IPO-bound Anhui Conch Material’s fate cemented to construction industry

The cement admixture producer has bucked recent construction industry weakness, but dependence on an affiliate could be the biggest hurdle on its path to a Hong Kong listing

Key Takeaways:

• Anhui Conch Material has filed for a Hong Kong IPO, reporting revenue from sister firm Anhui Conch Cement accounted for 30% of its total in the first half of this year
• The company’s accounts receivable stood at 790 million yuan at the end of June, equal to 72% of its total revenue in the first half of the year

By Lee Shih Ta

China’s struggling property market has taken down not only developers, but also the many supporting industries that also soared on the sector’s earlier boom. Cement makers are one of the groups that’s fallen on hard times, as demand for their product rapidly dries up.

But Anhui Conch Material Technology Co. Ltd. has bucked the industry-wide weakness. Now, it’s hoping its counter-cyclical growth will attract investors to a planned Hong Kong listing, which it detailed in its second IPO application filed late last month. China Securities (International) is the deal’s sole sponsor.

According to its application, the company is a fine chemical materials supplier that produces and sells cement admixture, concrete admixture and their upstream raw materials. Third-party market data in the document shows the company ranked first in China last year in terms of both sales volume and revenue for cement admixtures, with market share of 28.3% and 32.3%, respectively.

The company is a unit of Conch Holdings, China’s biggest cement manufacturer and a China Fortune 500 company. Conch Holdings is Anhui Conch Material’s controlling shareholder with 36.4% of its stock. The holding company’s other assets include Anhui Conch Cement (600585.SH; 0914.HK), which is listed in both Shanghai and Hong Kong.

The woes for China’s broader cement industry are apparent in the numbers. Manufacturers churned out 850 million tons of cement in the first half of this year, down 10% year-on-year and the lowest first-half-year output since 2011, according to China’s National Statistics Bureau. The average price for cement in the first half of the year was 367 yuan per ton, down 13% year-on-year, hitting a nearly six-year low.

What’s more, large players in the industry lost a combined 3.4 billion yuan ($484 million) in the first five months of the year, with over 55% of companies from that group in the red.

Countercyclical profit surge

Despite the broader market’s weakness, Anhui Conch Material has maintained solid growth over the last three years. Its revenue rose from 1.54 billion yuan in 2021, to 1.84 billion yuan in 2022 and 2.39 billion yuan last year. Its revenue also grew 5.7% year-on-year to 1.1 billion yuan in the first half of this year, translating to annual growth of 24.8% over the three-and-a-half year period. The company also logged a profit of 52.7 million yuan in the first half of this year, up by a healthy 38% year-on-year.

The company derives a big chunk of its revenue from sister company Anhui Conch Cement, which has been a major customer since the second half of 2018. Anhui Conch Cement has consistently been Anhui Conch Material’s biggest client, though the latter’s reliance has fallen steadily from accounting for 52.5% of revenue in 2021 to 30.7% in the first half of this year.

The numbers make it clear that Anhui Conch Material is eager to shake off its reliance on its bigger sister. And, in fact, the company attributed its ability to keep increasing its revenue in the first half of the year to orders from new clients. But business from such clients also typically comes with relatively lower margins, which risks eroding Anhui Conch Material’s own gross margin.

Its prospectus shows its gross margin from sales to affiliated clients stood at 45.4% in the first half of the year, compared to just 40.2% for unrelated third-party clients. The company admitted to selling to such unaffiliated buyers at lower prices to grab market share, adding it was able to charge higher prices to affiliated clients due to their higher demand for product quality as well as its provision of supporting services.

“We usually set a relatively high price range so as to maximize the potential profit without compromising our chance of securing the contracts successfully,” Anhui Conch Material said, explaining its philosophy for participation in bidding organized by affiliated clients.

Put differently, Anhui Conch Material may be more diverse now than before in terms of revenue, but its profitability is still closely tied with the fortunes of Anhui Conch Cement. And Anhui Conch Cement’s financials hardly look positive right now as the entire cement industry suffers.

According to its interim results, Anhui Conch Cement’s revenue plunged 30.4% to 45.6 billion yuan in the first half of the year, while its profit fell by an even larger 48.4% year-on-year to 3.48 billion yuan. In the first 10 days of September, the company issued 7 billion yuan in medium-term notes bearing interest rates of 2.12% and 2.10%.

Growing accounts receivable

Anhui Conch Material’s strong ties with affiliated companies hasn’t come without some pain, as its accounts receivable have soared. According to its listing application, the company’s trade receivables more than doubled from 300 million yuan at the end of 2021 to 760 million yuan by the end of last year. The figure rose further to 790 million yuan by the end of June this year, equivalent to 72% of its revenue in the first half of the year. As its receivables grew, the company’s average number of turnover days for those receivables grew from 68.8 days in 2021 to 99.7 days by June this year.

The rapidly rising accounts receivable and turnover days are clearly red flags that potential investors need to take note of.

While the company wants to show investors it’s not completely reliant on its affiliated companies for sales, many may still be skeptical. And the industry’s broader weakness will also create a major overhang for the IPO. Given such a precarious situation for construction material makers in general, even a company with growing profits and revenue like Anhui Conch Material may have trouble convincing investors to buy into its IPO makes it to market.

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