"Jinzhengyan" Southern Capital Center Xi Yue/Author Ting Lu Xizhou/Risk Control
Located in the middle of the coast of Zhejiang Province, Taizhou City is surrounded by mountains and sea, with plains and hills alternating, forming a pattern of "seven mountains, one water and two fields". In addition, Taizhou is also the cradle of China's joint-stock cooperative economy and an important birthplace of the private economy. Zhejiang Danong Industrial Co., Ltd. (hereinafter referred to as "Zhejiang Danong"), which is rooted here, is about to land in the capital market . Can it overcome all obstacles?
Looking at the death of Zhejiang Da Nong, there may be many strange phenomena. Doubts surrounding the business competition between Zhejiang Danong and the subsidiaries of its largest shareholder Leo Group Co., Ltd. (hereinafter referred to as " Leo Group ") are difficult to eliminate. Public information shows that Leo Shares’ subsidiaries are still selling a variety of similar products on the Alibaba overseas sales platform, which may mean that Leo Shares is still competing with its peers in Zhejiang Danong or Cun. Will Leo Shares' commitment to avoid horizontal competition become "empty talk"? Doubts remain to be resolved. In addition, Zhejiang Danong may not be short of money, and it still raises funds to replenish working capital after paying large dividends. The rationality of the fundraising is questionable. In the face of inquiries from regulators, Zhejiang Danong’s reply may not be tenable. It is worth noting that, with its market share at the "bottom" of the industry, Zhejiang Danong is also facing the dilemma of lower sales growth than its peers.
1. The largest shareholder’s subsidiary sells similar products overseas and the promise to avoid horizontal competition may become “empty talk”
Horizontal competition refers to the situation where a listed company and its controlling shareholder, actual controller and the enterprises controlled by it are engaged in the same or similar business. In actual verification, the scope of horizontal competition is even greater.
Zhejiang Danong was “questioned twice” by regulators precisely because of horizontal competition. After research, it was found that the products of Zhejiang Danong and its related parties overlapped, and business competition doubts were difficult to eliminate.
1.1 Zhejiang Danong is engaged in the production of high-pressure cleaning machines , and Leo shares promise not to engage in business that constitutes a competitive relationship
According to the prospectus signed on December 15, 2022 (hereinafter referred to as "Prospectus"), Zhejiang Danong focuses on the R&D, production and sales of high-pressure cleaning machine-related products. Its products include complete high-pressure cleaning machines, high-pressure plunger pumps and cleaning machine accessories. It is a comprehensive cleaning equipment manufacturer integrating household, commercial and industrial use.
Among them, Zhejiang Danong’s main products include high-pressure cleaners, high-pressure plunger pumps and cleaning machine accessories. The three types of products are sold separately.
It can be seen that the production and sales of high-pressure cleaning machine-related products are the main business of Zhejiang Danong. After
's listing, Zhejiang Danong's largest shareholder Leo Shares and its subsidiaries issued a commitment to avoid engaging in any form of business that competes with Zhejiang Danong.
According to the prospectus, Leo Shares and its subsidiary Leo Group Zhejiang Pump Co., Ltd. (hereinafter referred to as "Leo Zhejiang Pump") issued a "Commitment to Avoid Horizontal Competition" stating that starting from April 18, 2022, Leo Shares and other companies controlled by Leo Shares During the period of holding shares of Zhejiang Danong, will not directly or indirectly engage in any business that competes with the main business of Zhejiang Danong and its subsidiaries; it will not support third parties in any form, either within China or abroad, to directly or indirectly engage in business that competes with the main business of Zhejiang Danong and its subsidiaries.
But in fact, Leo Co., Ltd. and its controlled subsidiaries are also involved in the sales of a small amount of high-pressure plunger pumps and the production and sales of high-pressure cleaning machines.
Inevitably, the horizontal competition and conflicts of interest between Zhejiang Danong and Leo Co., Ltd. and its subsidiary Leo Zhejiang Pump have attracted the attention of regulators.
1.2 Leo Co., Ltd.'s subsidiary Leo Zhejiang Pump Co., Ltd. was asked about a small amount of competitive business and responded that it had terminated such business.
According to the "Reply to the Inquiry Letter Regarding the Review and Inquiry Letter of Zhejiang Danong Industrial Co., Ltd.'s Public Issuance of Stocks and Listing Application Documents on the Beijing Stock Exchange" signed on October 18, 2022 (hereinafter referred to as the "First Round Inquiry Reply"), The North Exchange requires that Zhejiang Danong fully disclose the activities of Leo Co., Ltd. and its subsidiaries. The main situation of the same or similar business with Zhejiang Danong, including but not limited to the production capacity and situation, operating income and profit proportion of similar businesses of Leo Shares and its subsidiaries, indicating the proportion of this type of business in Leo Shares, whether there are the same or similar situations with Zhejiang Danong's customers, suppliers, core products and core technologies, whether there is an upstream and downstream supply and demand relationship with Zhejiang Danong, and whether the aforementioned share changes avoid the recognition of horizontal competition.
In response to this, Zhejiang Danong responded that during the reporting period, although Zhejiang Danong had overlapping customers and suppliers with Leo Co., Ltd. and its subsidiaries, the number of overlapping customers and suppliers and the proportion of purchase and sales amounts were relatively low; except that Leo Zhejiang Pump was involved in a small amount of high-pressure plunger pumps and high-pressure cleaning machine businesses during the reporting period due to the occasional needs of its own downstream customers, the core products and core technologies of both parties did not have the same or similar situation.
At the same time, except for a small amount of related transactions such as processing labor services between Leo Zhejiang Pump and Zhejiang Danong, there is no upstream and downstream supply and demand relationship between Leo Zhejiang Pump and Zhejiang Danong. Except for the small amount of high-pressure plunger pump and high-pressure cleaning machine businesses that Leo Zhejiang Pump has operated during the reporting period, and has currently terminated such business and issued a commitment to avoid horizontal competition, there is no horizontal competition between Leo Pump and its controlled subsidiaries and Zhejiang Danong, and there is no situation to avoid the identification of horizontal competition through share changes.
can be seen that as of October 18, 2022, the date when the first round of inquiry responses were signed, neither Leo Shares, the largest shareholder of Zhejiang Danong, nor Leo Zhejiang Pump, its controlled subsidiary, has a high-pressure cleaning machine business, and there is no horizontal competition.
However, the actual situation is not like this. Leo Zhejiang Pump, a subsidiary of Leo Co., Ltd., may still retain the related production and sales business of high-pressure cleaning machines.
1.3 As of the inquiry date, December 15, 2022, Leo Zhejiang Pump sells its self-produced high-pressure cleaning machine
through a cross-border e-commerce platform. According to data from the Market Supervision Administration, Leo Zhejiang Pump was established on December 23, 2015, and its address is No. 1, Third Street, Eastern Industrial Cluster District, Wenling City, Taizhou City, Zhejiang Province.
As of the query date of December 15, 2022, "Jinzhengyan" Southern Capital Center searched on Alibaba's overseas sales platform and found that there is a merchant named Leo Group Pump (Zhejiang) Co., Ltd. Public information shows that Leo Group Pump (Zhejiang) Co., Ltd. is the English name of Leo Group Pump (Zhejiang) Co., Ltd.
The business profile states that the company’s registration date was December 23, 2015, which is consistent with the establishment date of Leo Zhejiang Pump. And according to the certification certificate uploaded by the merchant, the certificate holder is Leo Zhejiang Pump, and its address is No. 1, Third Street, Eastern Industrial Cluster District, Wenling City, Zhejiang Province, China. This address is consistent with the address registered by Leo Zhepump with the Market Supervision Administration.
can see that the Chinese name, English name, and company address of the merchant named Leo Group Pump (Zhejiang) Co., Ltd. are the same as Leo Group Pump (Zhejiang). This merchant may be Leo Zhejiang Pump.
The merchant’s store page shows that the products sold by Leo Zhejiang Pump include lawn mowers, gasoline water pumps, gasoline tillers, high-pressure washers, and accessories. Among them, the high-pressure cleaning machine includes a total of 12 different models of cleaning machines.
At the same time, the right side of the product page shows that Leo Zhejiang Pump is a custom manufacturer.
1.4 The trademark "LEO" printed on the products sold in the official store of Leo Zhejiang Pump may be authorized by Leo Co., Ltd.
It is worth mentioning that the trademark with the word "LEO" is used on the homepage and product pages of the Leo Zhejiang Pump store.
According to the Trademark Office of the State Intellectual Property Office, Leo Zhejiang Pump does not hold a trademark. Leo Co., Ltd. has applied for a total of 50 trademarks with the word "LEO", and many of the trademarks are highly consistent with the trademarks on the Leo Zhejiang Pump store page.
This may mean that Leo Zhejiang Pump sells high-pressure cleaning machines overseas, and the products are produced independently. The product OEM trademark "LEO" is authorized by its parent company, which is Zhejiang Danong's largest shareholder Leo Shares.
In short, in response to the regulator’s inquiry on horizontal competition, Zhejiang Danong responded that although Leo Zhejiang Pump, a subsidiary of Leo Co., is involved in a small amount of high-pressure plunger pumps and high-pressure cleaning machine businesses, it has terminated such business and issued a commitment to avoid horizontal competition. However, Leo Zhejiang Pump is still selling many similar products on Alibaba's overseas sales platform, which may mean that Leo Zhejiang Pump is still suspected of competing with its peers in Zhejiang Da Nongcun. Will Leo Shares' commitment to avoid horizontal competition become "empty talk"? Doubts remain to be resolved. The
problem is not over yet.
2. After listing on the New Third Board, dividends may only be distributed once, claiming to maintain a reasonable dividend frequency or falsely stating the amount of funds to be raised for the
"supplementary working capital" project. This is a company's calculation of the amount of supplementary funds required based on the actual operating conditions in order to alleviate the shortage of working capital.
However, many indicators of Zhejiang Danong may indicate that it is “not short of money” and the rationality of fundraising is questionable. Not only that, Zhejiang Danong was questioned about raising funds to supplement working capital after paying large dividends. In response, Zhejiang Danong claimed that it maintained a reasonable frequency of dividends. However, in fact, Zhejiang Danong has only paid dividends once since it was listed on the New Third Board in 2014. Where does the reasonable frequency of cash dividends come from?
2.1 With this listing, Zhejiang Danong plans to raise 30 million yuan to supplement working capital. According to the prospectus, Zhejiang Danong plans to raise 4.258 billion yuan, which will be invested in the "high-pressure plunger pump and pump system product expansion project", "R&D center construction project" and "supplementary working capital project".
Among them, the planned investment amount for the “supplementary working capital project” is 30 million yuan.
It should be pointed out that at the end of each period from 2019 to 2021 and January to June 2022, Zhejiang Danong had no long-term or short-term borrowings, and the overall asset-liability ratio showed a downward trend.
2.2 The asset-liability ratio is on an overall downward trend. As of the end of June 2022, there were no short-term loans and long-term loans.
According to the prospectus, at the end of each period from 2019 to 2021 and January to June 2022, Zhejiang Danong’s asset-liability ratio was 26.41%, 23.53%, 26.11%, and 22.73% respectively, showing an overall downward trend.
From the perspective of liability composition, at the end of each period from 2019 to 2021 and January to June 2022, Zhejiang Danong has no short-term loans, long-term loans and non-current liabilities due within one year.
In other words, as of the end of June 2022, Zhejiang Danong has no interest-bearing liabilities (long-term and short-term borrowings and non-current liabilities due within one year).
Not only that, before this fundraising, Zhejiang Danong paid a large amount of dividends, and had more than 100 million yuan in monetary funds on its account.
2.3 As of the end of June 2022, it "held" more than 100 million yuan in monetary funds, and dividends exceeded 40 million yuan.
According to the prospectus, from 2019 to 2021 and from January to June 2022, the net cash flow generated by Zhejiang Danong's operating activities was 55.3345 million yuan, 64.5642 million yuan, 61.5517 million yuan, and 38.0103 million yuan respectively.
At the end of each period from 2019 to 2021 and January to June 2022, Zhejiang Danong’s monetary funds were 41 million yuan, 90 million yuan, 105 million yuan, and 138 million yuan respectively, and the balances of cash and cash equivalents were 36 million yuan, 83 million yuan, 95 million yuan, and 128 million yuan respectively.
In addition, Zhejiang Danong also pays dividends.
According to the prospectus, on May 11, 2021, Zhejiang Danong held the 2020 annual shareholders' meeting and decided to distribute a cash dividend of 42.0375 million yuan to all shareholders.
As can be seen from the above, in recent years, Zhejiang Danong has not only shown an overall downward trend in its asset-liability ratio, but also has no long-term or short-term borrowings as of the end of June 2022. At the same time, Zhejiang Danong’s balance of monetary funds, cash and cash equivalents has exceeded 100 million yuan.
According to public information, Zhejiang Danong began to receive listing counseling on January 11, 2021.
Under this circumstance, Zhejiang Danong plans to raise 30 million yuan to supplement its working capital, but its rationality is questionable.
Inevitably, the phenomenon of using raised funds to replenish working capital after making large dividends has also attracted the attention of regulators.
2.4 After a large dividend was distributed, the company was asked about raising funds to replenish blood, saying that it maintained a reasonable frequency of cash dividends after listing on the New OTC Market. According to the first round of inquiry responses, the Beijing Exchange requested that Zhejiang Danong explain the calculation basis for the amount of funds to be used to supplement working capital, whether it is compatible with Zhejiang Danong’s existing business scale, financial status, technical level, development planning and management capabilities, etc., and the rationality and necessity of using raised funds to supplement working capital after large dividends.
In response, Zhejiang Danong responded that according to Zhejiang Danong’s Beijing Stock Exchange listing plan, its retained earnings after listing will be shared by new and old shareholders. After Zhejiang Danong was listed on the National Equities Exchange and Quotations System, it maintained a reasonable frequency of cash dividends and effectively took into account the investment returns of new and old shareholders after listing. In order to cope with the pressure on working capital demand caused by the company's increasing operating scale after listing on the Beijing Stock Exchange, Zhejiang Danong reasonably predicts the cash gap and effectively uses direct financing tools to supplement working capital, which can enhance the company's market competitiveness and protect the legitimate rights and interests of new and old shareholders. Therefore, it is reasonable and necessary for Zhejiang Danong to use the raised funds to supplement working capital after paying dividends.
But that's not the case.
2.5 It has only paid dividends once since it was listed on the New OTC Market in 2014. Where does the frequency of reasonable cash dividends come from? The prospectus shows that Zhejiang Danong obtained the Letter [2015] No. 81 from the National Equities Exchange and Quotations System on January 9, 2015, "Letter Concerning Approval for the Listing of Zhejiang Danong Industrial Co., Ltd.'s Shares on the National Equities Exchange and Quotations", and listed it on the National Equities Exchange and Quotations for public transfer on February 3, 2015.
According to Oriental Fortune Choice data, from 2014 to 2021 and from January to June 2022, Zhejiang Danong only paid dividends once, with the dividend amount being 42.0375 million yuan.
is the above-mentioned dividend of over 40 million yuan, which was implemented by Zhejiang Danong at the shareholders’ meeting on May 11, 2021, and has entered the listing guidance period. However, in the six years since its listing on the New Third Board, Zhejiang Danong has not implemented a dividend.
So far, Zhejiang Danong claims that it has maintained a reasonable frequency of cash dividends after being listed on the National Equities Exchange and Quotations. Is this suspected of false representation? Zhejiang Danong's response to large dividends and the use of raised funds to replenish working capital may be difficult to "establish a firm footing."
3. The market share is at the bottom of the industry and the sales growth rate is lower than that of peers. Market competitiveness may be "tortured"
In an industry where competition is stimulated, companies can only remain invincible if they have full competitiveness. But in this regard, Zhejiang's big farmers may be short-term and deep-rooted.
3.1 The gross profit margin is decreasing year by year, and the replacement of market share by is disclosed as a special risk reminder
According to the prospectus, from 2019 to 2021 and from January to June 2022, Zhejiang Danong’s gross profit margin was 38%, 37.07%, 32.99%, and 32.63%, showing a decreasing trend year by year.
In the special risk warning, Zhejiang Danong stated that there is a risk that its market share will be replaced by competitors in the same industry. At this stage, Zhejiang Danong’s market share is not high and its sales are small. If Zhejiang Danong fails to continuously upgrade its technology and production capacity, it may face the risk of declining market share or even being replaced by competitors due to gradually intensifying market competition, which will have an adverse impact on Zhejiang Danong’s continued operations.
Specifically, compared with comparable companies in the same industry, Zhejiang Danong ranks last in domestic and overseas market share.
3.2 Zhejiang Danong’s domestic and overseas market share totals nearly 4.03%, ranking last among comparable companies in the same industry
According to the “Response to the Second Round Review Inquiry Letter Regarding Zhejiang Danong Industrial Co., Ltd.’s Application Documents for the Public Issuance of Stocks and Listing on the Beijing Stock Exchange” signed on February 18, 2022 (hereinafter referred to as the “Second Round Inquiry Reply”), from 2019 to 2021, Zhejiang Danong’s environment Domestic sales were 64.4908 million yuan, 69.7964 million yuan, and 72.7681 million yuan respectively, and the domestic market shares were 3.07%, 3.1%, and 2.99% respectively; during the same period, the domestic sales Foreign sales were 160.7003 million yuan, 177.6466 million yuan, and 212.3602 million yuan respectively, and the overseas market shares were 0.81%, 0.85%, and 1.04% respectively.
Looking at comparable companies in the same industry, Zhejiang Danong’s market share may be relatively low.
According to the prospectus, Zhejiang Danong selected Zhejiang Yitian Mechanical and Electrical Co., Ltd. (hereinafter referred to as "Yili Mechanical and Electrical"), Lutian Machinery Co., Ltd. (hereinafter referred to as " Lutian Machinery ") and Hytek Power Co., Ltd. (hereinafter referred to as "Hitek Power") as comparable companies in the same industry. The selection basis is that Yili Electromechanical and Lutian Machinery both produce high-pressure cleaning machines and are competitors in the same industry of Zhejiang Danong; Hytec Power and Zhejiang Danong both produce high-pressure plunger pumps, and both belong to the C34 "Manufacturing- General Equipment Manufacturing " industry category.
is in the high-pressure cleaning machine sector. Comparable companies in the same industry of Zhejiang Danong are Lutian Machinery and Yitian Electromechanical. The responses to the second round of inquiries from
show that in terms of the market size of the high-pressure cleaning industry, from 2019 to 2021, Lutian Machinery’s domestic market shares were 11.87%, 15.27%, and 16.26%, respectively, and its overseas market shares were 3.89%, 4.08%, and 5.67% respectively. From 2019 to 2020, Yili Electromechanical's domestic market shares were 20.71% and 18.89% respectively, and its overseas market shares were 5.99% and 7.2% respectively.
It is obvious that Zhejiang Da Nong’s market share is at the “bottom” of the industry, whether in the domestic market or overseas market.
With market share at the "bottom" of the industry, Zhejiang Danong's sales growth is also lower than that of comparable companies in the same industry.
3.3 From 2020 to 2021, Zhejiang Danong's sales growth rate was lower than that of its peers.
According to the first round of inquiry responses, from 2019 to 2021, Lutian Machinery's global sales were 524 million yuan, 628 million yuan, and 869 million yuan respectively; Zhejiang Danong's global sales were 225 million yuan, 247 million yuan, and 285 million yuan. From 2019 to 2020, Yili Electromechanical's global sales were 1.31 billion yuan and 1.592 billion yuan respectively.
According to calculations by the Southern Capital Center of "Jinzhengyan", Lutian Machinery's sales growth rates from 2020 to 2021 were 19.8% and 38.52% respectively. Zhejiang Danong’s sales growth rates were 9.88% and 15.23% respectively. In 2020, Yili Electromechanical's sales growth rate was 21.53%.
It can be seen that in 2020, the sales growth rate of Zhejiang Danong was significantly lower than that of Lutian Machinery and Yili Electrical and Mechanical. In 2021, the sales growth rate of Yili Electromechanical has not been disclosed, but only compared with Lutian Machinery, Zhejiang Danong's sales growth rate for the year is still "left behind".
In other words, with the market share at the "bottom" of the industry, Zhejiang Danong's sales growth rate is lower than that of its competitors. Can it protect its market share from being seized in the future? Maybe it should be a question mark.
The obstacles are difficult and difficult, so be prepared to try them. What kind of challenges will the above-mentioned problems of Zhejiang Danong bring to its future?
