratio are relatively low.

In 2022, Hengda Intelligent Control's sales expense ratio was only 4.10%, 2.13 percentage points lower than that of peers; during the same period, the management expense ratio was only 2.03%, lower than that of peers by 3.55 percentage points.

However, the R&D cost rate of Hengda Intelligent Control is also significantly lower than that of its peers. In 2022, R&D expenses were only 4.09%, which is 5.58 percentage points lower than its peers.

As to the reason for the low R&D cost rate, Hengda Intelligent Control explained that its R&D efficiency is high.

“During the reporting period, the company's R&D expenses were lower than the industry average. The main reason was that the company adhered to the principle of R&D service sales. The company invested in R&D resources in a targeted manner according to market demand, and the R&D efficiency was high.” Hengda Intelligent Control pointed out.

However, Hengda Intelligent Control's IPO sparked another controversy in the market because it paid huge dividends during the reporting period.

From 2020 to 2022, Hengda Intelligent Control's dividend amounts reached 350 million yuan, 300 million yuan and 750 million yuan respectively, accounting for 83.43%, 57.34%, and 102.33% of net profit attributable to mother, respectively.

Until September 2022, Hengda Intelligent Control was a wholly-owned subsidiary of Zheng Meiji, so the dividends during the reporting period also mainly went to Zheng Meiji, the sole shareholder at the time.

Corresponding to this, Hengda Intelligent Control's cash reserves at the end of 2020 and the end of 2021 were limited, with cash and cash equivalent balances of 983,400 yuan and 213,200 yuan respectively during the same period.

In this IPO, Hengda Intelligent Control also plans to raise 250 million yuan to supplement working capital.

Hengda Intelligent Control believes that this move will help enhance its ability to pay its debts and reduce financial risks.

“The increase in working capital will facilitate the smooth progress of the company's existing projects and enable new fund-raising investment projects to have sufficient working capital. While enhancing the company's ability to repay its debts, it will reduce the company's financial risk and operating risk.” Hengda Intelligent Control said.

Under the act of “left-handed dividends and right-handed fund-raising,” the need for Hengda Intelligent Control's IPO fund-raising has yet to be verified.