Fifth Time Lucky? Wheel Maker Buyang Takes New Spin at Hong Kong IPO

Key Takeaways:

• Buyang International is making a fifth attempt to list in Hong Kong, hoping to raise funds for a major new expansion that will double its capacity
• The company churns out a majority of its revenue from overseas markets, leaving it largely in the dust in its home market

By Ken Lo

Four failures might discourage most companies from doing just about anything, but not aluminum alloy automobile wheel maker Buyang International Holding Inc. The car parts manufacturer filed last week for a new listing in Hong Kong, spinning the wheel once more in hopes that the fifth time will be the charm.

As a small segment of the huge automotive market, aluminum alloy automobile wheels that are Buyang’s bread-and-butter are a slow-growth and also highly competitive area. Focused on the aftermarket, Buyang offers around 19,900 different types of products worldwide for a wide range of vehicles, including subcompacts, minivans, full-size SUVs and pickup trucks.

Although China is Buyang’s single largest market, most of its revenue comes via sales to a wide range of other countries like the U.S., Canada, Japan, the United Arab Emirates and Lithuania, which collectively accounted for 66.2% to 74.8% of its revenue in the past three years.

According to its preliminary prospectus, the company’s revenue fell slightly from 374 million yuan ($51.5 million) in 2019 to 362 million yuan in 2020 mainly due to Covid-related slowdowns in its overseas markets. But the figure rebounded 21.5% to 440 million yuan last year as the company made significant investments to meet rebounding customer demand.

Things then took a spin for the worse this year as deliveries to overseas markets were temporarily disrupted by a Covid outbreaks in China. That led the company’s revenue to decline by 6.1% year-on-year in the first five months of 2022 to 150 million yuan.

Declining profitability

Buyang’s profitability has also been in a slow state of decline, with net income falling from 46.1 million yuan in 2019 to 37.66 million yuan last year, mainly dragged down by higher costs of sales and administrative expenses, exchange rate fluctuations, and higher prices for aluminum alloy ingots.

Weak demand in the two major auto markets of Europe and China, combined with a chip shortage, sent global auto production down by 16% year-on-year to 76.3 million units in 2020, though the market rebounded slightly by 3.6% last year. As most countries’ economies fast approach a return to pre-pandemic levels, auto production is expected to get back on track and increase to 97.6 million units in 2026, growing at a compound annual rate of 4.3% from 2021 to 2026.

But the wheels are spinning more slowly for aluminum alloy car wheels, with the aftermarket only expected to grow 2.5% annually from 40.3 million units in 2021 to 45.5 million units in 2026, according to third-party data cited in the prospectus. That market-lagging growth, combined with the continuous arrival of new competitors, makes Buyang’s prospects look less-than-ideal.

All that said, Buyang is still just a tiny cog in both the domestic and global markets for its industry. It accounted for just 1% of China’s exports of aluminum alloy automobile wheels last year, not even making the top 10. Its share of the domestic market was even lower at just 0.4%, while the top five players held a combined 87.2% share.

And the going for the company isn’t likely to get any easier, as it faces competition both at home and abroad, combined with the potential for disruptions related to future Covid-19 flareups and geopolitical tensions. The company also warned that it sold products to several countries sanctioned by the U.S., European Union, United Nations and Australia, adding that ongoing tensions between Lithuania and China could also have a negative impact on its business.

Confronted by the double obstacles of slow industry growth and its own small market share, Buyang clearly needs to boost its scale if it hopes to survive in the longer term.

Low on cash

To boost its longer-term competitiveness, Buyang has vowed to introduce more advanced production technology and accelerate its mass production capacity. To this end, the company plans to acquire two rotary casting machines to produce lighter but better quality aluminum alloy wheels using less raw material.

In addition to expanding capacity, the company also plans to upgrade its production lines and replace outdated machines and equipment to maintain its efficiency.

Construction of a planned new factory will be completed in two phases. The first will break ground in November and be put into operation a year later, with annual production capacity of approximately 800,000 aluminum alloy automobile wheels. The second phase will begin construction immediately after completion of the first, and also take about a year to finish. The two phases will have combined annual production capacity of about 1.2 million units, doubling the company’s total annual capacity to approximately 2.4 million units.

Buyang expects to spend roughly 93.9 million yuan to build the new facility, which includes land acquisition, construction costs and equipment purchases. But with only approximately 4.7 million yuan allocated from its own internal resources, a significant funding gap remains.

The company had less than 100 million yuan in cash and cash equivalents at the end of May. Its cash flow from operating activities has been limited by the pandemic and other factors over the past three years, meaning it may have difficulty financing the new facility on its own. Which may be why it’s so eager to do the IPO.

To estimate Buyang’s potential market value, we can look at the price-to-earnings (P/E) ratios of three Zhejiang-based rivals, Zhejiang Yueling (002725.SZ), Zhejiang Wanfeng (002085.SZ) and Zhejiang Jinfei Kaida (002863.SZ), which are 96 times, 29 times and 19 times, respectively. Taking their average of 48 times and extrapolating the five-month profit this year for the full year could give Buyang a market value of about 1.9 billion yuan.