As the year 2024 approaches its end, Gree Electric Appliances' chairman, Dong Mingzhu, made headlines with her recent remarks regarding retirement rumorsShe stated boldly, "Some people hope I will retire; if I do, there will be one less rival." This comment grabbed attention, especially considering Dong's long-standing rivalry with other major manufacturers in the air conditioning industry.

Among those possibly wishing for Dong's exit would be the company Aux, which has been embroiled in conflicts and lawsuits from Gree for over a decadeDong's statement seemingly reinforces her position as a fierce competitor within the industry landscape, particularly as Aux moves forward with its own aspirations for market growth.

Less than a month after her statement, Aux submitted a listing application to the Hong Kong Stock Exchange, aiming to be publicly listed on the main board

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This strategic move appears to align with the prevailing trend among Chinese enterprises to enhance their presence in international capital markets amidst fierce global competition.

According to Aux's fundraising plans, these funds are intended for areas such as global research and development, upgrades in smart manufacturing systems, and strengthening supply chain managementSpecifically, they plan to enhance their operational capabilities across various critical sectors.

Interestingly, this is not Aux's first attempt at capital market success; in 2016, they initiated a brief listing on China's New Third Board but pulled out less than a year laterThey received guidance for A-share listings starting in 2018 but failed to submit necessary documents after completing guidance in mid-2023, prompting Aux to pivot to the Hong Kong Stock Exchange.

The decision to list in Hong Kong is intriguing yet expected, as most Chinese companies have increasingly sought international avenues for capital operation, particularly in an age of globalization

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However, Aux faces significant hurdles as they attempt to gain footholds in intensely competitive overseas markets while still heavily relying on a price-driven strategy to expand in domestic markets.

Considering the upcoming IPO, what are Aux's chances of success? Can they still rely on their earlier strategies of competition?

Analyzing their provided performance data, Aux seems to present a picture of steady growthTheir revenue figures for 2022, 2023, and the first three quarters of 2024 stood at 19.528 billion yuan, 24.832 billion yuan, and 24.278 billion yuan respectively, while adjusted net profits increased from 1.449 billion to 2.743 billion yuan over the same period, indicating a positive trajectory.

For instance, in the first three quarters of 2024, Aux reported a revenue growth rate of 15.40% and an adjusted net profit growth rate of 18.06%. In comparison, industry rivals like Midea Group, Haier, and Gree experienced revenue growth rates of 9.57%, 2.17%, and a slight decrease of 5.39% respectively, with net profit growth also lagging behind Aux's achievements.

However, Aux's seemingly excellent performance begins to raise eyebrows upon closer examination

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In their IPO prospectus, Aux highlights being the fifth-largest air conditioner producer globally and the leading brand in the Chinese mass-market household sectorYet, reality portrays a stark contrast when juxtaposed against established behemoths.

For example, in the first three quarters of 2024, Midea, Haier, and Gree reported staggering revenues of 320.25 billion yuan, 202.97 billion yuan, and 147.416 billion yuan respectively, far surpassing Aux's figuresAux's claim of being China's number one is tied to a niche market under 2,500 yuan, limiting its gross profit margins compared to its competitors.

Take, for instance, the gross profit margins of 37.04% for Gree, 29.37% for Haier, and 25.57% for Midea's HVAC products; Aux's home air conditioning product gross profit margin lingers at a mere 20.5%. The disparity is striking when considering the central air conditioning products, which yield a higher profit margin of 28.9%, yet contribute minimally to the overall revenue.

Looking ahead to 2024, as national subsidies become more entrenched, how long can Aux maintain its price-driven market expansion strategy? Reports suggest that the average price of Aux's online air conditioning products may drop significantly, which—while it could increase sales volume—might further compress their already slim profit margins.

Reflecting on Aux's journey thus far, it becomes apparent that while "low pricing" has paved the way for its early successes, it has also morphed into a relentless constraint

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Since around 2000, while brands like Midea and Gree were rapidly gaining market share, Aux struggled to establish a strong brand identity.

In a groundbreaking move in 2001, Aux initiated an aggressive campaign to reduce prices across more than 40 of its models by 30%. This bold tactic transformed Aux into a household name in the air conditioning realm, especially as they released a detailed 'Air Conditioning Cost White Paper' the following year, positioning their products as being more cost-effective than competitors.

While this move irritated industry rivals, Aux managed to rapidly capture substantial market share, experiencing a spike in sales from 200,000 to over 3 million units between 2001 and 2004. They also capitalized on the e-commerce boom, ultimately achieving a remarkable 28.57% market share in online sales during their peak in 2018.

However, the subsequent years saw Aux struggle to retain or grow its market presence post-2018, drawing significant attention to 2019 as a pivotal year

This was when Gree publicly accused Aux of testing subpar energy efficiency on eight of its models, prompting regulatory scrutiny.

This confrontation brought to light the longstanding tensions between Gree and Aux, with Dong accusing Aux of luring away Gree's talent as early as 2013, eventually leading to multiple lawsuits centered around patent infringements—many of which Gree won.

The court rulings demonstrated Aux's vulnerabilities in core technological competencies, revealing that their R&D spending has traditionally languished around 2%, lagging behind the significant investments seen by competitors like Gree and Midea.

Furthermore, Aux's decline into a downward spiral has been exacerbated by strategic missteps

As production and sales declines loomed over the country in 2019, Aux responded by prioritizing the establishment of offline channels, hoping to merge online and offline sales strategies.

Unfortunately for Aux, the rapid emergence of the global pandemic disrupted their plansConsumers increasingly flocked to online shopping, compelling established players like Midea and Gree to fast-track digital transformations and e-commerce investments, which in turn squeezed Aux's market share.

By 2024, market data indicates a shift; major players like Midea, Gree, and Xiaomi account for over 55% of the online air conditioning market, with Aux's share dwindling to just 7.36%. Meanwhile, the offline market remains heavily dominated by the same trio, capturing a staggering 70% of total sales while Aux trails with a mere 2.06% share.

From their IPO documents, it is evident that Aux’s online sales presence is waning, with contributions from online channels dropping to 22.9% in the first three quarters of 2024—a significant reduction from previous years.

As Aux grapples with dwindling market support and lack of technological backing, the question remains: beyond continued price reductions, what avenues does Aux have to carve out a future in an ever-more competitive landscape?

A noteworthy factor emerges ahead of their IPO as Aux announces a sizable dividend distribution

Reports reveal that in the first three quarters of 2024, Aux distributed 3.79 billion yuan in dividends—representing roughly 56.54% of their net profit during that timeframe.

In light of Aux's troubling financial status—with an 84.6% debt ratio and short-term and long-term bank loans nearing 27.46 billion yuan—the timing of such large dividends raises eyebrows.

The planned Hong Kong listing not only presents Aux with a speedy fundraising opportunity but also acts as a potential "gateway" into overseas marketsSince 2018, Aux has ventured into global markets, establishing production and R&D bases in various countries, including Malaysia, Thailand, and the United States.

Performance-wise, Aux's overseas ventures demonstrate promising growth potential compared to the stagnant domestic market, with international sales contributing nearly 45.9% to their total revenue in the first three quarters of 2024, representing an increase of 27.58% year-on-year.

However, it is worth noting that over 80% of Aux's international income derives from original equipment manufacturing (ODM) partnerships, which might limit their brand visibility and overall influence overseas.

As the world's largest air conditioning production country, China produces over 80% of the global supply, which has intensified competition among domestic brands in overseas markets as the landscape continuously evolves.

Aux readily acknowledges in its risk disclosures that its air conditioning segment faces fierce rivalry from both Chinese and multinational air conditioning companies in domestic and international markets