US Stock IPO Preview | Tiancheng Zhilian: Profits Decline in the Construction Logistics Industry, Potential Benefits from China's Infrastructure "Going Global"

Against the backdrop of a huge era dividend and policy dividend, the cross-border e-commerce and logistics industry has attracted a large amount of capital. According to incomplete statistics from the Xiaosheng Research Institute, from 2008 to April 2024, there have been a total of 197 capital events in the cross-border e-commerce logistics related fields, with 30 capital events occurring in 2023.

However, from the current market perspective, the cross-border logistics industry is still in a relatively fragmented pattern. With the influx of capital, more and more companies are trying to strengthen their business capabilities and expand their service radius through investment mergers and acquisitions, and listing financing. Tiancheng Zhilian is one of them.

On September 5th, Eastern International, a domestic and cross-border logistics supplier in China (referred to as Tiancheng Zhilian), submitted an initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to list on the Nasdaq with the stock code ELOG, aiming to raise as much as $7 million. The company plans to issue 1.6 million shares of stock in the price range of $4 to $5 per share. Based on the midpoint of the proposed range, Tiancheng Zhilian's market value will reach $54 million.

According to the Securities Times APP, Tiancheng Zhilian, through its subsidiary Suzhou Tiancheng Zhilian Logistics Co., Ltd. (referred to as "Suzhou Tiancheng Zhilian"), formerly known as Suzhou Longliqi Dongyuan Logistics Co., Ltd., was listed on the New Third Board on May 17, 2017, with the stock abbreviation Dongyuan Logistics. It was delisted on February 15, 2023, with a stock price of RMB 2 at the time, and a market value of RMB 98 million.

Revenue of about $40 million fails to hide profit decline

The prospectus shows that Tiancheng Zhilian is headquartered in Hangzhou, providing services including domestic and international transportation, warehousing, urban distribution, and international freight forwarding services. The company mainly serves the new energy projects (wind turbines, photovoltaics, renewable energy storage, etc.), chemical equipment, and infrastructure construction (including road and bridge construction, tunnel construction) sectors, with services covering China and Southeast Asia. Currently, the company owns 20 trucks and has established cooperative relationships with other truck owners and drivers to provide domestic long-distance transportation and less-than-truckload services for over 2,000 trucks. The company also has 4 warehouses/logistics centers in three different provinces, with a total area of over 30,000 square meters, providing general and special storage, distribution, and value-added services to customers.

Since its establishment, Tiancheng Zhilian's number of high-quality customers has steadily increased, and its main business has shown a stable growth trend. The company is committed to establishing long-term cooperative relationships with large enterprise customers such as listed companies, multinational corporations, and well-known brands, including Goldwind, CSSC Haizhuang Windpower Co., Ltd., Shanghai Huaneng, Jiangxi Electric Power Group, Guizhou Electric Power Group, Hydropower Fourth Bureau, Trina Solar, JD Logistics, Wuhu Ande Zhilian, Aisen (China), Goodbaby, Marco, China Post, and Longrich, among others As the number of customers gradually increases, the company's revenue shows a growth trend. In the fiscal year 2023 to 2024 (hereinafter referred to as the "reporting period"), Tiancheng Zhilian's revenue was 24.16 million yuan (unit: USD: the same below) and 40.44 million yuan, an increase of 67.4% year-on-year.

In terms of business segments, during the period, Tiancheng Zhilian's revenue from transportation services was 21.085 million yuan and 37.579 million yuan, an increase of 78.2% year-on-year; revenue from warehouse subleasing services was approximately 3.077 million yuan and 2.865 million yuan, a decrease of 6.9% year-on-year. The significant increase in transportation service revenue is due to the company's orders increasing to 2,947 in 2024, a year-on-year increase of 260%; project logistics revenue reached as high as 23.438 million yuan, a year-on-year increase of 265.3%. In addition, the company's general logistics revenue slightly decreased by 3.6% year-on-year to 14.14 million yuan.

Apart from revenue growth, Tiancheng Zhilian's profits have declined slightly. During the period, the company's gross profit margins were 14.4% and 12.4%, a decrease of 2 percentage points year-on-year; the corresponding net profits were 1.19 million yuan and 1.08 million yuan, a decrease of 8.9%, highlighting the phenomenon of increased revenue but not increased profits.

Of note is that due to the company's reliance on a small number of customers, its accounts receivable are high. During the reporting period, the revenue contribution of the company's two customers accounted for approximately 38% and 58% of the total revenue, with corresponding accounts receivable and accounts receivable balances of 37.177 million yuan and 43.596 million yuan. It can be seen that as the company's dependence on customers deepens, accounts receivable continue to grow, even leading to negative net cash flow from operating activities for the company, amounting to -0.5 million yuan and -0.63 million yuan respectively.

The international competition in the billion-dollar market of engineering project logistics is becoming increasingly fierce

Driven by the overall development of the logistics industry in China, the specialized sector of engineering project logistics is also showing a rapid development trend. Some professional logistics companies or integrated logistics companies in China have entered the project logistics business. The rapid development of the construction industry, including the energy sector, industrial production lines, infrastructure, special safety, traditional chemicals, and alternative energy sectors, especially the Chinese wind energy and solar energy sectors, has played a positive role in promoting the steady development of the project logistics industry.

With changes in market demand, especially in the energy, infrastructure, and chemical industries, there is a significant demand for heavy-duty transportation by specialized project logistics enterprises. Therefore, in recent years, the proportion of project logistics volume to total logistics volume has been continuously increasing. In 2023, the size of China's engineering project logistics market was 36.49 billion yuan, a year-on-year increase of 4.10%.

 

However, Chinese engineering project logistics companies are usually decentralized and small in scale, with tremendous growth potential. On the other hand, the Chinese economy has always been a powerful engine driving global economic recovery. The "Belt and Road Initiative" has also brought more business opportunities for cross-border project logistics companies. Companies such as SF Holding, YTO Express International, and JD.com have already engaged in related businesses. With the advancement of the "Belt and Road" construction, more and more express delivery companies will follow "China's infrastructure" and "Made in China" to go global. This not only helps Chinese companies expand into international markets but also cultivates and strengthens their core competitiveness.

Tiancheng Zhilian has been internationalizing its layout relatively early and has begun to scale. Since 2019, the company has started to provide cross-border logistics services, focusing mainly on inland transportation and railway transportation between mainland China and Southeast Asian countries, such as bulk commodities, electronic products, tires, new energy equipment, and other machinery. For example, in 2022, the company completed the transportation of 707 40-foot containers, 914 20-foot containers, and 244 open containers of rubber, iron ore, barley, and cassava starch from Laos to China. In addition, Tiancheng Zhilian also provides services to Europe by transporting washing machines through the China-Europe Railway Express.

According to the prospectus, the funds raised this time will be used for business expansion, enhancing its international competitiveness in the engineering logistics industry, and enjoying the increasingly growing market dividends. For example, around 20% will be used to develop project logistics business in Southeast Asia; around 20% will be used for investment in equipment, machinery, and other capital expenditures; around 10% will be used to develop logistics management systems and provide internal training for employees to improve management and technical skills; around 10% will be used for potential acquisitions of high-quality logistics teams or companies; and around 40% will be used for working capital and other general corporate purposes.

In conclusion, Tiancheng Zhilian is currently in a high-growth stage, but the phenomenon of increasing revenue without increasing profits has already emerged. Additionally, the fact that two major customers contribute nearly sixty percent of revenue has become a hidden concern for its healthy development. However, with the gradual enhancement of the international competitiveness of the engineering logistics industry, the company's first-mover advantage is expected to realize growth dividends