Hongli Group Shares: HLP Begins US IPO Efforts

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A brief overview of the Hongli Group

According to an F-1 registration statement, the Hongli Group (HLP) has filed for an IPO of its common stock for $ 28.75 million.

The company is a supplier of cold rolled steel products in China.

HLP is a tiny player in a large global market.

I’ll make a final statement when we learn more about the IPO.

Accompaniment

Based in Weifang, China, Hongli was founded to design, customize, and manufacture cold rolled steel for various machines and equipment for a range of industries.

Management is led by Mr. Jie Liu, Chairman and CEO, who joined the company in October 2009 and previously graduated from the Nanjing Artillery Academy with a degree in business administration.

The company’s primary steel offerings are sold to these industries:

• Mining

• excavation

• construction

• Agriculture

• transport

Hongli has received at least $ 980,000 in equity investments from investors including Hongli Development Limited (controlled by Chairman Liu).

Hongli – customer acquisition

The company has customers in both China and overseas in Japan, South Korea, the United States, and Sweden.

According to management, most of the company’s “major customers increased orders with” [its] Business units in the PRC in the fiscal years to the end of fiscal 2020 and 2019 and based on their new contract with [its] The units operating in the PRC will continue to increase their orders over the next 2-3 years. ‘

The share of sales, administration and administration costs in total sales has increased with increasing sales, as the following figures show:

Sales, terms and conditions	Expenses vs. Income
Period	percentage
Six mos. Ended June 30, 2021	14.7%
2020	17.8%
2019	12.0%

(Source)

The Sales, G&A Efficiency Rate, which is how many dollars of additional new revenue are generated by each dollar of sales, G&A spend, rose sharply to 3.6x over the most recent reporting period, as shown in the following table:

Sales, terms and conditions	Efficiency
Period	Several
Six mos. Ended June 30, 2021	3.6
2020	0.9

(Source)

Hongli’s Market & Competition

According to a market research report by 360 Market Updates for 2020, the global market for cold rolled steel production was estimated at $ 120 billion in 2020 and is projected to reach $ 147 billion by 2026.

This corresponds to a forecast CAGR of 2.9% from 2021 to 2026.

China is the largest producer of cold rolled steel with a market share of 54%. As of 2020, Europe will have a market share of 15%.

Also, the industry is likely to be hit by price inflation that will affect OEMs and then consumers worldwide.

Key contest entrants or other industry participants include:

• China Baowu Steel Group

• NSSMC

• JFE Steel Corporation

• Shougang group

• TISCO

• APERAM

• NLMK group

• AK steel

• ThyssenKrupp

• Ansteel

• Masteel

• Posco

• Convincing (Tata Steel)

• Stalprodukt SA

• CSC

Financial performance of the Hongli Group

The company’s latest financial results can be summarized as follows:

• Increasing sales from a small base

• Increasing gross profit, but lower gross margin

• Uneven operating income

• A swing to cash that is used in the company

The following are relevant financial results derived from the company’s registration statement:

Total sales
Period	Total sales	% Deviation vs. prior
Six mos. Ended June 30, 2021	$ 10,261,131	111.5%
2020	$ 11,158,820	20.1%
2019	$ 9,293,364
Gross profit (loss)
Period	Gross profit (loss)	% Deviation vs. prior
Six mos. Ended June 30, 2021	$ 3,497,154	79.9%
2020	$ 4,452,517	11.5%
2019	$ 3,991,919
Gross margin
Period	Gross margin
Six mos. Ended June 30, 2021	34.08%
2020	39.90%
2019	42.95%
Operating profit (loss)
Period	Operating profit (loss)	Operating margin
Six mos. Ended June 30, 2021	$ 1,988,972	19.4%
2020	$ 2,469,504	22.1%
2019	$ 2,880,722	31.0%
Net income (loss)
Period	Net income (loss)	Net margin
Six mos. Ended June 30, 2021	$ 1,458,543	14.2%
2020	$ 2,423,941	23.6%
2019	$ 2,079,406	20.3%
Cash flow from operating activities
Period	Cash flow from operating activities
Six mos. Ended June 30, 2021	$ (563,418)
2020	$ 2,764,720
2019	$ 1,788,640
(Glossary of terms)

(Source)

As of June 30, 2021, Hongli had $ 436,718 in cash and $ 8 million in total debt.

Free cash flow for the twelve months ended June 30, 2021 was $ 630,125.

Details on the Hongli Group’s IPO

Hongli intends to generate gross proceeds of $ 28.75 million from an initial public offering of its common stock, the final number may vary.

No previous shareholder has shown interest in acquiring shares at the IPO price.

Management says it will use the net proceeds from the IPO to:

30% for the repayment of the bank loan in connection with our expansion plan or other use determined by our board of directors (1);

30% for new production facilities as part of the expansion plan;

10% for product research and development; and

30% for working capital.

(Source)

A presentation of the company roadshow by management is not available.

Regarding pending legal proceedings, management says the company or its directors are not involved in any legal proceedings.

The only publicly traded bookrunner of the IPO is EF Hutton.

Commentary on Hongli’s IPO

HLP seeks funding in the US capital market to repay debt and expand its manufacturing capabilities and facilities.

The company’s financial data shows growing sales on a small-scale, rising gross profits, variable operating income, and a trend toward operational cash burn over the past six months.

Free cash flow for the twelve months ended June 30, 2021 was $ 630,125.

The share of sales and administrative expenses in total sales has tended to increase with increasing sales; the efficiency rate of sales, G&A increased 3.6-fold in the last reporting period.

The market opportunities for cold-rolled steel are great, but are expected to grow only slowly around the world.

Like other Chinese companies that want to enter US markets, the company operates within a VIE structure or a variable interest entity. US investors would only have a stake in an offshore company with contractual rights to the company’s operating results, but would not own the underlying assets.

This is a legal gray area that carries the risk of management changing the terms of the contractual arrangement or the Chinese government changing the legality of such arrangements. Potential IPO investors would need to consider this important structural uncertainty.

Additionally, the Chinese government’s crackdown on IPO candidates, coupled with additional reporting requirements from the US, has seriously slowed China’s IPOs and post-IPO performance.

EF Hutton is the sole underwriter, and the company’s IPOs over the past 12 months have had an average negative return (25.4%) since it went public. This is a minor performance for all major underwriters over the period.

The main risk to the company’s outlook is that it is subject to highly uncertain Chinese regulatory impacts that have negatively impacted Chinese companies in US equity markets.

When we learn more details about the IPO, I’ll make a final statement.

Estimated IPO Price Date: To be announced.