On September 30, 2024, Yatu High-tech New Material Co., Ltd. (hereinafter referred to as "Yatu High-tech") officially received acceptance of its IPO application by the Beijing Stock Exchange, with GF Securities acting as the sponsor.

Yatu High-tech is primarily engaged in the research and development, production, and sales of industrial coatings. Its main products include automotive touch-up coatings, automotive interior and exterior coatings, other industrial coatings, and auxiliary materials. These products are widely used in various industrial fields such as automotive touch-ups, automotive interior and exterior decoration, new energy commercial vehicles, rail transit, and special-purpose vehicles.

The actual controllers behind Yatu High-tech are the Feng brothers—Feng Zhaojun and Feng Zhaohua. They each hold 22.7564 million and 9.7527 million shares of the company, with direct shareholding ratios of 27.02% and 11.58%, respectively. In addition, through Heli Investment, Gongqingcheng Yaxu, and Gongqingcheng Guantu, they indirectly control 57.90% of Yatu High-tech's shares, totaling 96.50% of the company's equity, making them the joint actual controllers.

Expanding downstream market demand and reduced upstream raw material prices

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According to the prospectus, from 2021 to 2023 and the first quarter of 2024 (hereinafter referred to as the "reporting period"), Yatu High-tech's operating income was 449 million yuan, 557 million yuan, 636 million yuan, and 158 million yuan, with year-on-year growth rates of 24.05% and 14.18%, respectively. The gross margin rates were 31.79%, 35.45%, 43.50%, and 44.54%, with year-on-year growth rates of 11.51% and 22.71%, respectively. The net profit attributable to the parent company after deducting non-recurring gains and losses were 37.6533 million yuan, 75.4606 million yuan, 116 million yuan, and 32.2979 million yuan, with year-on-year growth rates of 100.41% and 53.72%.

These figures indicate that during the reporting period, Yatu High-tech achieved significant growth in operating income, gross margin, and net profit attributable to the parent company after deducting non-recurring gains and losses.

Yatu High-tech stated that from January to June 2024, the company achieved operating income of 325 million yuan, a year-on-year increase of 12.13%; the net profit attributable to the parent company after deducting non-recurring gains and losses was 66.1074 million yuan, a year-on-year increase of 33.56%.

Looking at the prospectus, the significant increase in the company's performance can be attributed to two main factors: 1) the expansion of downstream market demand; 2) the reduction in upstream raw material prices.

In terms of the downstream market, in recent years, the increase in the global stock of automobiles and the continuous rise in the sales of new energy vehicles have driven significant growth in the demand for the company's automotive touch-up coatings.

Data from Market Research shows that the global automotive touch-up coatings market was valued at 14.4 billion USD in 2022 and is expected to expand to 21.8 billion USD by 2030, with a compound annual growth rate of approximately 5.32%. The domestic market is expected to grow from 2.63 billion USD in 2022 to 4.9 billion USD in 2030, with a compound annual growth rate of about 8.1%. In addition, the rapid rise of China's new energy vehicle industry has also brought new development opportunities for local independent brand coating enterprises.Data from the China Association of Automobile Manufacturers (CAAM) shows that China's new energy vehicle (NEV) production soared from 1.366 million units in 2020 to 9.587 million units in 2023, with a market share reaching 31.6%. CITIC Securities further predicts that by 2025, the sales of new energy vehicles in China and globally will reach 15.6 million and 24.1 million units, respectively. Against this backdrop, the future substantial increase in the automotive market is expected to continue driving the demand for automotive coatings.

In terms of the upstream industry, the decline in raw material prices has alleviated the production cost pressure for companies. Yatu High-tech's main business costs include direct materials, direct labor, manufacturing expenses, transportation costs, and distribution expenses. Direct materials include main raw materials such as resins, pigments, curing agents, additives, solvents, and packaging materials, accounting for more than 80% of the main business costs.

During the reporting period, although there were fluctuations in the prices of the company's main raw materials, they generally showed a downward trend, with particularly significant price reductions for solvents and curing agents. From 2021 to 2023, the unit price of solvents decreased by 13.86% and 5.30% year-on-year, respectively; in 2023, the unit price of curing agents decreased by 42.02% year-on-year. The company stated that since 2022, raw material procurement prices have decreased to varying degrees due to factors such as market demand, crude oil prices, and the release of domestic production capacity. Benefiting from the decrease in product costs, the company's product gross margin has correspondingly increased.

Senior industry observer and editor-in-chief of "Coating World," Huang Changjun, pointed out to "Harbor Business Observation" that the significant increase in Yatu High-tech's gross margin is driven by multiple factors, mainly reflected in the following four aspects: 1) In 2023, the prices of bulk raw materials generally fell, reducing production costs; 2) Overseas business performance was strong, and the gross margin of overseas business was higher than the domestic market; 3) The company's measures in cost control and cost savings have achieved significant results; 4) The company's product structure adjustment has taken effect, and the sales proportion of high-gross-margin products has increased.

Overseas revenue accounts for more than half, and related risks are worth vigilance.

During the reporting period, the increase in the company's operating income mainly came from the overseas market. The company's overseas sales cover six continents, with major export countries including the United States, Russia, Nigeria, the United Arab Emirates, South Africa, Ghana, and others.

Looking at the revenue distribution by sales region, during the reporting period, the company's foreign sales income was 187 million yuan, 279 million yuan, 350 million yuan, and 78.965 million yuan, with year-on-year growth rates of 48.92% and 25.48%, accounting for 41.86%, 50.28%, 55.10%, and 50.22% of the main business income, respectively. From 2021 to 2023, the proportion of the company's foreign sales income in operating income has been climbing year by year.

Yatu High-tech stated that this growth is mainly attributed to the gradual maturation of the localization and refinement of sales strategies implemented by the company's overseas subsidiaries, while the brand awareness in overseas markets has also been continuously increasing. Especially in the United States and Russia markets, the company's expansion has been significant, with both regions showing a relatively fast growth rate in revenue.

However, the growth of overseas income is inevitably affected by the international political environment, where trade sanctions and exchange losses are the main sales risks faced by the company. As the global situation becomes increasingly complex and market competition intensifies, if some countries implement trade or tariff policies that are unfavorable to the company, or if international political and economic factors prevent the smooth remittance of funds from overseas subsidiaries, the company will face adverse effects on cash flow and operating performance.In terms of exchange gains and losses, the company's export business is mainly settled in US dollars and Russian rubles. Affected by international political and economic factors, the exchange rates of these two currencies against the Chinese yuan fluctuate significantly. During the reporting period, the company's exchange gains and losses were 2.602 million yuan, -5.311 million yuan, 0.3349 million yuan, and -1.1208 million yuan, respectively, accounting for 5.60%, -5.72%, 0.24%, and -2.83% of the total profit. As the company's export scale continues to expand, if the Chinese yuan continues to appreciate significantly, it will put considerable pressure on the company's operating performance.

Regarding the future trend of the Chinese yuan against the US dollar, Sun Yike, a researcher at Waseda University's International Finance Research Institute, pointed out that although the exchange rate between the US dollar and the Chinese yuan has long fluctuated around 1:7, with the Federal Reserve entering a rate-cutting cycle, the pressure for the yuan to appreciate is gradually increasing. On September 19, 2024, the Federal Reserve announced a rate cut of 50 basis points, the first rate cut since March 2022, and the yuan exchange rate once broke through the 1:7.07 mark. If the Federal Reserve continues to cut rates, it is possible that the yuan will break through the 1:7 mark.

Despite the unsaturated capacity utilization, the company still expands production, and the R&D expense ratio is lower than that of peers. Automotive coatings can be divided into two categories based on the solvent medium: solvent-based and water-based. Although solvent-based coatings have stable processes and good storage properties, they are classified as hazardous chemicals due to their adverse environmental impact. In contrast, water-based coatings are more environmentally friendly but have disadvantages such as instability, difficulty in storage, and higher short-term costs. During the reporting period, solvent-based coatings remained the core product of Yatu High-tech.

Looking at the production capacity, from 2021 to 2023, the production capacity of solvent-based coatings was 19,500 tons, and the production capacity of water-based coatings was 684.25 tons, with the solvent-based capacity being approximately 28.48 times that of water-based. The production of solvent-based coatings was 13,900 tons, 15,100 tons, 17,200 tons, and 3,596.47 tons, with corresponding capacity utilization rates of 71.39%, 77.30%, 88.51%, and 73.83%. In contrast, the production of water-based coatings was 247.73 tons, 309.96 tons, 387.92 tons, and 96.91 tons, with corresponding capacity utilization rates of 36.20%, 45.30%, 56.69%, and 56.65%.

Overall, the capacity utilization rates of both solvent-based and water-based coatings do not seem to be saturated, and there are frequent fluctuations during the period, especially the capacity and capacity utilization rate of water-based coatings are significantly lower than those of solvent-based coatings. In response, the company stated that the main reason is that the downstream market demand is still dominated by solvent-based coatings.

According to the prospectus disclosed, the company plans to publicly issue no more than 24.14 million A shares to the public, with an expected total fundraising amount of 431 million yuan, of which 141 million yuan will be used for the construction of a smart production line for water-based coatings, accounting for 32.71% of the total fundraising amount. The construction period of the project is two years, with an expected capacity release of 40% in year T+3 and reaching 100% in year T+6. After the project is completed, it is expected that the annual production capacity of water-based coatings will reach 8,000 tons, an increase of 8 times compared to the current production capacity of less than 1,000 tons.

Regarding the digestion of the additional production capacity of water-based coatings, Yatu High-tech stated that it is mainly based on the following three factors: 1. With the gradual implementation of national policies and local government policies, the "oil-to-water" process of automotive touch-up coatings will be further accelerated, providing a policy basis for the digestion of the project's production capacity; 2. The wide application field and huge market space of water-based industrial coatings have laid a solid market foundation for the digestion of the project's production capacity; 3. The company's complete sales network and high-quality customer resources also provide strong support for the digestion of production capacity.

At the same time, Huang Changjun also believes that most of the additional production capacity of Yatu High-tech will likely be used in the fields of water-based automotive OEM coatings, water-based automotive parts coatings, and water-based industrial coatings. This is mainly due to the rapid growth of Yatu High-tech in the automotive OEM coatings business this year, and the company is also actively expanding the water-based industrial coatings market, covering application fields such as new energy commercial vehicles and rail transit equipment.

In addition to expanding the water-based coatings project, the company plans to invest the remaining raised funds in the R&D center upgrade project, digital integration center construction project, global marketing network demonstration store construction project, and supplementary working capital, with corresponding fundraising amounts of 106 million yuan, 66 million yuan, 83 million yuan, and 35 million yuan. It is worth noting that the company plans to use 35 million yuan to supplement working capital, accounting for 8.12% of the total fundraising amount.At the same time, the prospectus shows that the company distributed a cash dividend of 33.6842 million yuan to all shareholders in proportion to their shareholdings for the fiscal year 2023. Given that the Feng brothers hold 96.50% of the shares of Yatu High-tech, the vast majority of this dividend payment undoubtedly flowed into their accounts.

Against the backdrop of highly concentrated company equity, the move to raise 35 million yuan to supplement working capital after cash dividends may raise investors' doubts about the necessity of the fundraising.

In response, the company explained that from 2021 to 2023, the company's revenue compound annual growth rate was 18.96%, and the scale of production and operation continued to expand. According to calculations, the company's funding gap will reach 59.5898 million yuan in the next three years, so it is necessary to supplement working capital. This will help support business expansion, optimize financial structure, reduce risks, and enhance market competitiveness. The company also pointed out that it will strictly implement the dividend policy in the future, strengthen the investor return mechanism, and ensure that the interests of the company's shareholders, especially small and medium shareholders, are protected.

Finally, it should be pointed out that the company's R&D cost ratio is significantly lower than the industry average. According to the prospectus and reply, the company's R&D cost ratios during the reporting period were 3.40%, 3.06%, 3.63%, and 3.59%, which are relatively stable and in line with the company's R&D expectations. However, there is still a significant gap compared to the average values of 5.81%, 7.71%, 7.26%, and 8.30% of comparable companies in the same industry.

In response, the company said that the main reason is the different application fields of R&D investment. Specifically: 1. During the reporting period, the company's operating income grew rapidly, especially from overseas markets, resulting in a relatively low proportion of R&D costs; 2. The company's R&D focuses on automotive repair coatings, automotive interior and exterior coatings, and water-based coatings for rail transit and commercial vehicles, while comparable companies in the same industry cover a wider range of application fields and have a larger R&D investment in coatings other than automotive products.