Double Rui's Venture into ChiNext Amidst Headwinds, Accelerating Asset Integration in 'China Ship' System

On November 1st, China Shipbuilding Double Rui (Luoyang) Special Equipment Co., Ltd. (hereinafter referred to as "Double Rui Shares") is set to undergo a review by the regulatory board.

According to the prospectus, the company plans to go public on the ChiNext board, issuing 80 million to 107 million shares, and raising funds of 650 million yuan预案 for the special equipment R&D center project, high-quality stainless steel and alloy materials industrial base project, waste heat utilization and cold-heat joint supply industrialization base construction project, and to replenish working capital.

Looking at the shareholder structure, Double Rui Shares is a subsidiary of China Shipbuilding Corporation. Companies including China Shipbuilding Heavy Industry, China Shipbuilding, China Power, and China Shipbuilding Defense are all its "sibling companies".

Once Double Rui Shares goes public, the company is also expected to become the ninth listed company in the "China Shipbuilding System".

In addition to Double Rui Shares, in the past six months, listed companies under the "China Shipbuilding System" have also been very active. For example, China Shipbuilding Heavy Industry first announced a 5 billion yuan related acquisition of Hong Kong Shipbuilding Heavy Industry assets in August, and then announced a share swap merger plan with China Shipbuilding in September. Recently, the acquisition of part of the equity of China Shipbuilding Diesel Engine by China Power under China Shipbuilding and the accompanying fund-raising event also emerged last week.

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Analysts pointed out that the asset integration speed of the "China Shipbuilding System" has significantly accelerated, marking the state-owned capital's attempt to strengthen the control and influence of state-owned enterprises in this round of deepening state-owned enterprise reform, and is committed to the overall goal of enhancing the value of state-owned assets.

Performance "deceleration"

Data shows that the predecessor of Double Rui Shares was Luoyang Double Rui Special Equipment Co., Ltd., established in 2005, and was reorganized from some departments of the "725th Institute" under China Shipbuilding Heavy Industry, namely "Luoyang Ship Materials Research Institute". Since then, Double Rui Shares has established a business system mainly based on special equipment and bridges through asset restructuring within the China Shipbuilding system, and completed the shareholding system reform after 2022, and submitted the listing application.

From the shareholder structure, the controlling shareholder of the company is Luoyang Double Rui Technology Industry Holding Group Co., Ltd., which is wholly owned by the 725th Research Institute (Luoyang Ship Materials Research Institute) of China Shipbuilding Heavy Industry Group Company after the restructuring, and controls 54.53% of the equity of Double Rui Shares to be listed.

Financial data shows that from 2021 to 2023, Double Rui Shares achieved operating income of 1.262 billion yuan, 1.336 billion yuan, and 1.611 billion yuan respectively; the year-on-year growth rates were 5.87%, 20.59%, and 2.32% respectively; the net profit attributable to the parent company's shareholders were 105 million yuan, 89.9683 million yuan, and 111 million yuan respectively, with year-on-year decreases of 14.04%, increases of 23.35%, and increases of 8.60% respectively.In the first half of this year, the company achieved a total operating revenue of 743 million yuan and a net profit attributable to the parent company's shareholders of 51.25 million yuan. Judging solely from the financial data, the company's operational performance growth rate until the first half of this year is not impressive.

Additionally, from 2021 to the first half of 2024, the company's net profit attributable to the shareholders, after deducting non-recurring gains and losses, were 92.37 million yuan, 85.51 million yuan, 102.32 million yuan, and 50.01 million yuan, respectively, indicating a certain degree of decline.

Although part of the "China Shipbuilding Industry Corporation (CSIC)" family, compared to other "sibling companies," Shuangrui Shares has a relatively low correlation with the shipbuilding industry chain.

In terms of business, Shuangrui Shares has taken over and integrated the casting and forging steel, expansion joints, pressure vessels, bridge bearings, and high-pressure gas cylinders businesses under the 725th Research Institute, and has developed into five business segments: bridge safety equipment, pipeline compensation equipment, special material products, energy-saving equipment, and energy storage and transportation equipment. In 2023, these five businesses achieved revenues of 700 million yuan, 327 million yuan, 359 million yuan, 79.41 million yuan, and 130 million yuan, respectively.

Upon reviewing the prospectus, it was found that among these five major businesses, only pipeline compensation equipment and special materials have some relevance to shipbuilding. In the special materials sector, which includes fasteners, bars, and some forgings used in ship components, and in the pipeline compensation equipment sector, only the metal bellows expansion joints are related to shipbuilding and offshore engineering, and both have a relatively low proportion in the company's overall business.

The low proportion of related shipbuilding business also limits the company's ability to fully benefit from the current booming "ship cycle." As shown in the prospectus, in 2023, the company's significant related party transactions amounted to 96.96 million yuan in related purchases and 248 million yuan in sales, while the general related party transactions amounted to 65.5 million yuan in purchases and 26.03 million yuan in sales, indicating that the shipbuilding business occupies a small proportion in the company's supply and sales system.

"Against the Wind" Breakthrough

It is worth noting that, due to its focus on the application of special materials in shipbuilding, which often concentrates on special working environments such as corrosion resistance, high pressure resistance, and high salt resistance, Shuangrui Shares actually has a sufficient number of application scenarios in the bridge, chemical, and power industries.In the field of bridge safety equipment, Shuangrui Shares operates in railway bridge safety equipment, intercity rail transit safety equipment, and load-bearing components of elevated bridges, accounting for the largest share of the company's business. In addition to these, the company's pipeline compensation equipment and heat pump equipment are also mainly applied in the energy and chemical industry, with clients including Sinopec, Wanhua Chemical, and other refining and chemical enterprises, as well as some natural gas companies, among others.

Looking solely at the business composition, Shuangrui Shares' main clients are in the energy and chemical, as well as infrastructure sectors. However, these two types of businesses have been impacted to some extent against the backdrop of a slowdown in infrastructure investment and increasing debt pressure on local platforms in recent years.

Data shows that the company's annual operating cash flow from 2021 to 2023 was an inflow of 73.61 million yuan, 67.38 million yuan, and 181 million yuan, respectively; however, in the first half of 2024, there was a sharp downturn, with the operating cash flow turning into a net outflow of 262 million yuan. Upon further examination, the company received only 628 million yuan in cash flow from the sale of goods and provision of services in the first half of the year, which is less than half of the 1.51 billion yuan for the entire year of 2023.

Although it is common for companies to have lower cash receipts in the first half of the year, considering the widespread phenomenon of periodic net outflows of operating cash flow in the annual reports of infrastructure companies listed on the A-share market, Shuangrui Shares' cash flow difficulties are not "lonely" in the current environment.

"The company's performance is affected by various factors, including the scale of infrastructure investment, changes in industry policies, and fluctuations in raw material prices. If these factors undergo adverse changes in the future, the company will face the risk of fluctuating operating performance," the company mentioned in the risk warning section of its prospectus.

The company also pointed out that if future industry development policies undergo adverse changes or if economic growth slows down, leading to a tightening of government finances, local government investment in infrastructure construction may not recover or may even decrease further. This could lead to adverse changes in market demand for the company's bridge safety equipment, which would negatively impact its operating conditions and profitability.

It is worth noting that during the company's acceptance of regulatory inquiries, Shuangrui Shares was frequently asked about the reasons for the decline in revenue from its core business, bridge bearings. In response, the company and its sponsor believe that the decline in government railway infrastructure investment due to policy adjustments in previous years led to a decrease in related corporate revenues. Some railway projects experienced delays in design, bidding, and construction, resulting in a temporary slowdown in the market demand for railway bearings.

However, at the same time, the company's new order volume began to gradually stabilize after a decline in 2021 and 2022. The industry is facing structural adjustments, and the share of leading manufacturers is also increasing. The contracts on hand to some extent ensure the stability of the company's revenue.

From a dynamic perspective, as central debt measures continue to be implemented, there is hope that by resuming infrastructure investment and expanding domestic demand, the relevant industries can be put back on a growth track.Tianfeng Securities recently pointed out in its research report that for local governments, having more debt reduction resources will allow them to free up more local financial resources and energy from debt reduction to support stable growth and the "three guarantees" work. Local governments are expected to gradually shift from a "tight balance" state to a "re-expansion" in terms of stable growth, and there may be a certain degree of improvement in the physical workload of infrastructure investment.

At the same time, if the borrowing space for local governments is increased, the funds available for government investment and physical workload will increase significantly year-on-year, accelerating the implementation of infrastructure physical quantities and improving the quality of financial statements for construction companies.