In recent years, the phenomenon of globalization has driven many domestic companies to pursue capital raising through the Hong Kong stock marketOne of the latest entrants to this trend is Aux Electric Co., Ltd. (hereafter referred to as Aux), which has recently submitted its prospectus to the Hong Kong Stock Exchange (HKEX) with the intention of being listed on the main boardThe company has appointed China International Capital Corporation Limited (CICC) as the sole sponsor for its Initial Public Offering (IPO).

Aux has articulated its strategic goals for this IPOThe company aims to accelerate its global expansion, boost sales of its proprietary brands, and continually develop its central air conditioning businessThe capital raised from the IPO is expected to fund global research and development, upgrade its intelligent manufacturing systems and supply chain management, enhance sales and distribution channels, and support working capital and general corporate purposes.

However, research from financial analysts points out some financial concernsDespite maintaining stable growth in performance during the reporting periods of 2022, 2023, and the first three quarters of 2024, Aux's gross profit margin remains below that of other major competitors in the industry due to its low pricing strategiesAdditionally, the company's net current liabilities have gradually increased over the same period, with its debt-to-asset ratio reaching 84.6% by the end of September 2024. In a notable decision before the IPO, Aux distributed nearly 60% of its net profit in dividends to shareholders, raising questions about its financial sustainability.

The disparity in gross profit margins compared to industry leaders raises concerns about Aux's financial robustnessFounded in 1994, Aux specializes in designing, developing, manufacturing, and selling high-quality household and central air conditioning systems, and its brands include "Aux," "Hua Guan," and "AUFIT." According to Frost & Sullivan data, Aux ranked as the fifth largest air conditioning company globally in terms of sales in 2023, holding a 6.2% market share.

In the reporting period, Aux generated revenue figures of CNY 19.528 billion, CNY 24.832 billion, and CNY 24.278 billion, with adjusted net profits of CNY 1.449 billion, CNY 2.511 billion, and CNY 2.743 billion respectively

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Although Aux's income and net profit continue to grow, the pace has begun to slowRevenue growth rates for 2023 and the first three quarters of 2024 were reported at 27.2% and 15.4%, while net profit growth rates for the same periods were 72.5% and 17.8%.

The primary reason for the reduced gross profit margins is the company's aggressive pricing strategy in a fiercely competitive marketThe prospectus reveals that Aux's gross profit margins over the reporting period stood at 21.3%, 21.8%, and 21.5%. In contrast, leading competitors such as Midea Group, Gree Electric Appliances, and Haier Smart Home reported gross profit margins of 26.76%, 30.21%, and 30.85% for the first three quarters of 2024.

Aux's announcement explains that the slight gross profit margin decline in the first three quarters of 2024 could be attributed to lower margins from household air conditioning sales, driven primarily by decreasing average selling prices and an increase in ODM sales, which generally offer lower marginsAnalysts in the industry suggest that these lower margins indicate a smaller profit space for Aux's products, diminishing its ability to withstand market pressuresShould raw material prices rise or competition intensify, the company’s profitability may be adversely impacted.

Working towards alleviating its financial pressures appears to be a key motive for Aux’s IPO aspirationsAccording to the prospectus, the overall current liabilities of Aux rose to CNY 16.449 billion as of the end of September 2024, an increase from CNY 14.850 billion at the end of 2023. The net debt grew from CNY 2.029 billion to CNY 2.402 billion over the same periodThe company attributes this increase primarily to rising expenses in raw material procurement and interest-bearing bank loans, as well as increases in trade receivables and accounts receivable notes.

Aux's total liabilities amounted to CNY 19.269 billion by the end of September 2024, with CNY 17.284 billion classified as current liabilities due within one year – yielding an alarming debt-to-asset ratio of 84.6%. For context, during the same period, Haier Smart Home's, Gree Electric Appliances', and Midea Group's debt-to-asset ratios were reported at 58.66%, 65.05%, and 61.16%, respectively.

Interestingly, notwithstanding an optimistic goal to raise funds through the IPO, Aux during the same timeframe still opted to distribute a significant dividend amounting to CNY 3.79 billion

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Given that the company’s total profit for the reporting period was CNY 6.645 billion, this dividend payout took a remarkable 57.04% of the net profit accumulated over approximately two years and nine months.

Aux operates under a family-controlled equity structure with its ultimate controller, Zheng Jianjiang, holding control through ZeHui, China Prosper, and Aux Holdings, collectively commanding a staggering 96.36% voting powerNotably, Aux Holdings is the main holding company for Aux, and the Zheng family has significant stakes that further solidify their control over the company.

Should the IPO in Hong Kong be successful, Aux would mark Zheng Jianjiang's third publicly listed company, adding to his portfolio that includes three-dimensional medical and OMX International, both of which were established in the years 2011 and 2014 respectively on domestic and international exchanges.

Amidst the challenging backdrop of 2024, the domestic air conditioning market has exhibited signs of sluggish growthAs reported by Aowei Cloud Network, the retail scale for air conditioning in the domestic market has decreased by 2.2% year-on-year, totaling CNY 207.1 billion in 2024. In stark contrast, China's air conditioning exports reached an astonishing 93.26 million units, reflecting a 40.4% increase year-on-year and constituting nearly half of total production.

Given these market dynamics, Aux has strategically identified overseas markets as a primary avenue for its growthData from the prospectus indicates that revenue from international markets has consistently bolstered Aux's expansion, especially from regions such as Asia (excluding China), Europe, North America, and South America, with notable growth within the North American market since 2023.

During the reporting period, revenues from Aux’s overseas operations grew to CNY 8.386 billion, CNY 10.412 billion, and CNY 11.136 billion, constituting 42.9%, 41.9%, and 45.9% of total revenue respectively

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