"Yi Lian Tech, Bound to CATL, How Close to IPO?"

Recently, Shenzhen Yilian Technology Co., Ltd. (hereinafter referred to as: Yilian Technology/Company) has had its IPO registration on the Growth Enterprise Market (GEM) of the Shenzhen Stock Exchange take effect, with China Merchants Securities as the sponsoring institution.

Yilian Technology's GEM IPO application was accepted in June 2022 and entered the inquiry phase in the same month. In June 2023, the company successfully passed the review of the listing committee. Recently, Yilian Technology submitted its registration application, which has now taken effect.

Despite the effective registration, the market has raised many questions about Yilian Technology. In recent years, the company's main business gross margin has shown a trend of decline year by year. At the same time, the company's dependence on Contemporary Amperex Technology Co., Limited (CATL) is increasing. In addition, on the eve of applying for the IPO, Yilian Technology acquired assets under the name of its actual controller at a premium.

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High Dependence on CATL

Established in December 2011, Yilian Technology is a high-tech enterprise specializing in the research and development, design, production, sales, and service of electrical connection components. The company has a wide range of product lines, including battery cell connection components, power transmission components, and low-voltage signal transmission components, among various electrical connection components.

According to the prospectus, from 2021 to 2023, Yilian Technology achieved operating revenues of 1.434 billion yuan, 2.758 billion yuan, and 3.075 billion yuan, respectively, and achieved net profits attributable to the company of 143 million yuan, 236 million yuan, and 260 million yuan, respectively.

Although Yilian Technology's revenue and net profit show a trend of year-on-year growth, the gross margin has declined. From 2021 to 2023, the company's comprehensive gross margin was 21.69%, 19.54%, and 18.94%, respectively, and the gross margin of the main business was 21.7%, 19.48%, and 18.89%, respectively.

It is reported that the electrical connection component market where Yilian Technology is located has a relatively high entry barrier. Customers usually value the technical strength and industry experience of suppliers and tend to establish long-term cooperative relationships with suppliers. The company has established cooperative relationships with well-known domestic and foreign enterprises, including CATL, Xiaopeng Motors, Volvo, Volkswagen, Nissan, Geely Automobile, Zero Run Automobile, and Changan Automobile.

However, Yilian Technology's products are not entirely irreplaceable. During the period from 2021 to 2023, the company terminated cooperation with several important customers, including BYD, Duoduo Fluoride, Jiangsu, and Zhongpu Fang New Energy Technology Co., Ltd. It is worth noting that BYD is one of the customers that cooperated with Yilian Technology since its establishment.Additionally, Yilian Technology faces the risk of high customer concentration, particularly a strong dependence on CATL (Contemporary Amperex Technology Co., Limited). From 2021 to 2023, the company's revenue from the top five customers accounted for 77.12%, 83.37%, and 87.61% of its total revenue, respectively, with CATL's revenue share reaching as high as 64.72%, 67.98%, and 71.13%.

Yilian Technology stated that the company has established a stable cooperative relationship with CATL and expects that the proportion of sales revenue from CATL will remain high for a certain period in the future.

It is worth mentioning that CATL is not only the largest customer of Yilian Technology in recent years but also one of the contributors to the company's important shareholders. In June 2021, Yilian Technology received a strategic investment led by Changjiang Morning Road, with an investment amount of approximately 79.9787 million yuan. One of the partners of Changjiang Morning Road, Wending Investment, is a wholly-owned subsidiary of CATL, holding about 15.87% of Yilian Technology's shares.

High-premium acquisition boosts performance

Related party transactions have always been a key issue in the IPO review process.

Before applying for the ChiNext IPO, Yilian Technology, in order to resolve the issue of competition within the same industry, acquired assets under the control of its actual controller at a premium. In response, the Shenzhen Stock Exchange required Yilian Technology to provide detailed explanations on the fairness of this related party asset acquisition transaction, the compliance of accounting treatment, and the existence of any interest transfer in both the first and second rounds of review inquiries.

The prospectus disclosed that Yilian Technology has production bases in Shenzhen, Guangdong; Ningde, Fujian; Liyang, Jiangsu; Yibin, Sichuan; and Yueqing, Zhejiang. Among them, Ningde Yilian Electronics Co., Ltd. (referred to as "Ningde Yilian") and Liyang Yilian Electronics Co., Ltd. (referred to as "Liyang Yilian") are the operating entities of the company's production bases in Ningde, Fujian, and Liyang, Jiangsu, respectively.

To avoid competition within the same industry, reduce related party transactions, and enhance operational independence, Yilian Technology implemented an asset restructuring in 2019, acquiring 100% of the equity of Ningde Yilian and Liyang Yilian through the issuance of shares, and acquiring the wire harness business of Shenzhen Wangxing Industrial Development Co., Ltd. (referred to as "Wangxing Industry") through cash acquisition.

Before this acquisition, Ningde Yilian was a wholly-owned subsidiary of Wangxing Industry, and Liyang Yilian was a wholly-owned subsidiary of Shenzhen Benyun Investment Co., Ltd. (referred to as "Shenzhen Benyun"), both of which were engaged in similar businesses to Yilian Technology. Wangxing Industry and Shenzhen Benyun are both related enterprises controlled by the father and son, Tian Wangxing and Tian Ben, who are the actual controllers of Yilian Technology.

This acquisition significantly improved Yilian Technology's performance. In the year before the completion of the asset restructuring (2018), the total revenue and total profit of Ningde Yilian, Liyang Yilian, and Wangxing Industry's wire harness business accounted for 100.12% and 112.31% of Yilian Technology's revenue and total profit for that year, respectively.From 2021 to 2023, the combined operating income of Ningde Yilian and Liyang Yilian accounted for 81.95%, 88.13%, and 98.07% of Yilian Technology's operating income, respectively; the combined net profit accounted for 64.15%, 71.61%, and 79.69% of Yilian Technology's net profit, respectively. It can be seen that over the past three years, the main sources of income and profit for Yilian Technology have been these two subsidiaries.

R&D strength to be examined

R&D investment is a key indicator of a company's technological innovation capabilities, which is particularly important for a high-tech company planning to go public.

From 2020 to 2023, Yilian Technology's R&D expenses were 38.4571 million yuan, 60.9137 million yuan, 92.2694 million yuan, and 108 million yuan, respectively, accounting for 5.50%, 4.25%, 3.35%, and 3.52% of the same period's operating income. Although the company's R&D expenses have increased year by year, the proportion in operating income has shown a downward trend.

As of the end of 2023, Yilian Technology's R&D team had 516 employees, accounting for 10.81% of the company's total headcount. However, among these 516 R&D personnel, 388 had a bachelor's degree or below, accounting for as high as 75.19%.

In addition, Yilian Technology's technological R&D strength is also below the industry average. As of May 2023, Yilian Technology and its subsidiaries had obtained a total of 9 invention patents, while the average number of invention patents of 7 comparable companies in the same industry was 14.

Among these 9 invention patents of Yilian Technology and its subsidiaries, 5 were obtained through assignment, 2 were obtained with the acquisition of Ningde Yilian Electronics Co., Ltd., and only 2 were the results of Yilian Technology's independent research and development. Moreover, since 2020, Yilian Technology has not obtained any new invention patents for more than 4 years.

In this IPO, Yilian Technology plans to raise 1.193 billion yuan, but only 64 million yuan is used for the R&D center construction project.