Challenges Faced by Zhejiang Merchants’ Leader Nan Cunhui’s Zhengtao Aneng Amidst Heavy Inventory and Independence Concerns
In a tightening IPO environment and a cooling market for spin-off listings, Zhejiang businessman Nan Cunhui, at the helm of Zhengtao Electric, is pushing for the main board listing of Zhengtao Aneng, which focuses on residential photovoltaics.
According to its prospectus, Zhengtao Aneng’s accounts receivable have increased fivefold over the past three and a half years, with inventory surging to 35.2 billion yuan. Faced with high debt levels and increasing short-term repayment risks, Zhengtao Aneng is relying on a spin-off listing to secure financing. However, with compliance scrutiny on spin-off listings, related transactions, and internal controls intensifying, concerns about Zhengtao Aneng’s significant related party transactions and operational independence have been raised, putting immense pressure on its IPO journey.
Heavy Inventory and High Debt Levels
Since the introduction of the Regulations on the Pilot of Spin-off Listings for domestic subsidiaries in December 2019, there was a surge in spin-off listings within the A-share market. However, as regulatory policies tightened, many companies withdrew their applications. In 2024 alone, over 20 listed companies have retracted their spin-off applications.
Despite the tightening IPO pace and the cooling spin-off market, Zhengtao Electric, under Nan Cunhui’s leadership, remains determined. Recently, the Shanghai Stock Exchange updated its website, indicating that Zhengtao Aneng Digital Energy (Zhejiang) Co., Ltd. has resumed the review of its IPO application. The company plans to issue no less than 270 million new shares, representing at least 10% of the post-issue total share capital, with a fundraising target of 6 billion yuan. This capital will primarily be allocated for collaborative construction of residential photovoltaic power stations (5 billion yuan), the development of an information platform (200 million yuan), as well as replenishing working capital and repaying 800 million yuan in bank loans.
Founded in August 2015, Zhengtao Aneng specializes in residential photovoltaic business. By the end of June 2024, the company had developed over 1.4 million residential photovoltaic power stations, securing its position as the industry leader. As of the date of the prospectus, Zhengtao Electric directly and indirectly holds 64.13% of Zhengtao Aneng’s shares, making it the controlling shareholder. The actual controller of Zhengtao Electric, Nan Cunhui, controls 53.00% of Zhengtao Aneng’s shares.
Since 2020, driven by the ongoing push for dual carbon goals, the domestic photovoltaic industry has entered an investment and expansion boom, leading to rapid growth in Zhengtao Aneng’s operational performance. The company reported operating revenues of 5.631 billion yuan, 13.704 billion yuan, 29.606 billion yuan, and 12.803 billion yuan for the years 2021 to 2023 and the first half of 2024, respectively. Net profits were 867 million yuan, 1.753 billion yuan, 2.604 billion yuan, and 1.269 billion yuan, demonstrating stable growth.
However, behind this seemingly impressive performance lies a growing short-term debt pressure. The prospectus reveals that since 2021, Zhengtao Aneng’s debt-to-asset ratio has remained around 80%, significantly exceeding the industry average. By the end of June 2024, the company’s current ratio and quick ratio were 1.35 and 0.26, respectively, both well below safe levels.
In the prospectus, Zhengtao Aneng explained that the company has been increasing its installed capacity in residential photovoltaic power stations, which has heightened its funding needs and overall debt levels. Additionally, a high proportion of current assets are tied up in inventory, which has lowered the quick ratio. As sales volume expanded, both accounts receivable and inventory amounts surged, leading to significant liquidity strain. By the end of each reporting period, accounts receivable grew from 637.25 million yuan to 3.2719 billion yuan, and inventory skyrocketed from 6.8 billion yuan to 35.25 billion yuan, with inventory accounting for 80.87% of current assets.
Faced with soaring accounts receivable, high debt ratios, and overwhelming inventory, Zhengtao Aneng opted for a spin-off listing to alleviate financial pressure. However, the scrutiny over compliance with regulations for spin-off listings, related transactions, and internal control has intensified, leading to widespread skepticism about the company’s substantial related party transactions and operational independence. This has created significant challenges for Zhengtao Aneng’s IPO aspirations.
Independence Questioned by the Exchange
According to public records, Zhengtao Group was established in 1998, initially focusing on low-voltage electrical products. In 2010, Zhengtao Electric successfully went public on the Shanghai Stock Exchange, becoming the first listed company in China to specialize in low-voltage electrical products. Beyond its original business, Zhengtao Group has also significantly invested in the photovoltaic sector. As early as 2006, it co-founded Zhejiang Zhengtao Solar Technology Co., Ltd., primarily engaging in component manufacturing for photovoltaic power stations. In 2009, it established Zhengtao New Energy and Zhengtao Power, focusing on photovoltaic station investment and construction, as well as manufacturing photovoltaic inverters and storage products. Zhengtao Aneng was established in August 2015, focusing on residential photovoltaic business.
In November 2015, Zhengtao New Energy acquired all shares of Zhengtao Solar from Zhengtao Group, Astronergy, and Shanghai Yunsong Equity Investment Partnership, making Zhengtao Solar a wholly-owned subsidiary of Zhengtao New Energy. By December 2016, Zhengtao Electric completed its acquisition of Zhengtao New Energy, obtaining 99.44% of its direct and indirect interests, thus integrating Zhengtao Solar and Zhengtao Aneng as part of Zhengtao Electric’s photovoltaic assets. In February 2021, Zhengtao Solar transferred its corresponding investment to Zhengtao Electric. Through this series of complex equity changes, Zhengtao Aneng ultimately became a subsidiary of Zhengtao Electric.
At the end of 2021 and 2022, Zhengtao Aneng underwent two rounds of external financing. In the latest round in November and December 2022, institutions such as Yinneng Investment and Green Fund invested at a price of 12.96 yuan per share, giving the company a pre-issue valuation of approximately 31.6 billion yuan. If the current IPO issues up to 270 million shares and raises 6 billion yuan, the estimated issue price is around 22.15 yuan, potentially giving Zhengtao Aneng a market value of 60 billion yuan. As of March 11, Zhengtao Electric’s latest market value was approximately 51.5 billion yuan. If successful, Zhengtao Aneng’s market capitalization would surpass that of its parent company.
Since its inception, Zhengtao Aneng has received substantial support from Zhengtao Group and its subsidiaries, raising questions about its operational independence. Independence is a key focus of exchange reviews for IPO candidates. In the first round of inquiries, the Shanghai Stock Exchange posed ten questions concerning aspects like authorized patents, leased sites, raw material sales, guarantees, payroll and social security management, and fund management. The exchange requires Zhengtao Aneng to clarify its independence regarding assets, personnel, and business development, as well as its reliance on its controlling shareholder.
For instance, regarding patent authorization, as of the end of June 2024, Zhengtao Aneng owned 151 patents, out of which 31 patents were acquired, and one was a shared patent. Among the two invention patents, both were obtained from related parties. In terms of trademark usage, Zhengtao Aneng signed a Trademark Licensing Agreement with Zhengtao Electric and Zhengtao Solar in 2020, allowing Zhengtao Aneng to use their trademarks for a fee of 0.1% of quarterly revenues payable to Zhengtao Electric.
Significant Related Transactions
In addition to trademark and patent issues, Zhengtao Aneng’s financial dealings with its controlling shareholder and subsidiaries are even more staggering. Data shows that from 2021 to the first half of 2024, Zhengtao Aneng purchased photovoltaic components from related parties such as Zhengtao New Energy and Taiheng New Energy, with amounts totaling 1.3058 billion yuan, 3.4457 billion yuan, 3.5041 billion yuan, and 1.0119 billion yuan, accounting for 17.38%, 22.42%, 19.58%, and 19.52% of total photovoltaic component purchases during those periods. This indicates that nearly one-fifth of Zhengtao Aneng’s required photovoltaic components were supplied by related parties.
Furthermore, Zhengtao Aneng also procured inverters and other products necessary for building residential photovoltaic power stations from related parties. The prospectus reveals that the proportion of inverters acquired from related party Shanghai Zhengtao Power and its subsidiaries was 8.86%, 14.71%, 19.24%, and 16.14% during the reporting period. Similarly, the proportion of electric meter boxes sourced from another related party, Zhengtao Instrument, was 75.10%, 69.52%, 70%, and 71.04%, indicating a near monopoly of related parties in the procurement of electric meter box products.
Additionally, during the reporting period, Zhengtao Aneng also engaged in purchasing wires and cables from related parties, received installation and operational services from related parties, and accepted logistics services from related parties. The exchange has requested Zhengtao Aneng to explain the differences in purchasing photovoltaic main and auxiliary materials from related parties versus non-related parties, as well as the fairness of acquiring installation and operational services, logistics, and warehousing services from related parties.
From the data disclosed in Zhengtao Aneng’s response, there are noticeable price differences for photovoltaic components and inverters purchased from related parties. For instance, the prices of single-phase inverters obtained from related party Shanghai Zhengtao Energy were generally lower than those from non-related parties, with price variance rates of 0.89%, -3.05%, and -0.8% from 2021 to 2023.
In addition to ongoing substantial related transactions, during the reporting period, Zhengtao Aneng frequently borrowed funds from related parties for its production and operations. Between 2021 and 2022, Zhengtao Electric provided Zhengtao Aneng with additional loans totaling 3.11 billion yuan and 4.667 billion yuan. Additionally, Zhengtao Aneng secured loans from related party Zhengtao Finance, with a remaining balance of 1.15 billion yuan as of the end of June 2024. It is well-known that related transaction issues have always been a focal point for regulatory reviews, as they not only pertain to the operational independence of enterprises but also aim to prevent the misuse of related transactions for profit transfer. Given the frequent related transactions and fund borrowing issues, along with a series of inquiries regarding its operational independence, Zhengtao Aneng’s IPO journey faces multiple challenges.
Note: Unless stated otherwise, all charts and data in this article are sourced from Zhengtao Aneng’s IPO materials. The stock market carries risks; investment should be approached with caution.
