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Titanium Alloys Leading Company Western Superconducting to Launch on STAR
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Titanium alloys used in aircraft. Image credit: Krzysztof Kowalik on Unsplash

Western Superconducting (西部超导), a new material company to list on STAR Market, set its initial public offering (IPO) price at CNY 15 (USD 2.18) per share, valuing the company at 67.8 times its earnings in 2018.

The company is mainly engaged in R&D, production and sales of high-end titanium alloy materials, superconducting products and high-property superalloy materials. 

Titanium alloys (钛合金), the super arm of Western Superconducting account for 75% -85% in revenue, are metals that contain a mixture of titanium and other chemical elements. They have high tensile strength and toughness at extreme temperatures. Plus they are light in weight and resistant to extraordinary corrosion. Nevertheless, the high cost of both raw materials and processing limit their use to military applications, aircraft, spacecraft, medical devices, etc..

Founded in 2003, the Shaanxi-based company chose its location well. The province owns the most intensive aviation industry in China with over 60% of China's aerospace and aviation industry. The company's market share in the domestic aviation aerospace titanium market is 23.90%, a relatively high percentage with few competitors. Baoti Group, a listed company in the Shanghai Stock Exchange, is one of its major rivals mentioned in the prospectus.

However, due to the particularity of the industry, the company's bargaining power is not strong. The top five suppliers accounted for 66.42%, 63.06% and 57.52% of the total current purchases of the company in 2016, 2017 and 2018 respectively while the sales percentage for top five clients accounted for 67.37%, 57.04% and 56.19% in revenue.

As for its financial performances, Western Superconducting generated revenue of CNY 1.09 billion (USD 158.25 million) with an increase rate of 12.51%. Gross profit amounts to CNY 162 million, CNY 142 million and CNY 135 million in recent three years. However, with the government subsidies around CNY 40 million each year, the net cash flow is quite low compared with the gross profit. Besides, its asset-liability ratio has increased year-by-year. Considering that the company's accounts receivable took a relatively high proportion and the cash flow recovery is not ideal, it is more likely that it will rely on debt financing to support working capital in the future, and the company's financial risks might gradually increase as well.

The funds raised in IPO will be used to repay CNY 292 million bank loans and CNY 508 million investment in fixed assets. When fixed assets are put into use, large depreciation costs will also erode profits.

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