Wen/Rui Finance Li Shanshan

On May 11, three months after replying to the second round of inquiry of Shenzhen Stock Exchange, Shenzhen Feifei Innovation Technology Co., Ltd. (hereinafter referred to as "Feifei Innovation"), which had not waited for the next step, withdrew its order, and its IPO journey of one year and two months ended regretfully.

Looking at the rapidly innovative prospectus, many key indicators disclosed by it are full of doubts.

From 2020 to the first half of 2023, although rapid innovation has achieved continuous growth in revenue and profits, its business model of highly relying on overseas markets is worrying. What's more, the authenticity of its performance is also difficult to be reliable. According to the second round of reply, the coverage rate of the sponsor and the reporting accountant for the verification of the company's income in each period is only about 50%.

Secondly, there are also problems in the company's supply chain. In addition to the common problem in the industry of highly relying on outsourcing production, the top five suppliers of rapid innovation unexpectedly include two competitive enterprises, laying a hidden danger to the stability of the supply chain.

In addition, when the gross profit rate of the company is extremely high, the R&D expense rate has declined year by year. The R&D personnel's salary is at the bottom of the salary of personnel in all departments. 60% of the invention patents were obtained by succession, and one of the invention patents obtained by assignment was also incorrectly disclosed as originally obtained.

What's more rare is that during the IPO of Rapid Innovation, a fund-raising project was cancelled. Is the consideration of its capital investment direction complete? In addition, when there is still 570 million yuan of idle wealth management funds in the company's account, the necessity of using 400 million yuan of the raised funds for replenishment is questionable.

01

The valuation soared 22 times in a year and a half

Invest 15 million yuan to purchase domain names from the actual controller

The founder of rapid innovation is Xiang Wei. Before starting his business, he worked as a designer in Yazhi Integrated Housing Co., Ltd. and Huaqiang Group. With only two and a half years of work experience and two years of freelance career, Xiang Wei personally invested 100000 yuan to establish the company's predecessor Yuxuan Co., Ltd. in April 2009.

At the initial stage of rapid innovation, the business scale was small, and the operation and financial situation were weak.

According to the data, by the end of December 2015, the total assets and net assets of Rapid Innovation were 30.6499 million yuan and -46222 million yuan respectively. In 2015, the operating income and net profit were 41.3398 million yuan and -10452 million yuan respectively. Not only is it insolvent, but the performance is still in the loss stage.

However, the company needs to purchase relevant international domain names for its operation and development, including www.fs.com and www.feisu.com. The purchase prices are 5.8 million yuan and 1.6818 million yuan respectively, with relatively high purchase costs.

At that time, potential investors with rapid innovation tended to give priority to the company's funds for the construction and improvement of the company's product testing facilities and the global layout of warehousing. Based on this, Xiang Wei, the actual controller of the company, bought the above two international domain names from his own pocket in 2015 and 2016 and provided them to the rapid innovation for free.

It was not until July 2019 that Fast Innovation purchased these two international domains from Xiang Wei, with the purchase price of 12.85 million yuan and 2.125 million yuan respectively, totaling 14.975 million yuan, and the value-added rate of 121.55% and 26.35% respectively.

At the beginning of the reporting period (early 2020), the number of fast innovation shareholders increased to 18. From 2020 to the first half of 2023, the company experienced five equity transfers and three capital increases again, and the valuation rose rapidly.

In March 2020, Xiang Wei transferred 0.15% of the company's equity (corresponding to the registered capital of 2300 yuan) to Peng Chao with 4.5 million yuan, and the corresponding equity transfer price was 1956.52 yuan/registered capital. The company's valuation was calculated to be about 300 million yuan. Subsequently, Mingcheng Phase I, Shenzhen Chiyu, Jiayuan Chuangfu, etc. successively became shareholders.

In December 2021, the last external equity financing before the submission of the statement by Feifei Innovation, six war investors, including Shenzhen Venture Capital, Hongtu No.1, Nanshan Hongtu, Mingcheng Ruiying, Mingcheng Feifei and Jiayuan No.1, invested 320 million yuan at a total price of 10467 yuan per share, and the company's valuation soared to 6.6 billion yuan, 22 times that of a year and a half ago.

Before the submission, Xiang Wei directly held 56.65% of the company's shares, and indirectly controlled 4.51% of the company's shares and 61.16% of the company's shares by acting as the general partner of Yuxuan Growth, Yuxuan Enterprise and Yuxuan Robust. He served as the company's chairman and general manager, and was the company's controlling shareholder and actual controller.

02

Doubts about the authenticity of performance

Only half of the revenue verification coverage of the sponsor

Feifei Innovation is an enterprise focusing on the R&D, design and sales of core equipment and general accessories in the field of network communication, and is committed to providing global customers with one-stop supply of communication equipment, general accessories and system solutions.

The company's main products include optical modules and high-speed cables, network equipment, optical jumper and pigtail, optical wiring management products, optical transmission equipment, copper integrated wiring products, testing instruments and tools, etc.

After more than ten years of development, the FS brand effect of the company has been continuously enhanced. As of the end of the reporting period, the company had more than 340000 registered customers on its proprietary internet platform fs.com, covering nearly 200 countries and regions in the world. In 2022, there will be more than 70000 customers placing orders on the platform in the whole year, and the number of orders placed on the platform in the whole year will be nearly 260000.

From 2020 to 2022 and the first half of 2023, the company's operating revenue will be 1.179 billion yuan, 1.581 billion yuan, 1.988 billion yuan and 1.039 billion yuan, respectively, with a compound annual growth rate of 29.86% from 2020 to 2022; During the period, the net profits were 130 million yuan, 280 million yuan, 365 million yuan and 226 million yuan respectively

The rapid innovation performance seems to be eye-catching, but its authenticity may be a question mark.

When faced with the regulatory inquiry on "income authenticity verification", Feifei Innovation said in the reply letter that the company's customers are all over the world, and the sales staff mainly communicate with customers through e-mail in their daily business. Therefore, the recommendation agency and the reporting accountant also send e-mail letters when sending paper letters to ensure the efficiency of letters.

However, China Merchants Securities, a rapid innovation intermediary, only sent letters to the top 30% of the company's customers, while the remaining 70% were sent by random sampling.

In the end, the amount of letters sent by the sponsor was 376 million yuan, 504 million yuan, 621 million yuan and 326 million yuan, respectively accounting for 31.85%, 31.86%, 31.23% and 31.33% of the current operating revenue. The proportion of the amount of correspondence in the letters sent was 45.28%, 28.56%, 26.3% and 21.84%, respectively.

The amount of letters sent by the reporting accountant was 356 million yuan, 515 million yuan, 620 million yuan and 323 million yuan, respectively, accounting for 30.21%, 32.54%, 31.2% and 31.13% of the current operating income. The proportion of the amount of correspondence in the replies to the letters was 20.47%, 30.16%, 20.79% and 30.21%, respectively.

It is understood that letters are external evidence with high reliability, which usually require more than 90% of letters to be sent and more than 70% of replies to be sent. In contrast, the rapid and innovative letter verification is obviously too low.

In addition, the rapidly innovative recommendation agency and the reporting accountant also verified the authenticity of the company's customers and sales through video interviews and telephone return visits. Among them, video interviews were conducted after the first 30% of the sales amount in each period of the reporting period had been invited in advance, and telephone interviews were conducted surprise interviews with customers whose sales amount in each period of the reporting period was between 30% and 70%.

During the reporting period, the total amount covered by video, questionnaire interview and telephone return visit was 391 million yuan, 516 million yuan, 653 million yuan and 322 million yuan, respectively, accounting for 33.13%, 32.59%, 32.82% and 31.03% of the current operating revenue. In other words, most of the revenue sponsors of rapid innovation have not been recognized.

The second round of review response letter shows that during the reporting period, the proportion of the amount recognized by the recommendation agency after the combination of letter, substitution test, interview and detail test in the revenue after de duplication is 44.87%, 50.27%, 52.71% and 54.48% respectively; The relevant verification ratios of the reporting accountants were 44.19%, 50%, 52.71% and 54.48% respectively.

03

Overseas sales accounted for more than 99%

The US patent lawsuit has not been completed

With the rapid innovation of products for global customers, its overseas revenue accounts for the absolute value of the company's total revenue.

From 2020 to the first half of 2023, overseas sales of rapid innovation accounted for 98.89%, 99.15%, 99.29% and 99.27% respectively. This means that the company's economic activities are largely dependent on overseas markets.

However, this has also brought a series of operational risks. Rapid innovation frankly says that the company will face more risks arising from changes in the overseas operating environment, which may lead to fluctuations in operating performance or even a decline of 50% or more in operating performance.

Among the countries with rapid innovation and overseas sales, the sales to the United States accounted for the highest proportion, accounting for 45.77%, 43.58%, 46.25% and 46.38% respectively in each period, nearly half.

And depending on the US market, Sino US trade friction has also become a business risk of rapid innovation. The tariff increase caused by Sino US trade friction may hinder the company's operation to a certain extent. Although it has not had a significant impact on the company's performance so far, if Sino US trade relations deteriorate in the future, the company may face the risk of sales obstruction, business performance fluctuations or even a decline of 50% or more.

During the reporting period, FS US, a subsidiary of Fast Innovation, had a patent infringement lawsuit with Corning, a subsidiary of Corning, a US listed company.

It is understood that Corning submitted an application to the United States International Trade Commission on February 21, 2020, applying to launch 337 investigations against 13 enterprises including FS US.

Corning believes that some imported products of high-density optical fiber equipment and its components sold by FS US in the United States (hereinafter referred to as "litigation related products") violate the provisions of Article 337 of the Tariff Act of 1930, and violate five U.S. patents (US 9020320 US 8712206, US 10120153, US 10094996, US 10444456), requesting the US International Trade Commission to conduct a 337 investigation and issue a general exclusion order, a limited exclusion order and a stop order.

After reviewing the investigation records, the US International Trade Commission held that the products involved violated Article 337, and on August 3, 2021, it made a review ruling and issued a stop and termination order against the respondent Leviton, Panduit and FS US, prohibiting them from importing infringing high-density optical fiber equipment and components.

Then, on November 29, 2021, FS US and two other defendants filed an appeal to the United States Court of Appeals for the Federal Circuit; On April 20, 2023, the Federal Circuit Court made a ruling in support of the relevant decisions made by the United States International Trade Commission.

At the same time, on September 27, 2021, FS US issued the No 9020320 patent, filed a patent invalidation lawsuit to the United States Patent Office. By the end of the reporting period, the United States Patent Office had not yet made a ruling.

According to the reply, the product involved in the complaint is the FHX series product, which is a high-density distribution scheme of the company's optical fiber distribution management products, mainly including optical fiber distribution boxes, distribution boxes, etc. These products are used in conjunction with the company's main products, such as switches, optical modules, and other communication products, and are positioned as auxiliary integrated distribution and line management.

In 2020, the sales revenue and gross profit of FHX series products sold by FS US in the United States will be 1083600 yuan and 448800 yuan respectively, accounting for 0.09% and 0.04% of the company's total revenue and gross profit respectively.

Since 2021, FS US has taken the second place, stopped selling FHX series products in the United States and replaced them with FHD series products. From 2020 to the first half of 2023, the sales of FHD series products in the United States accounted for 18.45 million yuan, 29.4313 million yuan, 29.9028 million yuan and 17.1842 million yuan respectively.

04

Dependent on outsourcing production

Competitive enterprises frequently appear among the top five suppliers

The rapidly innovative product production mode mainly relies on outsourcing, that is, the cooperative outsourcing manufacturers produce according to the technical standards, structural performance, parameter indicators, and appearance styles set by the company, including two modes: the company develops and designs its own products and then submits them to the supplier for production, and the company and the supplier jointly develop and then the supplier completes production.

From 2020 to the first half of 2023, the cost of rapid innovation outsourcing products is 591 million yuan, 706 million yuan, 894 million yuan and 452 million yuan respectively, accounting for 85.53%, 83.76%, 82.58% and 84.51% of the company's main business costs.

While relying on outsourcing production and rapid innovation, frankly speaking, the capacity, quality and delivery date of the network communication products sold by the company are to some extent limited by the production capacity, product process, operation and management level of outsourcing manufacturers, and some products with industry-leading technology design may not be able to find qualified suppliers for mass production in a short time.

At the same time, if the outsourcing manufacturer shuts down, suspends production, or the cooperation agreement signed with the company terminates in advance and cannot be solved in time, and the company also fails to take timely and effective measures to remedy, or there is a delay in product supply, the company's business performance and financial situation may be adversely affected.

The rapid innovation of outsourcing production mode is also the focus of Shenzhen Stock Exchange's two rounds of review and inquiry, including whether the outsourcing purchase price is fair, the core competitiveness of the company's business model, and whether the company has significant dependence on major outsourcing manufacturers.

In this regard, the example of rapid innovation shows that the production of Ubiquiti (Ubiquiti), a major international comparable company, and Anke Innovation, a domestic listed company, are all completed by outsourcing manufacturers.

During the reporting period, the manufacturers with outsourcing production cooperation with the company mainly include many domestic and foreign suppliers such as Guangxun Technology (002281. SZ), Ruijie Network, Taichenguang (300570. SZ), Sols, Zhaolong Interconnect, Shengke Communication, Zhibang Technology, Finisar (Finisar), etc.

It is worth mentioning that Accenture Technology and Taichenguang are still comparable listed companies in the same industry that rapidly innovate and sell the same or similar products. During the reporting period, these two competing enterprises were among the top five suppliers of rapid innovation, which may lead to potential conflicts of interest and competition risks. The instability of the supply chain structure may also have a negative impact on the company's production and supply.

Among them, Accenture Technology is the fourth largest supplier of Rapid Innovation from 2021 to 2022, with the purchase amount from the company being 39.3384 million yuan and 81.2828 million yuan respectively, accounting for 6.1% and 6.55% of the total purchase amount; Taichenguang is the top five suppliers of the company from 2020 to 2021 grade in the first half of 2023. The purchase amount of each phase is 52.6881 million yuan, 58.3468 million yuan and 25.3197 million yuan, accounting for 6.74%, 9.04% and 8% respectively.

05

Gross profit rate is 1 times higher than the industry

Patent letter has flaws

Also relying on outsourcing production, the gross profit rate of rapid innovation is extremely high.

During the reporting period, the gross profit margin of the company's main business was 41.11%, 46.68%, 45.57% and 48.5% respectively, while the average gross profit margin of comparable companies in the same industry was 23.06%, 23.39%, 25.74% and 26.12%, nearly twice the industry average.

What about the R&D capability of rapid innovation under the ultra-high gross profit rate?

During the reporting period, the R&D expenses of rapid innovation were 73.999 million yuan, 84.2505 million yuan, 144 million yuan and 69.3521 million yuan, respectively. The R&D expense rates of each period were 6.87%, 5.48%, 5.02% and 5.01%, which declined year by year and were lower than the average R&D expense rates of comparable companies in the same industry of 7.99%, 7.72%, 8.43% and 8.91%.

Of the R&D expenses of the company in each phase, 60% is used for Internet platform and digital system R&D projects, and only 40% is used for product projects.

As of June 30, 2023, Fast Innovation has 446 R&D personnel, accounting for 29.04% of the total number of employees. However, the average salary of the company's R&D personnel is the lowest among all departments. Taking the first half of 2023 as an example, the salary of the company's management personnel, sales personnel and R&D personnel is 100100 yuan, 86600 yuan and 85300 yuan respectively.

There are three core technical personnel for rapid innovation, including founder Xiang Wei, deputy general manager and senior industrial design director Shang Ping, and deputy general manager and senior system R&D director Li Yang.

Judging from the resumes of the three people, only Shang Ping has two periods of experience as project engineer and product design engineer related to electronic companies; Li Yang, with a junior college degree, has entered rapid innovation since graduation. He has successively served as the company's development director, project manager, system development department manager, system development department director, deputy general manager and system development department director. In October 2022, his title was changed to deputy general manager and senior system development director.

In 2022, the annual salary of Shang Ping and Li Yang will be 703400 yuan and 742800 yuan respectively, while the annual salary of Zeng Di, the company's deputy general manager, chief financial officer, director and board secretary, will be up to 1495500 yuan, more than the total annual salary of the two core technicians, and more than the annual salary of Xiang Wei, the actual controller. This salary arrangement also led the market to question the internal decision of rapid innovation.

According to the data, Zeng Di, born in February 1986, once served as the senior audit manager of Deloitte Touche Tohmatsu (special general partnership) Shenzhen Branch and the deputy financial director of China Shoukong Group Co., Ltd. He joined the rapid innovation in December 2019.

In addition, in terms of patents, as of July 19, 2023, Rapid Innovation has obtained a total of 290 major patents at home and abroad, including 11 invention patents, 100 utility model patents, and 179 appearance patents.

Of the 11 invention patents, 7 were obtained by transfer.

It is worth noting that one of the company's invention patents "optical fiber connector forming mold and its manufacturing method" with patent number 2011101049350 was also classified as the original patent in the prospectus initially disclosed by Feifei Innovation, which was later changed to acquired by assignment.

It was found that the application date of the invention patent of "optical fiber connector forming mold and its manufacturing method" was April 26, 2011, the authorization announcement date was September 28, 2016, and the original applicant was Foxconn. In June 2016, the patent was transferred to Shenzhen Jinyanghai Network Intelligent Technology Co., Ltd; In August of the same year, it was transferred to Rapid Innovation again.

The R&D expense rate is low, the salary level of R&D personnel is at the bottom, more than half of invention patents are obtained by transfer, and there are loopholes in patent information disclosure. From this point of view, the level of rapid innovation R&D needs to be discussed.

06

Cancellation of raised investment projects during IPO

There are 570 million idle financing funds in the account, but 400 million will be replenished

According to the IPO fundraising plan, Feifei Innovation plans to raise 1.354 billion yuan, which will be used for 574 million yuan of construction projects of network communication equipment intelligent industrial park, 281 million yuan of upgrading construction projects of Internet platform and operation center, 98.591 million yuan of upgrading construction projects of internal management informatization, and 400 million yuan of supplementary working capital.

However, Feifei Innovation had previously planned to raise 1.394 billion yuan for five investment projects when it made pre disclosure of the offering materials in July 2022. After updating the prospectus, the company plans to cancel the "Shenzhen Warehouse Center Upgrading Construction Project" with an investment of RMB 40.0315 million.

As for the reasons for the cancellation, he explained that in order to meet the needs of the company's capacity expansion and rapid business development, the company will take the construction project of the network communication equipment intelligent industrial park (Wuhan Caidian warehouse) as the global core warehouse in the future to receive, process and transfer the inventory products in a centralized manner; The company will not renew the lease because of the high use cost of Shenzhen Storage Center. As a result, the "Shenzhen Warehouse Center Upgrading Construction Project" was cancelled.

However, it is rare that a fund-raising project has been terminated before it is listed.

In addition, Feifei Innovation intends to use 400 million yuan of the proposed raised funds to supplement working capital, accounting for 29.54% of the total raised funds, which is the second largest project of raised funds.

However, rapid innovation does not seem to be "short of money". By the end of June 2023, the company's monetary capital balance was 388 million yuan, while the short-term debt was only 32.028 million yuan; In the same period, the asset liability ratio was 19.08%.

During the reporting period, the rapid innovation trading financial assets increased year by year, with the amount of 191 million yuan, 321 million yuan, 390 million yuan and 571 million yuan in each period, mainly because the rapid innovation will temporarily idle funds to purchase bank structured deposits in order to improve the efficiency of fund use. That is to say, as of the end of the reporting period, the company still has 571 million yuan of wealth management funds.

While the company has a large amount of cash and idle funds on its account, it still needs to further reach out to the capital market. The rationality and necessity of rapid innovation and massive capital raising are not sufficient.

Appendix: List of Intermediaries for Rapid Innovation Listing

Sponsor and lead underwriter: China Merchants Securities Co., Ltd

Lawyer of the Issuer: Beijing Zhonglun Law Firm

Auditor: Deloitte Touche Tohmatsu (special general partnership)

Appraisal agency: Guozhonglian Assets Appraisal Land and Real Estate Appraisal Co., Ltd