On September 3rd, the official website of the Shenzhen Stock Exchange showed that the listing process of Hangzhou Grascent Co., Ltd. (referred to as “HAC”) on the main board has been terminated. This means that HAC’s nearly 4-year IPO journey has come to an end.
In fact, situations like HAC’s are not isolated cases. Since last year, 11 beauty-related companies have announced the termination of their IPOs, spanning various segments of the industry chain from upstream to midstream. This reflects that the difficulty of going public has become a norm in the cosmetics industry.
HAC voluntarily withdrew its IPO application with total revenue of 1.96 billion yuan over the past 3 years.
According to information from the Shenzhen Stock Exchange website, both HAC and its sponsor submitted applications to withdraw the “Application for Withdrawal of Initial Public Offering of Stocks and Listing on the ChiNext Board” to the Shenzhen Stock Exchange. Based on relevant regulations, the Shenzhen Stock Exchange decided to terminate the review of HAC’s initial public offering of stocks and listing on the ChiNext Board.
CHAILEEDO noted that HAC’s IPO journey has been full of twists and turns. On December 18, 2020, HAC initially submitted its IPO application to the ChiNext Board, but due to the anticipated significant decrease in net profits and failure to timely disclose environmental protection administrative penalty information of its subsidiary, it withdrew the IPO application material just three months later on February 18, 2021.
Fast forward to June 2, 2023, HAC updated its sponsoring institutions and legal advisors, once again initiating an IPO application to the ChiNext Board, and updated its financial reports on June 29, 2024, resuming the review. However, two months later, it withdrew the IPO application once again, thus ending its nearly 4-year journey to go public.
For HAC, the decision to voluntarily withdraw or other considerations are crucial. Shen Meng, Executive Director of Chaileedo Capital, revealed to CHAILEEDO, “As HAC’s industry is not a sector prioritized for IPOs, even with continuous efforts, successful listing cannot be guaranteed. Therefore, voluntarily withdrawing the IPO application could provide the company with more flexibility to evaluate future strategic directions.”
Public information indicates that HAC was founded in 1999 and primarily engages in the research, production, and sale of bio-based flavors and synthetic flavors, forming three product series: turpentine oil, cypress oil, and synthetic flavors, with specific products mainly including sandalwood, methyl cypress ketone, and Turquishone series, totaling nearly 40 sub-varieties, primarily used as raw materials for formulating daily chemical fragrances.
According to the latest prospectus, HAC is one of China’s largest suppliers of methyl cypress ketone and one of the few in China that has mastered the production technology of Turquishone and achieved industrialized production of flavors. It has established long-term and stable partnerships with well-known companies such as Procter & Gamble, Coty, Firmenich, and Givaudan.
The prospectus indicates that in the first half of 2024, HAC expects revenue to range from 429 million to 497 million yuan, a year-on-year increase of 24.98% to 44.72%, and net profit attributable to shareholders to range from 65 million to 78 million yuan, a year-on-year increase of 54.74% to 83.28%.
Over the past three years, from 2021 to 2023, HAC’s revenue was 594 million, 631 million, and 735 million yuan, with growth rates of -10%, 6.21%, and 16.39%, respectively. Net profits were 41 million, 68 million, and 93 million yuan, with growth rates of -36.77%, 67.24%, and 36.38%. In summary, HAC’s total revenue and net profit over the past three years were 1.96 billion yuan and 202 million yuan, respectively. However, it is notable that HAC experienced negative growth in revenue and net profit in 2021.
Looking at the business segments, from 2021 to 2023, HAC’s revenue from its semi-synthetic flavor business, including turpentine oil and cypress oil, was 332 million, 335 million, and 438 million yuan, accounting for 56.47%, 53.80%, and 59.92% respectively. Revenue from synthetic flavors was 236 million, 268 million, and 278 million yuan, accounting for 40.05%, 42.99%, and 37.97%. The two together accounted for over 96% of the main business income and are major components of HAC’s revenue.
Of note is that HAC has a relatively high proportion of export income, reaching 84%, 86%, and 87% from 2021 to 2023. Regarding this, HAC pointed out that since 2018, the Sino-U.S. trade frictions have led to a 25% additional tariff on its main products exported to the United States. If Sino-U.S. trade frictions escalate or overseas market access policies deteriorate, it may not be conducive to the company’s overseas sales and increase the risk of performance decline.
Additionally, HAC mentioned that the company faces various challenges, including fluctuations in raw material prices, mismatch between production capacity and downstream demand, high customer concentration, and risks of declining operational performance.
HAC’s fundraising plan exceeding 300 million yuan has been shelved.
As mentioned earlier, HAC experienced a decline in revenue and net profit in 2021, and during its second attempt at the IPO, the Shenzhen Stock Exchange also took note of this.
In response to the Shenzhen Stock Exchange’s first round of inquiries consisting of 10 questions, HAC and its sponsoring institutions jointly submitted a 547-page response document, with the 9th question being about “the decline in operating income and performance in 2021.”
In response, HAC explained that in 2021, due to various factors such as external environmental influences, the prices of the company’s main raw materials such as turpentine oil, phellandrene, and acetate rose significantly. Coupled with intensified competition domestically and abroad, the increased raw material costs could not be passed on to downstream, thereby squeezing the gross profit margin of turpentine oil and cypress oil products, leading to a decline in the company’s net profit that year.
In addition to performance fluctuations, HAC’s asset-liability ratio and operating cash flow situation also raised concerns at the Shenzhen Stock Exchange. According to the prospectus, from 2021 to 2023, HAC’s asset-liability ratios were 53.79%, 62.59%, and 55.64% respectively, significantly higher than the industry average of around 30%. Meanwhile, HAC’s current ratio and quick ratio were also significantly lower than other comparable listed companies during the reporting period.
In response to this, HAC stated that the company is in a critical phase of capacity expansion and business growth. Compared to other listed companies in the industry, HAC has a relatively single financing channel, primarily obtaining financing through bank loans. During the reporting period, to support operational activities and long-term asset investments, the company increased its bank loan quotas, resulting in some shortcomings in its debt repayment capacity indicators compared to peer listed companies.
Industry experts pointed out that this indicates that HAC is facing financial pressure, hence seeking to raise the necessary funds through an IPO. In HAC’s original IPO fundraising plan, it aimed to raise 375 million yuan, with the funds being closely related to the company’s existing business, including expanding production capacity and advancing intelligent construction.
Additionally, supplementing the company’s working capital is also one of the important uses of the IPO proceeds. According to the prospectus, an intended 106 million yuan will be used for this purpose, accounting for 28.27% of the total fundraising amount. As stated, the implementation of the working capital supplementation project will to some extent alleviate the company’s liquidity pressure, enhance its debt repayment capacity, and strengthen the financial stability of the company.
From the information in the prospectus, HAC’s “Annual Output of 6,800 Tons of High-grade Fragrance Project” and “Smart Factory Construction Project” have been filed. However, with HAC terminating its IPO process, this means that the initially planned fundraising of 375 million yuan is also put on hold.
Nevertheless, HAC also explicitly stated that “prior to the formal implementation of the fundraising, the company will use its own funds to invest in projects necessary for business development, and adjust based on the progress of each project’s implementation. Once the funds are in place, they will first be used to replace the previously invested self-raised funds and pay for the remaining costs of the projects. If the funds raised do not cover the needs of all projects, the company will use self-raised funds to fill this funding gap.”
