• News
• 2024-06-26

New Chip Shares Eye IPO Ambitions

After a three-month hiatus, the second proposed IPO company for the Science and Technology Innovation Board this year has emerged.

Xinxin Shares recently published a prospectus, planning to raise 4.8 billion yuan, with a total investment amount of 31 billion yuan for the projects to be financed.

The financing amount in the tens of billions has attracted attention. With such a large appetite, what makes Xinxin Shares stand out? What is the prospect of its IPO?

Trend is not favorable

The full name of Xinxin Shares is Wuhan Xinxin Integrated Circuit Co., Ltd., and its business mainly focuses on areas such as specialty memory, mixed-signal, and 3D integration.

In the prospectus, Xinxin Shares claims to be a leading domestic semiconductor specialty process wafer foundry company.

However, looking at the financial reports, the company's operating performance trend is not favorable.

In 2021, 2022, 2023, and the first quarter of 2024 (referred to as the "reporting period"), Xinxin Shares' revenue was 3.1 billion yuan, 3.5 billion yuan, 3.8 billion yuan, and 900 million yuan, respectively; the net profit attributable to the parent company was 600 million yuan, 700 million yuan, 400 million yuan, and 14.87 million yuan, respectively.

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The net profit attributable to the parent company decreased by as much as 45% in 2023, and the decline was even more significant in the first quarter of this year.

The company's explanation for this is that the net profit attributable to the parent company is affected by the cyclical nature of the industry, showing a certain degree of fluctuation.It is worth noting that as New Core Co., Ltd. approaches its IPO, its comprehensive gross margin has been on a continuous decline, gradually falling below the average of comparable companies in the same industry. From 2023 to the first quarter of this year, the company's comprehensive gross margin was 22% and 16%, respectively, while the average of comparable companies was 26% and 22%. In response, the company stated, "The gross margin level fluctuates due to factors such as market demand and product structure adjustments." At the same time, the utilization rate of New Core's production capacity also shows an overall downward trend, approximately around 100%, 91%, and 79%, respectively. Under these circumstances, the company is still planning to raise a substantial amount of over 4 billion yuan to fund projects such as the third phase of the 12-inch integrated circuit manufacturing production line. Some industry insiders have expressed that, against the backdrop of a poor industry environment and low production capacity utilization, the decision to blindly raise funds for expansion may face risks such as low efficiency in the use of funds and poor market prospects for products. For high-tech companies, R&D investment is undoubtedly a key element in forming core competitiveness. New Core's R&D expenditure ratio is also significantly lower than the industry average. During the reporting period, the company's R&D expenditure ratio was approximately 6%, 6.7%, 6.9%, and 7.5%, while the industry average was approximately 11%, 9%, 12%, and 13%, respectively.

Areas of Concern

In addition to the issues revealed in the financial statements, there are other puzzling aspects in the prospectus.Firstly, let's discuss the characteristics of a pre-IPO rush to dividend payouts.

In 2023, just before the IPO filing, despite a decline in net profits for the year, which were less than 400 million yuan, Xinxin Shares still carried out a cash dividend of up to 500 million yuan.

It is noteworthy that, under the provisions of the New National Nine and regulatory requirements, the act of implementing large dividend payouts before an IPO has become a matter of significant concern for regulatory authorities at present.

Secondly, there is a mysterious "Company Three" surrounding Xinxin Shares.

The prospectus shows that Xinxin Shares has a rather complex relationship with an associated party referred to as "Company Three."

In September 2021, Xinxin Shares borrowed 700 million yuan from "Company Three" at an annual interest rate of 1.75%. During the reporting period, Xinxin Shares paid interest to "Company Three" amounting to approximately 2.91 million yuan, 12.13 million yuan, 10.13 million yuan, and 0.22 million yuan, respectively.

As of March 31, 2024, the outstanding principal balance of the loan from the company was 430 million yuan.

Curiously, while Xinxin Shares borrowed from "Company Three," it also purchased equipment from "Company Three."

In 2023, the company spent about 2.1 billion yuan to purchase equipment from "Company Three." According to Xinxin Shares, some of the equipment purchased from "Company Three" was even mortgaged at the time of sale.

Moreover, Xinxin Shares also bought goods and accepted services from "Company Three." During the reporting period, the transaction amounts were approximately 26.59 million yuan, 13.06 million yuan, 5.73 million yuan, and 0.02 million yuan, respectively.Which company is "Company Three"? Why are all other companies named with their real names, but this one cannot disclose its specific name? What is the relationship between Xinxin Shares and "Company Three" that leads to such frequent and close business contacts?

No Actual Controller

It appears that the controlling shareholder of Xinxin Shares is Changkong Group, which directly holds approximately 68% of its shares.

However, the equity structure of Changkong Group itself is relatively dispersed.

Considering the historical evolution, articles of association, nomination and appointment of directors and senior executives, voting results on major issues by shareholders' and board meetings, internal governance structure, and daily management and decision-making of Changkong Group, there is no actual controller. Therefore, Xinxin Shares also has no actual controller.

The absence of an actual controller poses certain risks to Xinxin Shares.

Xinxin Shares also admits in its prospectus that this may affect its decision-making efficiency over its subsidiaries, putting the company at risk of missing development opportunities. In addition, if there is a change in the equity of the controlling shareholder in the future, it may indirectly lead to a change in the company's control, thereby bringing potential risks to the stability of operations and business.

Of course, Xinxin Shares also has its own advantages. The company's director and president, Sun Peng, and deputy general managers Zhou Jun and Wang Ning, as well as the head of the manufacturing center, Wang Sen, have all served in top domestic companies - SMIC.

The ultra-high fundraising amount of 4.8 billion, coupled with the special status of the leader and frequent changes in the company's senior management, has attracted market attention as soon as Xinxin Shares disclosed its prospectus.

There is no answer yet as to whether Xinxin Shares, entangled with the above-mentioned issues, can successfully go public.Industry insiders have analyzed that if Xinxin Shares wants to go public smoothly, it should fully demonstrate the necessity of expanding production, quickly reverse the downward trend in performance, strengthen information disclosure, and actively respond to the concerns of the market and investors.