Zhejiang Rongtai's pursuit of A+H listing: declining debt repayment ability and performance guarantee risks in the acquisition target

Ask AI · What chain reactions could be triggered if Deez Precision’s performance commitment fails?

Harbor Business Observation Zhi Fu

Recently, Zhejiang Rongtai Electromechanical Equipment Co., Ltd. (hereinafter, Zhejiang Rongtai) submitted an application to the Hong Kong Stock Exchange, and the application has been accepted. The exclusive sponsor is CITIC Securities.

As far as it is known, Zhejiang Rongtai (603119.SH) was listed on the SSE Main Board on August 1, 2023. This time, the company is going to Hong Kong with the goal of realizing its “A+H” dual-listing strategy. According to the plan, the company intends to use the proceeds mainly to expand global production capacity and establish an intelligent manufacturing system; strategic investments and acquisitions; accelerate the R&D and innovation of precision robotic components and safe-structure components for new energy applications; strengthen the global marketing network and improve management performance; and supplement working capital and other general uses.

The China Securities Regulatory Commission has recently required Zhejiang Rongtai to further explain the following matters, and to have lawyers review them and issue clear legal opinions:

1. Please, in accordance with the requirements of the “Guidance on the Application of Regulatory Rules — No. 2 for Overseas Issuance and Listing,” explain the establishment of the company and changes in equity capital holders during the period when it was a limited liability company.

2. Explain in detail the specific fulfillment of regulatory procedures such as overseas investment and foreign-exchange registration involved in establishing overseas subsidiaries, and provide a conclusive opinion on compliance.

3. The filing materials and the relevant content in the prospectus regarding the issuance scheme should be consistent. Please compare against the requirements of the “Guidance on the Application of Regulatory Rules — No. 2 for Overseas Issuance and Listing” and explain the issuance scheme for this offering.

4. Whether the existing, under-construction, and fund-raising projects in this round are “high-energy-consumption” and “high-emissions” projects, and provide relevant basis.

1

Performance is solid

Zhejiang Rongtai is a national high-tech enterprise specializing in the R&D, production, and sales of high-temperature-resistant insulating mica new composite materials. The company’s main products include hard-mica materials, flexible-mica materials, heating modules, thermal-management mica safety components, and various mica derivative products.

The mica products manufactured by the company are widely used in new-energy vehicles, rail transit, aerospace ships, special wires and cables, smart home appliances, and other related industrial fields. The company also provides customers with professional one-stop system solutions such as electrical insulation and thermal insulation.

During the periods recorded in the performance history, Zhejiang Rongtai mainly generated revenue through the following two categories: mica composite materials and related products; and key precision structural parts and related products used in robotics and advanced automation applications.

From 2023–2024 and January–September 2025 (hereinafter, within the reporting period), revenues from sales of new-energy products were RMB 575 million, RMB 898 million, and RMB 749 million respectively, accounting for 71.8%, 79.1%, and 78.1% of revenue for the respective period.

Zhejiang Rongtai’s mica composite materials and related products for non-new-energy applications (non-new-energy products) mainly include mica heaters, mica sheets, mica rolls, and precision-machined mica components used for household appliances, as well as mica rolls used for cables.

In the reporting period, revenues from sales of non-new-energy products were RMB 208 million, RMB 221 million, and RMB 160 million respectively, accounting for 26.0%, 19.5%, and 16.6% of revenue for the respective period.

In terms of sales volume, in each period of the reporting period, the sales volumes of new-energy products were 9,846 tons, 14,630 tons, and 12,068 tons respectively, with average selling prices of RMB 58.4k per ton, RMB 61.4k per ton, and RMB 62.1k per ton. The sales volumes of non-new-energy products were 9,315 tons, 11,019 tons, and 7,293 tons respectively, with average selling prices of RMB 22.4k per ton, RMB 20.1k per ton, and RMB 21.9k per ton.

By sales region, Zhejiang Rongtai’s revenue from Mainland China and Europe increased during the period, mainly driven by increased customer demand due to industry expansion and improved customer satisfaction.

In January–September 2025, Zhejiang Rongtai’s major customers completed batch stocking required for mass production, so demand for the company’s products declined during that period, resulting in lower revenue in the Americas and Asia-Pacific (excluding China) compared with the same period in 2024.

In each period of the reporting period, Mainland China’s revenue accounted for 59.4%, 49.5%, and 52.7% respectively, Europe’s share was 23.0%, 28.9%, and 34.3% respectively, and the Americas and Asia-Pacific (excluding China) accounted for 16.8%, 20.8%, and 12.3% respectively.

In the reporting period, Zhejiang Rongtai achieved revenues of RMB 800 million, RMB 58.4k, and RMB 960 million, respectively. Profits during the period were RMB 172 million, RMB 230 million, and RMB 205 million respectively. Net profits were RMB 172 million, RMB 230 million, and RMB 205 million respectively. Overall, performance maintained stable growth, with revenue growth rates for each period of 19.89%, 41.8%, and 18.65% respectively.

In the same period, the company’s gross margin was 35.3%, 32.0%, and 34.0% respectively. Among them, in 2024 the company’s gross margin declined slightly year over year, mainly due to factors such as changes in product mix and increases in raw material prices on the cost side.

As disclosed by the Shanghai Stock Exchange, in January–September 2025, Zhejiang Rongtai achieved revenue of RMB 960 million, up 18.65% year over year; net profit of RMB 203 million, up 22.04% year over year; and parent net profit after deducting non-recurring items of RMB 188 million, up 21.14% year over year.

2

Accounts receivable surge, and debt-paying capability declines somewhat

Zhejiang Rongtai’s customers mainly consist of leading new-energy vehicle manufacturers and battery manufacturers. Due to the business model, the company has formed a highly concentrated revenue base.

In the reporting period, revenues from the top five customers were RMB 334 million, RMB 481 million, and RMB 409 million, respectively, accounting for 41.7%, 42.3%, and 42.7% of total revenue, respectively. Meanwhile, revenues from the largest customer were RMB 86.2 million, RMB 141 million, and RMB 150 million, respectively, accounting for 10.8%, 12.4%, and 15.7% of total revenue, respectively.

The company stated: Since the revenue share of the top five customers exceeds 40%, if the company loses major customers, orders decrease, or customers’ production schedules are delayed, it may all lead to significant fluctuations in the company’s revenue and profitability.

At the same time as customer concentration is high, Zhejiang Rongtai’s accounts receivable from downstream and its own inventories are continuing to rise.

At the end of each period in the reporting period, the company’s trade receivables and notes receivable were RMB 227 million, RMB 277 million, and RMB 331 million respectively. The turnover days for trade receivables and notes receivable were 103 days, 81 days, and 86 days respectively. As of the end of September 2025, Zhejiang Rongtai’s accounts receivable were RMB 329 million, up 27.83% year over year.

Meanwhile, inventories were RMB 171 million, RMB 251 million, and RMB 384 million respectively, with inventory turnover days of 118 days, 100 days, and 137 days respectively.

Accounts receivable and inventory are still occupying part of working capital. At the end of each period in the reporting period, the company’s net cash flow from operating activities was RMB 234 million, RMB 230 million, and RMB 190 million respectively. As of the end of September 2025, Zhejiang Rongtai’s cash flow declined by about 18.8% compared with the end of 2024, and the cash-flow scale contracted somewhat.

In terms of debt-paying ability, during the reporting period, the company’s current ratio was 5.71x, 4.33x, and 1.67x respectively, and the quick ratio was 5.04x, 3.57x, and 1.3x respectively. During the period, the company’s debt-paying ability showed a clearly declining trend.

3

Performance commitment risk related to the M&A target

In April 2025, Zhejiang Rongtai and Deez Precision entered into an equity acquisition agreement with six shareholders at the time (collectively referred to as the Deez Precision transferors; each of them was an independent third party at the time of the acquisition). Under the agreement, the Deez Precision transferors agreed to transfer, while Zhejiang Rongtai agreed to purchase approximately 41.20% of the equity interest in total of Deez Precision for a consideration of RMB 165 million.

At the same time, Zhejiang Rongtai subscribed for the increased capital of Deez Precision for RMB 80 million, with the registered capital increased by RMB 61.4k. After completing the equity transfer and capital increase, Zhejiang Rongtai holds 51.00% of the equity interest in Deez Precision, and its financial performance is consolidated into the company’s consolidated financial statements. Accordingly, Deez Precision became a subsidiary of the company.

It is understood that Deez Precision is a domestic manufacturer focusing on precision structural components. Its products are widely used in fields such as robotics, medical equipment, 3C electronics, semiconductors, and precision actuators. In January–September 2025, Zhejiang Rongtai’s revenue from sales of key precision structural components and related products was RMB 62.1k.

Zhejiang Rongtai has disclosed in detail in its announcement on the transactions related to the acquisition of Deez Precision on the Shanghai Stock Exchange. In February 2025, Zhejiang Rongtai issued an announcement titled “Announcement on Signing a Letter of Intent for Equity Acquisition,” mentioning that the company, together with Deez Precision and its shareholders, signed a “Framework Agreement.” It is planned to receive part of the equity held by the above-mentioned shareholders in the target company through an equity transfer, and at the same time, to increase capital to the target company, thereby achieving an aggregate holding of 51% of the target company’s equity. The intended valuation for this transaction is RMB 400 million. After the transaction is completed, the company will hold 51% of the target company’s equity interest, and the target company will become a controlling subsidiary of the company, to be included in the consolidated scope of the listed company.

The transaction agreement mentions that, regarding the performance commitment, after preliminary consultations among all parties, the performance commitment period for this transaction will be the 2025 fiscal year, the 2026 fiscal year, and the 2027 fiscal year. The final performance commitment amounts and performance compensation arrangements will be determined through negotiations among all parties based on factors including the audit and valuation results of this transaction and the final transaction price for this transaction.

In its research report, GuoSheng Securities mentioned in more detail: “According to the performance commitment, the cumulative net profit of Deez Precision from 2025 to 2027 will be no less than RMB 70 million.”

Based on the audit report of Deez Precision disclosed by Zhejiang Rongtai, it can be seen that in 2024 Deez Precision achieved operating revenue of RMB 92.2127 million and net profit of -RMB 22.4k; in January–February 2025, it achieved operating revenue of RMB 12.7929 million and net profit of RMB 20.1k.

In June 2025, the company acquired, in cash, the equity interests in Deez Precision totaling 41.20% jointly held by Huang Mingtao, Chen Zengshou, Wang Liyong, Wang Lihui, Shanghai Shifeng Business Information Consulting Partnership (Limited Partnership), and Shanghai Kaifeng Business Information Consulting Partnership (Limited Partnership), with a transfer price of RMB 165 million. At the same time as the equity transfer, the company contributed RMB 80 million in cash to the target company, subscribing for an increase in registered capital of RMB 21.9k, and the remaining RMB 1.14B was recorded in the target company’s capital reserve. After completion of the above equity transfer and capital increase, the target company’s registered capital changed to RMB 14.9M, and the company held 51% of the target company’s equity.

This prospectus shows that, since the acquisition, Deez Precision has contributed RMB 40.97M to Zhejiang Rongtai’s revenue for the period up to the end of September 2025, and generated a comprehensive profit loss of RMB 6.321 million. This suggests that it may be quite challenging for Deez Precision to achieve the past performance commitments. And if the founders of the target company are unable to complete the performance commitments, it may not only affect Zhejiang Rongtai’s own profit, but also potentially trigger goodwill impairment, thereby undermining investor confidence.

Due to the acquisition of Deez Precision in 2025, Zhejiang Rongtai also generated some goodwill. In the reporting period, the company’s goodwill was RMB 0, RMB 0, and RMB 150 million, respectively.

Bai Wenxi, Deputy Director of the Capital Union of Chinese Enterprises, said: Once the performance commitments cannot be fulfilled, Zhejiang Rongtai will face a large goodwill impairment, directly impacting net profit. According to accounting standards, goodwill impairment will be recognized in profit or loss for the period, which may significantly erode the company’s originally steady core business profit.

However, Guotai Haitong Securities believes that the company has actively planned the industry related to humanoid robots, and has formed a joint venture with Weichuang Electrical to build a factory in Thailand. The company places great importance on strategic planning and business expansion related to humanoid robots, and actively cooperates with customers in product development. In 2025, by acquiring 51% equity of Deez Precision and 15% equity of Jinli Intelligent Transmission Technology, the company quickly entered emerging areas such as precision transmission, intelligent equipment, and humanoid robots. By the end of 2025, the company plans, together with Weichuang Electrical, to establish a joint venture company in Thailand, mainly engaged in R&D and production of electromechanical integrated components, intelligent transmission systems, and supporting products, which will be applied to the electromechanical integrated market of intelligent robots. Looking ahead, the basic demand for insulation in new-energy vehicles is expected to maintain steady growth, while the humanoid robot sector will become the company’s high-growth curve.

Regarding compliance, Zhejiang Rongtai estimates that the cumulative shortfall in social insurance and housing provident fund contributions during the period of performance records is less than RMB 30 million. (Harbor Finance & Economics production)