ZJK Crafts Small But Sturdy IPO With Its Focus On Nuts-And-Bolts

Key Takeaways:

• ZJK’s shares rose as much as 36% in their first week of trade on the Nasdaq, despite its relatively small IPO with only 2% of its shares sold
• The maker of fasteners and other components plans to use some of its IPO proceeds to set up a new foundry, possibly in Vietnam

By Edith Terry

Maybe it was just lucky timing, coming the same week as a massive rally for Chinese stocks fueled by a “bazooka-style” economic stimulus package from Beijing. Then again, ZJK Industrial Co. Ltd. ZJK has quite a lot going for it, despite its bland name and less-than-sexy status as a maker of industrial fasteners.

Whatever the reason, ZJK’s shares got a nice pop in the days after the company’s Sept. 30 listing, rising as much as 36% from their $5 IPO price to hit a peak of $6.80 this Monday. But the stock couldn’t avoid getting sucked into a selloff that has gripped Chinese shares this week, and gave back all the gains to close at $4.75 on Wednesday, 5% below the listing price. The offering was relatively small, raising $4.26 million in net proceeds through the sale of 1.25 million shares.

The company admits in its prospectus that it faces an uphill battle due to its small scale and high capital costs of building new foundries. Instead, its biggest attraction may lie in the star power of its client list that features the likes of electric vehicle giant BYD, chip superstar Nvidia, global drone leader DJI and iPhone maker Foxconn, among others.

All those big names need high-quality industrial fasteners, a fancy name for the screws, nuts and bolts that are ZJK’s mainstay. The Chinese sometimes call such fasteners the “rice of industry,” referring to the ubiquitous need for this small but important component in manufacturing. ZJK’s financials are far from shabby, although they’re modest compared to industry leader Suzhou Cheersson Precision (002976.SZ), which earned a net profit of 52 million yuan ($7.4 million) on 1.58 billion yuan in revenue last year.

ZJK is one of the smaller companies in China’s highly fragmented landscape of fastener makers. With manufacturing chops going back to 2011, it has a respectable growth story. Its revenue grew by 17.2% in 2023 to $29 million from $24.8 million in 2022. Two companies, PSM-ZJK and Bulten Fastners, both related parties, accounted for 52% and 24% of its revenues last year.

Its gross profit margin stood at a respectable 37.9% in 2023, up by 1.5% percentage points from the previous year, while its 2023 net income rose 5.7% last year to $7.7 million from $7.3 million in 2022. In 2023, it produced some 4.4 billion precision metal parts, up from 3.7 billion in 2022.

The company isn’t particularly cash rich, with $3.9 million at the end of 2023, which means the latest IPO will more than double its cash reserves. The company sold a relatively small 2% of its shares in the listing, so it’s quite possible it might raise more in the months ahead through a secondary listing.

At their current levels, ZJK’s shares look quite highly valued with a price-to-sales (P/S) ratio of 10 and a price-to-earnings (P/E) ratio of 39. That’s well ahead of Suzhou Cheersson’s P/S ratio of just 1.8, though Cheerson has a similarly high P/E of about 54, showing that ZJK is getting some strong respect in the investment community despite its small size.

Wide Product Range

ZJK’s products range from recognizable standard screws used in do-it-yourself configurations, to more specialized products like precision screws and nuts used in phones, cameras, consumer digital products and high-strength nuts and bolts used in new energy vehicles.

While not all of these markets are growing fast, and many require custom manufacturing, demand for ZJK’s high-tech fasteners looks solid. While automobile-use industrial fasteners account for only 3% to 5% of the total value of a typical vehicle, they account for 35% to 40% of total auto part sales, according to the prospectus.

5G base stations are another source of demand for the company’s high-tech fasteners, with ZJK’s home China market leading in that area. The country had 3.4 million such base stations by the end of 2023, leading the world. The company also makes a “special-shaped ultra-thin gasket mold” for drones, another fast-growing area.

Most of ZJK’s revenue currently comes from China, which isn’t surprising due to the nation’s status as the world’s dominant manufacturer. Last year, $25 million out of its $29 million in sales came from its home market, with another $2 million from Taiwan. But in a nod to the ongoing global movement to diversify from too much reliance on China, ZJK also set up a subsidiary in April in Vietnam, possibly for local manufacturing, and plans to set up a sales office in the U.S. early next year.

Such diversification could become important as fasteners end up in the global trade battleground now taking shape. China is the world’s largest exporter of fasteners, with $11.1 billion in exports in 2022, primarily to the U.S. According to Chinafastenerinfo.net, no fewer than eight anti-dumping or subsidy challenges have been mounted against Chinese fastener imports from such diverse regions as the EU, the U.S., Canada, Mexico, India, Argentina, South Africa and Ukraine.

The growing resistance to reliance on Chinese fasteners may also be reflected in the numbers. Another industry source, Fastener World, says that in the first seven months of 2023, Chinese fastener exports were down by about 6% from the same period of 2022, to 2.56 million tons, while the average unit price of those exports was down by 5% to 7.5%, at $2.2 to $3 per kilogram. A move to Vietnam could help ZJK diversify from its reliance on China-based production, though it could still find a cool reception to such products due to the company’s Chinese roots.

ZJK could also face some headwinds as it looks to expand abroad due to relatively high costs for a company of its size. It said new foundries typically costs $5 million, adding it will use 50% of its IPO proceeds for factory expansion. That means the company “will require external sources of financing to fund its continuous growth,” according to the prospectus, hence our earlier prediction that a secondary offering might be in store. It could also raise new funds through private placements or loans.

The company is relatively debt-free, with only $1.1 million in long-term debt, bank borrowings, operating and finance lease commitments and related party loans, according to the prospectus.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.