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China Securities Regulatory Commission (CSRC) official website recently revealed that Yuzhongqing Waterproof Technology Group Co., LTD. (hereinafter referred to as "Yuzhongqing", "the company") IPO vote will be postponed. The reporter noted that the waterproofing related business of Yuzhong Situation is closely related to the development of the real estate industry. Influenced by such factors as excess capacity and intensifying competition in the waterproofing industry, the receivables in Yuzhong Situation report period (2018-2020 and January-September 2021, the same below) have ballooned sharply, accounting for a continuously rising proportion of revenue. However, the turnover rate of receivables and inventory has continued to decline. The proud direct selling model of the company is accompanied by a large number of lawsuits, and the sustainable profitability of Yuzhong situation has encountered many challenges.

Corporate litigation surges

According to the prospectus, Yuzhongqing is mainly engaged in the research and development, production and sales of building waterproof materials, and provides waterproof engineering construction services. The company's main products are waterproof coil, waterproof coating series products, can provide customers with "one-stop" building waterproof solutions. As a waterproofing enterprise founded in the northwest, rain has been in Xi 'an, Shaanxi Xianyang, Gansu Lanzhou, Jiangsu Taizhou, Shandong Shouguang, Shaanxi Weinan and other places to establish a production and development base, sales and service network has covered most of the domestic areas.

During the reporting period, Yuzhongqing's total assets at the end of the period were 1.031 billion yuan, 1.369 billion yuan, 1.780 billion yuan and 2.295 billion yuan respectively, and the owner's equity attributable to the parent company was 635 million yuan, 806 million yuan, 1.148 billion yuan and 1.579 billion yuan respectively. During the reporting period, the operating revenue of the company was 1.098 billion yuan, 1.277 billion yuan, 1.598 billion yuan and 1.216 billion yuan respectively, and the net profit attributable to the owner of the parent company was 0.93 million yuan, 171 million yuan, 224 million yuan and 129 million yuan respectively. The company's operating income mainly comes from the sales revenue of waterproof materials, accounting for more than 90%, among which the sales revenue of waterproof coils accounts for more than 80% in each phase. During the reporting period, the Company's consolidated gross margins were 36.65%, 42.03%, 43.38% and 37.40%, respectively. The average combined gross profit margin of the comparable industry is 34.25%, 36.12%, 39.06% and 30.75%.

It can be seen that the comprehensive gross profit margin of Yuzhong is higher than the average of listed companies in the same industry. In this regard, Yuzhongqing explained that the company's product sales are mainly direct selling, which accounts for 90% in the reporting period. The gross profit rate of direct selling is generally higher than that of distribution, and the gross profit rate of direct selling is about 15% higher than that of distribution in the reporting period. In the same industry, Oriental Yuhong, Kellen Stock and Keshun Stock account for a higher proportion of distribution revenue than the company in the reporting period, and direct sales account for a higher proportion, leading to a higher gross profit rate in Yuzhong. In addition, comparable companies in the same industry waterproof construction income accounts for relatively large.

However, while the direct selling model brings high margins to Yuzhongqing, it also comes with a large number of lawsuits. Yuzhongqing's products are mainly used in real estate development, infrastructure construction, house repair and secondary decoration and other markets. In addition to large and medium-sized customers, there are also a lot of small projects, self-built houses and other scattered demands in the downstream market. These small customers often purchase only hundreds of thousands of yuan, due to various reasons leading to frequent litigation.

The reporter searched "The situation in the Rain is waterproof" on the website of China Judicial Documents, and found 369 legal documents, including 245 civil cases and 123 enforcement cases. The basic courts heard 330 cases. Since 2018, a total of 329 judgment documents have been involved, including 100 in 2020. Most of the cases are filed in the rain. The types of lawsuits are mostly contract disputes, that is, disputes over the amount of waterproof materials. There are dozens of cases with the target amount of hundreds of thousands.

In addition, a total of 385 lawsuits involving 20,604,900 yuan were filed, according to Tianyan Research. Among them, 358 contract disputes, in addition to the bill recourse and construction contract disputes. There are 160 cases of Yuzhong as the plaintiff, and 96 cases of applying for executor. Thus, the value of cases involved in each legal action is not high.

"Direct sales do not have middlemen, the profit is higher, but the rain directly face the final consumer customers, especially some small customers, will inevitably lead to an increase in the number of disputes. From a financial point of view, it will affect accounts receivable and bad debt provisioning." Senior accountant Mr. Hu said frankly.

The proportion of accounts receivable continues to rise

In fact, both the amount and the proportion of receivables in the rain show a continuous growth trend.

According to the prospectus, during the report period, the book value of accounts receivable of Yuzhong situation was 492 million yuan, 659 million yuan, 957 million yuan and 1.055 billion yuan respectively, accounting for 44.82%, 51.59%, 59.89% and 86.80% of the operating revenue of the same period, accounting for relatively high; The corresponding bad debt reserves for the current period were 54,892,200 yuan, 73,851,400 yuan, 105,058,600 yuan and 127,833,800 yuan respectively.

Yu Zhongqing said that with the further expansion of the company's business scale in the future, the amount of accounts receivable may continue to increase. If changes occur in the macroeconomic environment and customers' business conditions, the company's business results may be adversely affected if the company's accounts receivable cannot be timely recovered and bad debt losses are formed.

From the perspective of accounts receivable turnover rate, the turnover rate of receivables in rainy conditions during the report period was 2.24 times/year, 2.00 times/year, 1.78 times/year and 1.08 times/year respectively, which was generally low and showed a downward trend, and the gap was gradually widening.

It is worth noting that during the reporting period, the net cash flow generated by rainy operating activities was 55,922,400 yuan, 42,291,600 yuan, 67,099,800 yuan and -254 million yuan respectively, with a large outflow in the latest period.

Compared with the net profit of the same period, the net cash flow generated by the rainy operating activities is lower than the net profit of the same period.

In response, Yuzhong said, The company has increased its reserves of raw materials. However, during the reporting period, the total purchase of raw materials of Yuzhongqing and its subsidiaries was 678 million yuan, 769 million yuan, 765 million yuan and 799 million yuan respectively, and there was no significant change.

According to the prospectus, during the reporting period, Yuzhongqing's monetary funds were respectively 25,198,900 yuan, 65,227,700 yuan, 101 million yuan and 105 million yuan, and its short-term loans were 152 million yuan, 210 million yuan, 205 million yuan and 160 million yuan. Non-current liabilities due within one year are 16,666,200 yuan, 474,354 yuan, 63,457,700 yuan and 69.86,500 yuan, short debts total 169 million yuan, 257 million yuan, 263 million yuan and 230 million yuan, and the fund gap in the same period is 144 million yuan, 195 million yuan, 162 million yuan and 125 million yuan respectively.

It can be seen that there has been a funding gap in the rain for nearly four years. In order to ease the financial pressure, Yuzhongqing has taken out mortgage loans for many times. Its long-term loans are the mortgage, the guaranteed loan principal and the outstanding interest payable totaling 152 million yuan.

7 violations were punished during the reporting period

According to the prospectus and eye search information, Yuzhongqing and its subsidiaries were punished seven times by local regulators for environmental protection and production safety issues during the reporting period.

On October 5, 2018, Daxi 'an (Xianyang) Culture and Sports Functional Area Environmental Protection Branch of Xianyang Environmental Protection Bureau decided to order rectification and impose an administrative penalty of 20,000 yuan for violating the provisions of Article 48 of the "Air Pollution Prevention and Control Law" regarding the "organic waste gas spillover problem at the outlet of oiling section organic waste gas absorption fan" in Shaanxi Rain.

On October 29, 2018, the Work Safety Supervision Administration of Jinghe New Town, Xixian New District, Shaanxi Province, for clear sky technology, "emergency rescue plan for work safety accidents has not been revised, reviewed or filed; Did not see the hidden danger of production safety ledger "in violation of the" safety production Law "article 18 item 6 of the relevant provisions, decided to order a correction within a time limit and 20,000 yuan of administrative punishment.

On December 3, 2018, the Environmental Protection Branch of Da Xi 'an (Xianyang) Culture and Sports Functional Zone of Xianyang Environmental Protection Bureau decided to make immediate rectification and impose an administrative penalty of 30,000 yuan for violating the provisions of Article 108 (5) of the Law on Prevention and Control of Air Pollution by "not collecting dust from the modified asphalt process of the Rolling material Workshop as required" in Yuzhongqing, Shaanxi.

On May 17, 2019, the Environmental Protection Bureau of Jinghe New Town, Xixian New District, Shaanxi Province decided to impose an administrative penalty of 16,000 yuan for violating Article 25 of the Environmental Impact Assessment Law regarding the clear sky technology "2 asphalt storage tanks and 3 underground asphalt storage ponds without EIA procedures".

On June 11, 2020, Daxi 'an (Xianyang) Culture and Sports Functional District Branch of Xianyang Bureau of Ecological Environment decided to impose an administrative penalty of 10,000 yuan for violating the provisions of the third clause of Article 117 of the Law on Prevention and Control of Air Pollution by saying that "the modified roll is loading sand and the dust control measures are not in place when unloading sand" in Shaanxi Rain.

March 29, 2021, Shouguang City Emergency Management Bureau of Shandong Yuzhong situation "did not establish safety production education and training files, did not truthfully record the time of safety production education and training, content, participants and assessment results" violated the "safety production Law" article 25 section 4 and Article 25 section 1 provisions, Decided to impose an administrative penalty of 37,000 yuan.

On September 3, 2021, Weifang Bureau of Ecological Environment imposed a fine of 65,000 yuan on the unorganized discharge of waste gas in the oiling and film coating process of Shandong Yuzhongqing Self-adhesive waterproof coil production line.

In view of the above punishment, Yuzhongqing and its subsidiaries have been rectified, and have paid fines.