Francis Shares (02499), whose stock price is still hovering around the issue price, is about to face a new test.

The Zhitong Finance App observed that Francis shares were listed on the Hong Kong stock market on November 10, 2023, and introduced a cornerstone investor, Liugong Machinery Hong Kong Limited, in the global sale. The cornerstone subscribed 7.633,200 H shares of Francis shares at an issue price of HK$14.28, at a cost of HK$109 million, accounting for 62.90% of the number of shares offered globally, and 2.19% of Francis's issued share capital after the global sale was completed.

When the ban on restricted shares is lifted, the market often changes its tone. As the cornerstone investor of France, Liugong Machinery Hong Kong Co., Ltd. holds 7.633,200 H shares, and the ban on H shares will be officially lifted on May 10. The market can't help but worry, will Liugong Machinery Hong Kong Co., Ltd. cash out after the ban is lifted? Can the fundamentals of Francis shares withstand this potential challenge?

Reduce costs and increase efficiency to release most of the incremental profits

For Francis Shares, 2023 is a critical year in the company's development history. This is not only because it was successfully listed in Hong Kong, received capital help, and built up brand awareness, but also because 2023 was the first year in which the impact of the epidemic in China was eliminated and the economy returned to normal development. The business operations of Francis Shares also began to get on track and delivered impressive results in the first year of listing.

According to the 2023 financial report, the revenue of Francis Shares during the reporting period was 1,372 billion yuan, up 14.9% year on year, and net profit was 31.22 million yuan, down 11.9% year on year. The decline in net profit was mainly due to additional listing expenses of 39.2 million yuan. Excluding the impact of this non-recurring factor, the adjusted net profit of Francis Shares during the reporting period was 70.4 million yuan, an increase of 98.9% over the previous year. This means that Francis shares achieved rapid growth in revenue and net profit in 2023.

Surprisingly, the high growth in the performance of Francis shares was completely ignored by the market. From the release of its positive profit forecast on March 1 to the official release of its 2023 annual report on April 18, the stock price of Francis shares was still fluctuating sideways, with almost no fluctuation, and the turnover was sluggish. It was only tens of thousands or 100,000 per day, and the stock price hovered around the issue price of HK$14.28. Why isn't the market buying it?

As the largest full-life cycle solution provider for on-site logistics equipment in China, Francis Co., Ltd., founded in 2007, has been deeply involved in the on-site logistics equipment industry for more than 15 years, and has formed three major business segments, namely on-site logistics equipment subscription services, maintenance services, and on-site logistics equipment and accessories sales services. Among them, subscription services are the company's core business.

During the reporting period, the 14.9% increase in revenue of Francis shares was mainly due to the steady development of subscription services, as well as the rapid growth of maintenance services and equipment and parts sales services. Specifically, revenue from subscription services increased by 3.9%, while revenue growth rates for maintenance services and sales services were 31.8% and 33% respectively. Both became the main driving forces driving the company's overall revenue growth.

It is worth noting that the revenue performance of subscription services in 2023 fell short of market expectations, as can be seen from changes in the number of logistics equipment being managed in the market. According to financial reports, as of December 31, 2023, Francis Co., Ltd. has 67 offline service outlets in 47 cities across the country and manages more than 45,000 on-site logistics equipment. The number of service outlets during the reporting period was the same as in 2022, but the number of logistics equipment in the pipeline increased by at least 14.96% compared to 39145 in 2022, and the increase in the number of equipment far exceeded the increase in subscription service revenue. This is probably due to insufficient demand in some industries in the downstream market.

The main customers of Francis subscription services are manufacturing and logistics, and the continued downturn in the real estate industry is probably a key factor in insufficient downstream demand. To a certain extent, this has offset the rise in demand in the logistics industry, thereby inhibiting the faster revenue growth rate of subscription services.

While the development of subscription services is facing certain challenges, Francis has stepped up its efforts to expand maintenance services, equipment and accessories sales services. Thanks to the “repair and maintenance plan” service launched by the company, which was further recognized by the market in 2023, which brought in additional business and customers; at the same time, Francis shares actively expanded domestic and foreign markets, and also brought new customers for equipment and accessories sales services, such as Chengdu International Railway Port Economic and Technological Development Zone Construction and Development Co., Ltd., thus achieving rapid growth in revenue from these two major businesses.

In terms of profitability, the gross margin of Francis shares was 30.4% in 2023, while the adjusted net interest rate rose from 2.96% in 2022 to 5.13% in 2023. This is because the cost reduction and efficiency of Franz shares in 2023 reduced operating costs. In 2022, sales and marketing expenses, management expenses, and financial expenses accounted for 27.34% of revenue, while in 2023, this ratio fell to 25.2%, a reduction of 2 percentage points, thereby significantly releasing profit growth.

From this perspective, the impressive performance of Francis shares in 2023 needs to be discounted. With the continued macroeconomic recovery, the revenue side achieved rapid overall revenue growth by accelerating maintenance services and equipment and accessories sales services due to weak demand in some industries, but the near-doubling of the profit side benefited to a large extent from the implementation of cost reduction and efficiency, which squeezed out most of the incremental profits.

Inflated valuations may be the biggest obstacle to rising stock prices

Although performance needs to be discounted to a certain extent, the key reason that actually made the market “ignore” this performance of Francis shares is probably due to inflated valuations.

As of the close of trading on April 26, the total market value of Francis shares was HK$5,032 billion. If calculated with adjusted net profit of RMB 70.4 million in 2023 and net assets of RMB 1,077 billion, the current market value of Francis shares corresponds to PE and PB valuations in 2023, 66.21 times and 4.32 times, respectively.

This kind of valuation is clearly overestimated for an enterprise that falls under the category of asset-heavy operations. If compared with Hongxin Construction and Development (09930), it can explain the problem even more. Hongxin C&D is one of the leading equipment operation service providers in China. It has a comprehensive equipment portfolio and strong service capabilities. In 2023, the number of aerial work platforms managed reached 177,600, ranking first in Asia and the top three in the world, and the number of customers reached 232,000 in 2023.

In terms of performance, Hongxin C&D's revenue continued to increase from RMB 3.664 billion in 2020 to RMB 96.11 in 2023, with a compound annual growth rate of 37.86%. Adjusted net profit continued to increase from 504 million yuan to 1,043 million yuan during the period, with a compound annual growth rate of 27.45%. In the same period, the compound annual revenue growth rate of Francis shares was 11.87%, and the adjusted net profit compound growth rate was 9.14%.

The volume of Hongxin Construction and Development is several times that of Francis shares, but the performance growth rate is significantly faster than that of Francis shares, and the adjusted net interest rates since 2020 have all been more than 2 times that of Francis shares. The profitability far exceeds that of Francis, but the current market value difference between the two is only HK$400 million. More importantly, the 2023 PE and PB valuations corresponding to Hongxin C&D's current market value are only 3.85 times or 0.47 times. In contrast, there is a suspicion that Francis shares are inflated.

Against this background, whether the restricted shares that are about to be lifted will be sold will clearly affect the stock price trend of Francis Shares. In the Hong Kong stock market, the lifting of the ban on restricted shares is a major event for investors. Due to insufficient liquidity in Hong Kong stocks, once the ban on restricted shares is lifted, it is bound to cause serious negative feedback on stock prices. Taking Houson Fintech, which has plummeted just this year, the turnover of HK$670,000 alone caused the stock price of this company, which once had a market value of HK$4.2 billion, to plummet by more than 90%. This makes it easy to understand investors' focus on the trend of restricted stocks after the ban is lifted.

Meanwhile, Liugong Machinery Hong Kong Co., Ltd., the cornerstone investor of Francis Co., Ltd., is a wholly-owned subsidiary of Guangxi Liugong Machinery Co., Ltd. (“Liugong”). Liugong's main business is R&D, production, sales and service of construction machinery and key components, and is listed on the Shenzhen Stock Exchange (stock code: 000528). There are two possible reasons why Liugong Machinery Hong Kong subscribed to Franz shares. One is that it wants to become a supplier of Francis shares, and the other is that it already has a supplier relationship and wants to further strengthen cooperation with Francis Shares. Regardless of the reason, Liugong Machinery Hong Kong's current subscription is actually more strategic investment, so it is relatively unlikely that restricted shares will be sold after the ban is lifted.

However, even if Liugong Machinery does not sell stocks after the Hong Kong ban is lifted, the high valuation of Francis shares may take a long time to digest, and it will not be possible to break out of the new trend until the company's growth performance matches the valuation. Until then, its stock price may still face great upward pressure.