On October 8th, the International Cooperation Department of the China Securities Regulatory Commission disclosed the notice of record for the overseas listing of ShanH Technology Limited (hereinafter referred to as "ShanH Technology"). Consequently, ShanH Technology, one of the leading players in the second-hand electronics recycling track, has taken a step closer to an IPO on the Hong Kong Stock Exchange.

In recent years, the second-hand electronics recycling and trading industry has developed rapidly, but competition has also become increasingly fierce. For instance, in the mobile phone recycling sector, the main companies include AiHuiSheng Group (NYSE:RERE), ZhuanZhuan Group, Xianyu, ZhaoLiangJi, and HuiShouBao, among others.

ShanH Technology has also maintained relatively fast revenue growth over the past few years. On September 17th, ShanH Technology submitted its application to the Hong Kong Stock Exchange for the second time and disclosed the latest performance for the first half of 2024. According to the prospectus, from 2021 to the first half of 2024, ShanH Technology achieved revenues of 750 million yuan, 919 million yuan, 1.158 billion yuan, and 577 million yuan, respectively, with an average annual compound growth rate of approximately 26%.

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The business relies on upstream purchasers.

The prospectus information shows that since its establishment, ShanH Technology has completed five rounds of financing, with investors including Xiaomi Group, Shunwei Capital, Tongwei Ventures, Shenzhen Guarantee, Shenzhen Zhicheng Industrial Investment, and Shangyou Fund. Among them, the founder Liu Jianyi and CEO Yu Hairong together hold 45.35% of the company's issued shares, while Lei Jun's Shunwei Capital and Xiaomi-related companies together hold 10.73% of ShanH Technology's equity, making them the second-largest shareholder of the company.

In addition, as a shareholder, Xiaomi Group's support for ShanH Technology is also reflected at the business level. The prospectus shows that from 2021 to the first half of 2024, ShanH Technology's revenue from selling second-hand Xiaomi mobile phones was 221 million yuan, 271 million yuan, 301 million yuan, and 141 million yuan, respectively, accounting for 29.6%, 29.4%, 26.0%, and 24.5% of its total revenue.

However, as one of the "top three" in the second-hand electronics recycling track, ShanH Technology's overall market share is not particularly high. Data from the Frost & Sullivan report shows that, according to the GMV (Gross Merchandise Volume) of the mobile phone recycling market in 2023, AiHuiSheng's market share is 9.1%, ranking first; ZhuanZhuan's market share is 8.4%, ranking second; ShanH Technology's market share is 1.4%, ranking third.

On the other hand, while ShanH Technology's revenue continues to grow, its gross margin has fluctuated. The prospectus shows that from 2021 to the first half of 2024, ShanH Technology's sales gross margin was 8.20%, 6.06%, 6.76%, and 4.49%, respectively. In this regard, ShanH Technology publicly stated in the prospectus that the reason for the decline in gross margin is the increase in the procurement cost of second-hand mobile phones and the commission cost paid to the front-line sales staff of upstream procurement partners.

In fact, the increase in ShanH Technology's costs is closely related to its business composition. The prospectus shows that as a second-hand mobile phone recycling service provider, ShanH Technology owns two brands, "ShanHuiShou" and "ShanHuiYouPin". The former is the company's offline recycling business brand, while the latter is a second-hand electronic product sales platform.

From 2021 to the first half of 2024, ShanH Technology's sales costs were 688 million yuan, 863 million yuan, 1.08 billion yuan, and 551 million yuan, respectively. Among them, the cost of procuring second-hand consumer electronic products for ShanH Technology accounted for 85.3%, 86.1%, 88.4%, and 87.6% of the sales costs, respectively.In response to this, Flashback Technology stated in its prospectus: "Should our relationships with these upstream procurement partners deteriorate, it may have a significant adverse impact on our business, operating results, and financial condition."

At the same time, Flashback Technology's receivables have remained at a high level. The prospectus shows that from 2021 to the first half of 2024, Flashback Technology's trade and other receivables increased from 39.956 million yuan to 82.41 million yuan.

In the prospectus, Flashback Technology explained that the company relies on upstream procurement partners for a stable supply of second-hand consumer electronics. However, in the process of cooperating with upstream customers, when these customers recycle mobile phones, they offer promotional discounts to consumers that require Flashback Technology to make advance payments. Moreover, regardless of whether it is online or offline, Flashback Technology is required to pay a guarantee deposit, which has a significant adverse impact on the company's business, operating results, and financial condition.

Additionally, Flashback Technology stated in its prospectus that the net proceeds from this IPO will be mainly used to further strengthen strategic cooperation with upstream resource partners to continuously expand the scope of transaction services and national coverage, and to consolidate its current market position in China's offline trade-in mobile phone recycling services; to further increase technological and R&D capabilities to continuously enhance business products and operational efficiency; to intensify marketing efforts and develop new sales channels to steadily increase sales volume and profit margins.

Heavy pressure from betting agreements

A report by Frost & Sullivan shows that idle recycling is the main method of recycling mobile phones, followed by trade-ins. The transaction volume of idle recycled mobile phones in China increased from about 18.8 billion yuan in 2019 to about 48.7 billion yuan in 2023, and it is expected to further increase to about 132.9 billion yuan by 2028.

The prospectus shows that Flashback Technology has cooperated with businesses such as Xiaomi, JD.com, Huawei, vivo, and OPPO, and has cooperated with more than 42,000 offline merchants. Since November 2023, Flashback Technology has begun to provide offline trade-in mobile phone recycling transaction services in Hong Kong.

For this listing in Hong Kong, Flashback Technology is also under heavy pressure from betting agreements.

Data shows that from 2021 to the first half of 2024, Flashback Technology's net liabilities were approximately 235.1 million yuan, 333.2 million yuan, 622.4 million yuan, and 661.8 million yuan, respectively; the debt-to-asset ratios were 301.67%, 308.89%, 366.73%, and 322.21%, respectively. In response to this, Flashback Technology stated in its prospectus that this was mainly due to the changes in the book value of redemption obligations arising from the preferential rights granted to investors, which led to an increase in redemption liabilities from about 307 million yuan as of December 31, 2021, to 751.4 million yuan as of June 30, 2024.

The reporter noticed that Flashback Technology has signed betting agreements with Series A, A1, and C round investors, each with redemption rights. From the terms, regarding the requirements for the final deadline for listing, Flashback Technology has failed to meet them.On December 29, 2023, Flashback Technology secured an $8 million Series D financing round, with Angel National Integration Holdings Co., Ltd. as the investor. In the Series D investor agreement, the investor requires Flashback Technology to complete a qualified IPO before December 31, 2024, otherwise, Flashback Technology will face a share repurchase obligation.

In response, Flashback Technology noted in its prospectus regarding the redemption liability: "When events occur beyond the control of the group and the holder, the group's contractual obligation to purchase its own shares in cash will generate a financial liability."

In terms of scale, the already listed industry leader, Everything Renewed, has far surpassed Flashback Technology. Relevant financial report data shows that from 2022 to the first half of 2024, Everything Renewed's operating income was 9.87 billion yuan, 12.97 billion yuan, and 7.428 billion yuan, respectively.

However, the secondary market seems not to favor the second-hand recycling business. As of the closing on October 9, the stock price of Everything Renewed has fallen from $14 per share at the time of listing in 2021 to $2.72 per share, with a current total market value of $597 million.