ShanH Technology dials up lackluster numbers in new IPO bid

The smartphone recycler backed by Xiaomi chief Lei Jun is making a second attempt to list in Hong Kong after its first try in February failed

Key Takeaways:

• ShanH has applied for a Hong Kong IPO, reporting steady losses over the last three years
• The smartphone recycler’s gross margin has dropped steadily due to stiff competition, and stood at just 4.5% in the first half of 2024

By Lau Chi Hang

Ever wonder how many used mobile phones were recycled worldwide last year? The answer is a surprisingly large 310 million, with China accounting for nearly 40% of that. Now, China’s third largest smartphone recycler ShanH Technology Ltd. has come calling on the Hong Kong Stock Exchange, aiming to dial up new funds with an updated listing application earlier this month.

The company gets its used smartphones and other consumer electronics from trade-ins conducted in online and offline partner stores using its Shanhuishou recycling system. The company then tests, grades and prices the devices, and sells them through its own Shanhui Youpin site and in its own online stores on third-party e-commerce platforms.

Rapid development

ShanH is quite young, reflecting the youth of its industry. Founded in Shenzhen in 2016, one of the company’s biggest resources is its founder, Liu Jianyi, who has connections and experience through 18 years in China’s telecommunication industry. Similar to major Western markets like the U.S., many Chinese still get their phones through their wireless carriers, though increasing numbers now also get them through other outlets.

Still, ShanH has capitalized on Liu’s background to tap the market by forming tie-ups with major wireless carriers within just a year of his company’s establishment. Another thing that sets his company apart was Liu’s ability to impress Lei Jun, one of the best-known names in China’s smartphone sector as co-founder and chairman of Xiaomi (1810.HK).

Lei’s fascination with the company isn’t completely unexpected, since he held 20% of ShanH after participating in the company’s A-round financing through his Jinmi Investment, Hangzhou Shunying and Shunwei Technology companies. Several rounds later, Lei’s holdings, both direct and through related parties, have been diluted to about 11%.

Using its funds and industry connections, ShanH quickly expanded its business to include a network of more than 49,000 offline stores in 31 provinces across China. The company’s revenue continues to rise, growing from 750 million yuan ($106 million) in 2021 to 1.16 billion yuan last year. Its revenue in the first half of this year totaled 577 million yuan, up 11% year-on-year.

Its Lie Jun connection aside, one of ShanH’s biggest supporters is the Chinese government, which is putting big emphasis on recycling these days. That kind of support is especially important in China, where syncing with government priorities often smooths the way for more easily obtaining necessary permits and gaining access to state-owned resources.

As early as 2021, China’s Ministry of Ecology and Environment issued guidelines for the recycling of nine types of electronic waste, including smartphones. In March this year, the State Council, China’s cabinet, issued an action plan that included the promotion of trade-ins and recycling of consumer electronics. Local governments often take their cues from such central directives, and in July the southern boomtown of Shenzhen launched its own local plan to encourage smartphone trade-ins.

Continuing losses

While strong government support is important, it has yet to bring profits to ShanH, whose losses continue to mount with its growing revenue. The company’s loss doubled from 48.7 million yuan in 2021 to 99.1 million yuan in 2022, though it stabilized last year at 98.3 million yuan. It remained in the red in the first half of this year with a 40.1 million yuan loss, though that was an improvement from its 68.6 million yuan loss in the year-ago period.

Meanwhile, the company’s gross margin has never reached double digits. In a trend that won’t exactly excite investors, the figure has been trending generally downward, falling from 8.2% in 2021 to 6.1% in 2022. It rebounded to 6.8% last year, only to drop to just 4.5% in the first half of this year.

The company blamed its sliding margin on fierce competition, which is forcing it to increase the prices it pays for used phones and to boost commissions for staff at its partner stores. The vicious cycle is expected to continue and even worsen in the current market, making it difficult for the company to reduce its cost of sales this year and become profitable in the near term.

Mounting debt

Mounting debt has long been another headache for ShanH. Its net current liabilities swelled from 237 million yuan in 2021 to 631 million yuan by 2023, as its growing debt reached 672 million yuan by the end of June. The mounting debt is keeping pressure on the company’s operations, and could be a ticking time bomb that could eventually derail its future development at any moment.

Meantime, ShanH’s inability to generate enough cash from its business has translated to net cash outflow for the company, with net operating cash outflow jumping from 6.4 million yuan in 2021 to 47.8 million yuan last year. The situation improved in the first half of 2024, when the figure turned positive with a net cash inflow of 13.1 million yuan.

Among recyclers, investors may be more interested in ATRenew (RERE.US), which listed in the U.S. in 2021 and recorded 27% revenue growth to 3.78 billion yuan in this year’s second quarter. Despite recording a loss for the period, the company, whose main smartphone recycling business focuses on Apple iPhones, recorded an 80.5 million yuan profit on an adjusted basis.

ATRenew is also notable for its recycling partnership with Apple, which is featured on the Apple website and in 47 Apple retail stores in China. That business generated 300 million yuan in revenue for ATRenew in last year’s fourth quarter, and the company has estimated it could reach 1 billion yuan annually. And while ShanH counts Xiaomi as a backer, ATRenew has its own strong patron in e-commerce giant JD.com, which holds more than 30% of ATRenew’s shares and provides the company with favorable placement on its e-commerce platforms.

Hong Kong’s stock market rally last week could bode well for all new IPOs, though the rebound is coming off low levels. At the same time, ShanH will have to vie with other stronger IPO candidates that are profitable. And while it benefits from national policy support in the phone recycling market, ATRenew seems to offer a better choice for investors who want to put their money into the recycling sector.

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