Wen/Rui Finance Yang Hongbin

In the 1980s, Kang Jingwei, a worker from a family background, was admitted to South China University of Technology to study electrical engineering science.

It is reasonable to say that after graduation, Kang Jingwei will become a scarce talent in China. In his own words, "When an engineer can be respected, it is meaningful for himself and the country."

However, Kang Jingwei's career path did not develop as usual. His first job was to do assembly line work in an electronics factory in Buji Town, Bao'an. It is hard to imagine that this is the place where his fate began to turn.

By virtue of his diligence, Kang Jingwei achieved the sales of the electronics factory, and then met the manager of Panasonic Shenzhen Branch, thus successfully changing jobs.

During his years in Panasonic, Kang Jingwei went to Osaka and Tokyo, visited Panasonic headquarters and Japanese factories, saw the development of science and technology in Japan at that time, and felt the restrictions of Chinese development in Japanese enterprises.

In 1995, Kang Jingwei, who left Panasonic, started his own business and established the Ketong Group to sell electronic components to enterprises all over the country. Since then, he has created a hard egg innovation for Internet companies. Today, Kang Jingwei's Hard Egg Innovation (00400. HK) has been successfully listed, and its old branch of science and technology has also launched a sprint to the capital market.

Unfortunately, Science and Communication Technology failed to successfully land in the capital market like hard egg innovation. In April this year, the company's IPO application was withdrawn.

It seems that Ketong Technology is very close to listing. Its IPO application was accepted on June 30, 2022. Since then, two rounds of inquiries have been completed at the Exchange. The Shenzhen Stock Exchange Listing Committee originally planned to review the IPO of Ketong Technology on February 7, 2024.

According to the prospectus, the valuation of Ketong Technology is relatively considerable, reaching about 3 billion yuan before the submission of the form. However, the fastest rising valuation of the financing is driven by the company's two employee stock ownership platforms.

In addition, with the rising valuation of the company, Shen Bing, the investor, kept cashing in, but returned part of the cashed out amount to the parent company Hard Egg Innovation behind Science and Technology. In order to solve the problem of horizontal competition with hard egg innovation, Science and Technology has absorbed some insolvent enterprises.

In terms of operation, although Ketong Technology continues to record profits, there has always been a gap in operating cash flow. By the end of June 2023, the gap has reached nearly 670 million. At the same time, the company's borrowing has been growing in recent years, and there is also short-term liquidity pressure. Withdrawal of IPO application may make the company's liquidity worse.

01. Employee stock ownership platform boosts valuation

Shen Bing sold shares and realized 607 million yuan

Established on May 24, 2005 with a registered capital of US $500000, Jinding Zhongtian, the predecessor of Ketong Technology, is a wholly foreign-owned enterprise solely funded by Alphalink Global Limited.

Between 2020 and 2022, Ketong Technology has received four capital increases and four equity transfers.

In July 2020, the registered capital of Ketong Technology increased from 500000 US dollars (equivalent to about 3.8258 million yuan) to 5101000 yuan, and the newly increased registered capital was 1.2752 million yuan subscribed by Youche Yigou (Hong Kong), with an actual contribution of 35 million yuan.

The essence of this transaction is actually "share exchange". Shen Bing, the holder of Youche Yigou (Hong Kong), will hold 30% equity of Hardeggs Holdings Limited in exchange for 25% equity of Ketong Technology held by Alphalink Global Limited. The valuation of Ketong Technology at the time of share exchange was 350 million yuan.

After the completion of the transaction, Scientech will be held by Alphalink Global Limited and Youche Yigou (Hong Kong) by 75% and 25% respectively.

1. The high price purchase of shares on the employee stock holding platform caused the valuation to nearly 7 times in two months, and the supervision questioned the existence of benefit transmission

Two months later, Youche Yigou (Hong Kong) transferred 9.8% of its equity to Innovation Union Co., Ltd. and Shenzhen Ketong Innovation Consulting Partnership (Limited Partnership) on average, with the price of 117.6 million yuan. Based on the transaction price, the pre investment valuation of Science and Technology Technology at this time reached about 2.4 billion yuan, and the cash of Youche Yigou (Hong Kong) was 235.2 million yuan.

In just two months, the valuation of CST technology has increased 6.86 times. After the completion of this round of transaction, the shareholding of Youche Yigou (Hong Kong) in Science and Technology fell to 15.2%.

The prospectus shows that Innovation United Co., Ltd. and Shenzhen Ketong Innovation Consulting Partnership (Limited Partnership), which bought shares at a high price from Youche Yigou (Hong Kong), are both employee stock holding platforms of Ketong Technology. In other words, it is Ketong Technology's own equity investment that has boosted the company's valuation.

Among them, Innovation Union Co., Ltd. is owned by Li Feng, former General Manager and now Senior Vice President of Strategy, Xie Zhangli, former Deputy General Manager and now Senior Vice President of Business, and Chen Xinyou, Business Director. The funds for investing in Ketong Technology are provided by the enterprises controlled by Li Feng's spouse, with an annual interest rate of 4.5% and a repayment date of April 16, 2024.

Shenzhen Ketong Innovation Consulting Partnership (Limited Partnership) is held by 8 senior managers of Ketong Technology, funded by loans provided by Qianhai Hard Egg Communication, with an annual interest rate of 6%, and the repayment date is also April 16, 2024.

The soaring valuation of Ketong Technology has raised regulatory questions, requiring the company to explain the rationality of the valuation rise in the short term and whether there is benefit transmission to Youche Yigou (Hong Kong).

Between August and September 2020, Science and Technology will welcome five more investors, namely Guangdong Yuecai Emerging Industry Equity Investment Fund Partnership (Limited Partnership), Zhongtai Venture Capital (Shanghai) Co., Ltd., Guangzhou Yimi Kaide Industrial Investment Fund Partnership (Limited Partnership), Guangdong Yimi Venture Capital Partnership (Limited Partnership) Guangzhou Chuangying Jianke Investment Partnership (limited partnership) subscribed an additional registered capital of 182998 yuan for Ketong Technology, with the actual contribution of 86.1 million yuan.

After the capital increase, the registered capital of Ketong Technology reached 5283998 yuan. Based on the price of this round of capital increase and the corresponding equity, the pre investment valuation of Ketong Technology is about 2.488 billion yuan.

Soon after, Ketong Technology was added by 14 investors, including Shenzhen Investment Holding Donghai Small and Medium sized Micro Venture Capital Enterprise (Limited Partnership), Hongwan Capital Management Co., Ltd., subscribed for the company's new registered capital of 5436.82 million yuan, and actually contributed 255.8 million yuan. It is roughly estimated that before this round of capital increase, the estimated value of CST was about 2.742 billion yuan.

2. Shen Bing realized 372 million shares by selling shares again, with a valuation of about 3 billion before submission

In November 2020, Youche Yigou (Hong Kong) will realize the shares of Ketong Technology again. First, the 8.6560% equity was transferred to Shenzhen Youche Yigou at a price of 237 million yuan, and Shenzhen Youche Yigou was also 100% held by Shen Bing. Only two days after getting the equity, Shenzhen Youche Yigou transferred all its equity to six enterprises, and the total amount of transfer was the same as the amount at the time of acquisition.

In May 2021, Ketong Technology will be changed into a joint stock limited company with a total share capital of 100 million yuan and a par value of 1 yuan per share.

In June 2021, Ketong Technology will issue an additional 5172413 ordinary shares to Guangdong Yuecai Industry Investment Fund Partnership (Limited Partnership) at a price of 29 yuan per share, totaling about 150 million yuan. The valuation of Ketong Technology before the IPO was about 3 billion yuan.

In May 2022, Youche Yigou (Hong Kong) realized the shares of Science and Technology again and transferred its 46477.43 million shares to Alphalink Global Limited at 29 yuan per share and 135 million yuan in total. After that, Shen Bing and the controlling enterprises withdrew from science and technology.

Shen Bing did not fully realize the amount realized through Shenzhen Youche Yigou, of which 207 million yuan was borrowed to Ketong Technology at a cost of no more than 8% per year. This phenomenon also caused regulatory questions, requiring Ketong Technology to agree on the reasons for borrowing part of the transfer funds to the company, as well as the authenticity of the equity transaction.

According to the reply letter of Science and Technology, the loan did not fall into the company's pocket, but was transferred to the hard core innovation. The purpose of Shen Bing's cash out amount shows that of the 607 million yuan of cash out, 197 million yuan is used to transfer money to hard egg innovation and margin according to the investment agreement.

In fact, Shen Bing has a strong relationship with science and technology and the hard core innovation behind it. He, together with Kang Jingwei's father, brother and others, who are the actual controller of Ketong Technology, hold the equity of Chongqing Songri Motor Co., Ltd., which is currently revoked. At the same time, there are capital exchanges between other enterprises controlled by Kang Jingwei and Shen Bing.

As of the submission, Alphalink Global Limited holds 66.8393% of the equity of Ketong Technology and is the controlling shareholder of the company. Alphalink Global Limited is actually controlled by the listed company Hard Egg Innovation (00400. HK). In addition, Hard Egg Innovation also holds shares of Ketong Technology through the Ingdan Group, with a total shareholding of 66.84%.

Kang Jingwei is the actual controller of Hard Egg Innovation, and can control 46.76% of the shares of Hard Egg Innovation in total. Therefore, Kang Jingwei is the actual controller of CSTC Technology.

The shareholders of Ketong Technology holding more than 5% shares include Guangdong Yuecai Investment Holding Co., Ltd., Shenzhen Yicun Songling Private Venture Capital Fund Management Co., Ltd. and Yao Yi, of which Yao Yi indirectly holds 5%.

Guangdong Yuecai Investment Holding Co., Ltd. holds 5.9965% of science and technology in total through Dongyue Property Industry Investment Fund Partnership (limited partnership), Guangdong Yuecai Emerging Industry Equity Investment Fund Partnership (limited partnership), and Guangzhou Chuangying Jianke Investment Partnership (limited partnership).

Shenzhen Yicun Songling Private Venture Capital Fund Management Co., Ltd. holds 5.1010% of the equity of Ketong Technology through Shenzhen Yicun Tongsheng Equity Investment Fund Partnership (limited partnership) and Shenzhen Weijing Tongrui Investment Center (limited partnership).

3. Asset restructuring absorbs the parent company's insolvent enterprises

The prospectus shows that Hard Egg Innovation planned to split its chip distribution business and list it in A-share market in December 2019. As the main body of listing, the two sides conducted a series of asset restructuring, including domestic asset restructuring and overseas asset restructuring, in order to solve the horizontal competition between Science and Technology and Hard Egg Innovation.

In terms of overseas asset restructuring, Hong Kong Ketong Broadband, Golder Holdings, and Comtech (HK) Holding Ltd. were included in Ketong Technology.

When Ketong Technology acquired all the equity of Golder Holdings, the cost was only $1, because as of December 31, 2019, the consolidated net assets of Golder Holdings were - 122 million yuan, and the cost had been offset by creditor's rights. Previously, Golder Holdings has included Hong Kong Ketong Broadband and Comtech (HK) Holding Ltd.

In terms of domestic restructuring, Shanghai Body, Beijing Xinchuang, Shanghai Xinchuang and Hard Egg Research Institute were included in the Science and Technology Communication. Among them, the net assets of Shanghai Xinchuang are negative, and the nominal consideration is 1 yuan. The daily operating expenses of Hard Egg Research Institute are all borne by Science and Technology, and there is no need to pay the transaction consideration.

The transaction consideration of Shanghai Body was 25.0286 million yuan, which was also offset by creditor's rights and debt. The transaction consideration of Beijing Xinchuang was 2.0048 million yuan.

In other words, Ketong Technology completed the restructuring at a cost of only 2.0048 million yuan, but also absorbed some insolvent companies from the parent company.

In addition, it is worth mentioning that during the financing process of Ketong Technology, the company's actual controller Kang Jingwei, the controlling shareholder Alphalink Global Limited, the former minority shareholder Shenzhen Youche Yigou, Youche Yigou (Hong Kong), and other 26 investors signed investment agreements with special rights clauses with Guangdong Yuecai Emerging Industry Equity Investment Fund Partnership (limited partnership), The clause will be completely terminated at the end of 2021.

The members of the board of directors and senior managers of Ketong Technology include Kang Jingwei, the chairman of the board; Li Honghui, director and general manager; Long Wanping, director and chief financial officer; Li Xia, served as director and secretary of the board of directors.

02. The purchase price of main products is 10 times of the sales price

Gross profit rate is lower than the industry level

Ketong Technology is a chip application design and distribution service provider. The authorized agent's product line mainly includes FPGA (programmable logic chips), ASIC (application specific chips), processor chips, analog chips, memory chips, software and others. Its application fields mainly include smart cars, digital infrastructure, industrial interconnection, energy control, and mass consumption.

From 2020 to 2022, the main business income of CST will be 4.221 billion yuan, 7.621 billion yuan and 8.074 billion yuan respectively, with a compound growth rate of 38.30%. In the first half of 2023, the main business income of CST will be 3.507 billion yuan.

In 2020 and 2021, analog chip sales will be the flagship business of Ketong Technology, bringing in 33.31% and 27.56% of the total revenue. FPGA and component sales will be the second largest revenue source of the company, accounting for 20.30% and 21.35% of the total revenue.

By 2022, the core business of CST will change. The sales of FPGA and components have become the business that brings the most revenue, accounting for 24.43% of the total revenue. The second largest source of revenue is the sales of processor chips, accounting for 23.96% of the total revenue, while the sales of analog chips have dropped to 20.28%, ranking third.

The prospectus shows that the unit price of analog chips sold by Ketong Technology is relatively low, which is 0.85 yuan, 0.97 yuan, 0.99 yuan and 0.91 yuan respectively during the period, but the sales volume is relatively large, which is 1.65 billion, 2.154 billion, 1.646 billion and 843 million respectively during the period.

The unit price of FPGA and components is relatively high, and the sales volume has increased year by year. During the period, the unit prices were 135.32 yuan, 154.62 yuan, 132.61 yuan and 181.04 yuan respectively, and the sales volumes were 6.3316 million, 10.5205 million, 14.8728 million and 3.8629 million respectively.

Processor chips are among the products sold by Ketong Technology whose unit prices have risen rapidly. During the period, the unit prices were 9.94 yuan, 23.43 yuan, 22.99 yuan and 19.16 yuan respectively, and the sales volumes were 64.3459 million, 66.4249 million, 84.1561 million and 48.5743 million respectively.

In terms of procurement, Ketong Technology relies on five major suppliers, especially the largest supplier. From 2020 to 2022, the purchase amount of Science and Technology from the top five suppliers accounted for 84.59%, 87.30% and 87.90% of the total purchase amount, of which the purchase amount from Xilinx, the largest supplier, accounted for 71.99%, 74.12% and 73.84% respectively.

It is worth mentioning that the price of several products purchased by Ketong Technology is much higher than the selling price. For example, the purchase price of FPGA and components during the period is up to 1490.61 yuan, 1433.38 yuan and 1405.69 yuan, almost ten times the selling price.

The purchase dependence of Science and Technology on Xilinx and the purchase price of FPGA and component products triggered an inquiry from the exchange, requiring the company to explain whether there is dependence on Xilinx and whether it affects the ability to continue operations; As well as the reason for the large difference between FPGA and component sales unit price and purchase unit price.

In the reply letter, Ketong Technology said that many suppliers of the company adopt the price management strategy of high purchase value, low sales revenue and high rebate compensation from downstream dealers, that is, Ketong Technology purchases chip products from the original factory according to the catalog purchase price, and settles with the original factory with the adjusted actual price. The difference between the catalog purchase price and the actual settlement price is adjusted to supplier rebate.

From the end of 2020 to the end of 2022, the amount of rebate receivable of Ketong Technology was 151 million yuan, 198 million yuan and 260 million yuan respectively. After deducting the influence factors of rebate, the actual purchase amount of Ketong Technology to Xilinx during the period accounted for 26.73%, 30.47% and 27.31% respectively.

If the rebate influencing factors are deducted, the actual purchase amount of Science and Technology to Xilinx from 2020 to 2022 does not exceed 50% of the total purchase amount of the current period, and there is no case of relying on Xilinx or affecting the company's ability to continue operations due to the limited purchase of Xilinx.

However, Ketong Technology also said in the reply that the company only has the right to get rebate after the goods are sold and delivered to customers. This means that if the sales do not meet the expectations, Ketong Technology will face certain losses. The reason why the purchase price is higher than the sale price is related to the rebate cooperation mode of Ketong Technology and upstream partners.

In terms of gross profit margin of products, although the unit price of analog chips of Science and Technology is low, the gross profit margin is not low. From 2020 to 2022, the gross profit rate of the product will be 7.35%, 8.74% and 8.79% respectively, increasing year by year, and in 2021, the gross profit rate will exceed that of FPGA and components with the highest unit price.

The gross profit rate of FPGA and components in the period is 13.85%, 6.51% and 10.09% respectively. The gross profit margin of the processor chip period is 9.70%, 6.17% and 3.47% respectively. During the period, the Company's comprehensive gross profit margin was 9.14%, 7.71% and 7.78% respectively.

From the perspective of the industry, the gross profit rate of CST is lower than the industry average. During the same period, the average comprehensive gross margin of the six comparable companies was 9.53%, 10.08% and 9.33% respectively.

03. The proportion of expenditure is lower than the industry average

Inventory falling price affects profit

In addition to operating costs, other expenses of CST are very low. From 2020 to 2022, the company's sales expenses, administrative expenses, R&D expenses and financial expenses account for 4.42%, 2.88% and 2.73% of the company's total revenue. Low expenses ensure the profitability of the company.

Among the three expenses of science and technology, the sales expenses accounted for a relatively high proportion, accounting for 2.53%, 1.47% and 1.75% of the operating income respectively during the period. During the same period, the average sales rates of the six comparable companies were 2.57%, 2.51% and 2.61% respectively.

During the same period, the proportion of the company's management expenses in the revenue was 0.59%, 0.57% and 0.73% respectively. During the same period, the management fees of the six comparable companies were 1.41%, 1.33% and 1.39% respectively.

Both of the two rates of CST are lower than the industry level, which led the exchange to question, and asked the company to explain why the sales expense rate and management expense rate are lower than the average of comparable companies in the same industry.

In fact, the financial expenses of CST are also at a very low level. In 2020 and 2021, the financial expenses will only account for 0.63% and 0.24% of the revenue. In 2022, it will even record net financial income, which is related to exchange gains and losses.

Compared with the period expenses, the asset impairment losses and credit impairment losses of Ketong Technology can affect the company's profits more. In terms of credit impairment, in 2020, 2021 and the first half of 2023, the credit impairment losses of the accounts receivable of Ketong Technology reached 24.1464 million yuan, 13.9494 million yuan and 23.7284 million yuan respectively.

The asset impairment of Ketong Technology is mainly the loss of inventory falling price. From 2020 to the first half of 2023, the loss of inventory falling price was 13136800 yuan, 12689500 yuan, 49931200 yuan and 47484600 yuan, respectively. This indicator will increase significantly in 2022.

The prospectus shows that the inventory of Ketong Technology will increase significantly in 2022, from 2.185 billion yuan in 2021 to 4.014 billion yuan in 2022, so the loss of inventory falling price will also increase.

It is worth mentioning that CST still fails to pay taxes according to the tax deadline. In 2022, the company recorded 2255700 yuan of overdue fine expenditure.

04、 Operating cash flow gap of 670 million

Short term debt gap of 740 million yuan

In addition to all costs and expenses, Ketong Technology recorded profits. From 2020 to 2022, the company recorded net profits of 159 million yuan, 313 million yuan and 309 million yuan respectively, with a compound growth rate of 39.28% from 2020 to 2022. The net profit in the first half of 2023 is 121 million yuan.

However, under the condition of continuous profitability, there has always been a gap in the net cash flow of Ketong Technology. From 2020 to the first half of 2023, the company's net operating cash flow will be - 163 million yuan, - 240 million yuan, - 148 million yuan and - 668 million yuan respectively, and the gap will expand rapidly in the first half of 2023.

As for the situation that the net profit deviates from the net operating cash flow, CST explained that the upstream payment requirements of the company are high, usually requiring prepayment or an accounting period of about 30 days for the company; For downstream enterprises, the company usually gives a longer payment period, resulting in a shorter purchase payment period than the recovery period of payment for goods.

In addition, the investment cash flow of Ketong Technology also continued to record negative values, which were - 3194400 yuan, - 18120700 yuan, - 3993700 yuan and - 179 million yuan respectively during the period.

Science and technology mainly depends on financing activities to maintain funds in hand. From 2020 to the first half of 2023, the net cash flow raised by the company is 377 million yuan, 193 million yuan, 387 million yuan and 875 million yuan respectively.

It can be found that in 2021, the company's net financing cash flow cannot cover the gap between operating cash flow and investment cash flow, but the company's monetary capital in hand has continued to grow, which will be 401 million yuan, 457 million yuan and 800 million yuan by the end of 2020 and 2022, respectively. By the end of June 2023, the Company's monetary capital in hand was 1.037 billion yuan.

The prospectus shows that the inflow of financing cash flow of Ketong Technology mainly depends on borrowings. In the first half of 2020-2023, the cash received from borrowings from financing activities will be 710 million yuan, 1 billion yuan, 2.134 billion yuan and 1.93 billion yuan respectively. This also led to the company's debt growth year by year.

As of the end of each period, the short-term borrowings of CST were 159 million yuan, 409 million yuan, 892 million yuan and 1.777 billion yuan respectively. In the first six months of 2023, the short-term debt of science and technology soared by nearly 900 million yuan.

Although the monetary capital of CSTC continues to grow, the company still has short-term liquidity pressure by the end of June 2023. The current monetary capital cannot cover short-term borrowings, and there is a gap of about 740 million yuan.

On the whole, the asset liability ratio of Ketong Technology is also growing year by year. From the end of 2020 to the end of June 2023, the asset liability ratio of the company is 76.36%, 77.73%, 81.00% and 83.42% respectively.

Compared with that, the average asset liability ratio of the six companies at the end of each period was 53.71%, 56.22%, 53.33% and 52.24%, respectively. The asset liability ratio of Ketong Technology was higher than the industry average.

Appendix: List of Intermediaries for the IPO of Ketong Technology

Sponsor and lead underwriter: Huatai United Securities Co., Ltd

Lawyer of the Issuer: Guangdong Xinda Law Firm

Audit institution: Daxin Certified Public Accountants (special general partnership)

Appraisal agency: Zhongjing Minxin (Beijing) Assets Appraisal Co., Ltd