U.S. Stock IPO Preview | With only 23 employees and poor fundamentals, how will commodity trading firm Tongying Group write its IPO story?

In commodity trading, metals such as gold, silver, and copper have always been the categories with the most significant profit effects, while agricultural products like corn, wheat, and soybeans have relatively weaker profit effects, easily constrained by factors such as supply and demand relationships, price fluctuations, and cost changes.

However, unexpectedly, among the many companies going public in the U.S. recently, there has emerged a "small but profitable" commodity trader.

On February 21, Tongying Group, a Chinese commodity trader focused on chemicals, metals, and agricultural products, submitted its initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to list on NASDAQ and aiming to raise up to $10 million, with the stock code "TYZ."

According to Zhitong Finance APP, Tongying Group was established in 2020 and is headquartered in Shanghai, China, with 23 full-time employees. It is a commodity trader specializing in chemicals, metals, and agricultural products. The company mainly engages in commodity and supply chain consulting services in China, with its trading business primarily involving purchasing chemical products, non-ferrous metal products, and agricultural products from upstream suppliers and selling these goods to downstream customers. As of 2024, the company's revenue reached $785 million.

The company's main operating entities in China include Shanghai Zhangyang Supply Chain Management Co., Ltd. and Zhejiang Xinyu Trading Co., Ltd. Its commodity trading business mainly involves purchasing ethylene glycol, purified terephthalic acid, rebar, corn, and other products. By 2024, the company's revenue reached $785 million.

With only 23 employees, yet generating an annual revenue of $785 million, what kind of commodity trader is this? What is the company's true strength?

Volume and price "fluctuations," poor fundamentals

It is reported that Tongying Group's main operating companies in China include Shanghai Zhangyang Supply Chain Management Co., Ltd. and Zhejiang Xinyu Trading Co., Ltd. The company's commodity trading business mainly involves purchasing ethylene glycol, purified terephthalic acid (PTA), rebar, corn, and other products.

The company's commodity trading business primarily involves bulk purchasing from upstream suppliers and then selling these goods to downstream customers. During this process, the company does not provide transportation and storage services, mainly hiring third-party warehouses to store the products purchased from suppliers. It maximizes production and optimizes efficiency and operational costs by quickly matching suitable suppliers through online resources, providing solutions for customers and suppliers, and achieving profitability through reasonable allocation of product supply and demand.

In short, Tongying Group's commodity trading business is similar to "middlemen making a profit on the price difference." However, this also means that Tongying Group's performance is highly susceptible to fluctuations in "volume and price."

According to the prospectus, in recent years, the company's commodity trading business volume has shown a stable upward trend, increasing from approximately 725,833.53 tons for the fiscal year ending December 31, 2022, to 1,259,390.70 tons for the fiscal year ending December 31, 2023.

In contrast, during the period from 2022 to 2023, customer demand, inquiries, and average prices for rebar and ethylene glycol showed a significant downward trend in daily operations, with only PTA prices remaining stable and demand significantly increasing Specifically, the average price of ethylene glycol decreased from 3,980 yuan per ton in 2022 to 3,630 yuan in 2023, while the price of rebar dropped from 3,480 yuan in 2022 to 3,220 yuan in 2022. In contrast, the price of PTA slightly increased from 5,100 yuan in 2022 to 5,120 yuan in 2024.

Such "flexible" changes will obviously have a direct impact on the company's operating performance.

In 2022 and 2023, Tongying Group achieved revenues of 438.8 million USD and 784.8 million USD, respectively, a year-on-year increase of 78.8%. By the first half of 2024, Tongying Group achieved revenue of 304.3 million USD, a year-on-year decline of 6.2%, showing a volatile performance.

At the same time, the company's net profit showed an upward trend, increasing from 127,000 USD in 2022 to 707,000 USD in 2023, a year-on-year increase of 456.7%. As of the first six months of 2024, the company achieved a net profit of 414,000 USD, a year-on-year increase of 17.28%.

However, it is worth noting that compared to the volatile revenue, the company's high current liabilities and tight cash flow may be the main factors indicating poor fundamentals.

According to the prospectus data, as of June 30, 2024, Tongying Group's cash and cash equivalents were only 95,000 USD, total current assets were 1.344 million USD, and total current liabilities were 1.822 million USD, resulting in a "liabilities exceeding assets" situation. Additionally, as of June 30, 2024, the company recorded a negative working capital of 478,000 USD, indicating significant liquidity pressure.

From the above financial data, for Tongying Group, although intermediaries can easily profit from commodity trading (i.e., achieving positive net profit growth), balancing the liquidity pressure brought by commodity price fluctuations, long-cycle trading, and mismatched payment terms may still be key.

Opportunities and Challenges Coexist in the Industry, "Seeking Change" Remains the Only Way

In light of the industry development trend, the commodity industry in which Tongying Group operates maintains stable growth, but caution is still needed regarding industry characteristics and cyclical impacts.

As a foundation and pillar industry of the national economy in mainland China, the chemical raw materials industry occupies a significant market space. Although the growth rates of various bulk products such as refined oil, synthetic materials, fertilizers, caustic soda, and soda ash have declined, overall market demand remains high, and the excess capacity of some products is gradually being resolved, while certain bulk products still possess considerable growth potential. Overall, the total volume of the chemical raw materials industry in mainland China has continued to grow in recent years, laying a foundation for the development of the chemical raw materials supply chain.

In the segmented field, in the PTA market, from 2020 to 2023, with the development of the global fiber industry, especially the rapid growth of the polyester fiber market, the demand for PTA has significantly increased. In 2020, the global PTA market size was 267.9 billion yuan. In 2023, the global PTA market size was 521.8 billion yuan Ethylene glycol demand is also maintaining a growth trend. As an important raw material in many industries such as textiles, dyes, antifreeze agents, and wetting agents, the demand for ethylene glycol will continue to increase with economic growth and consumption upgrades. It is expected that the demand for ethylene glycol products in mainland China will reach 25.16 million tons by 2024 and increase to 31.94 million tons by 2028.

Additionally, from the perspective of the steel industry, mainland China’s position as the world's largest steel producer remains solid. In the coming years, the macroeconomic outlook for mainland China is expected to recover and improve, and the real estate industry is also expected to receive more favorable policy support. The financing difficulties faced by developers are expected to ease, which will boost investment demand expectations and maintain the growth of domestic rebar sales. It is anticipated that rebar sales in mainland China will reach 140 million tons by 2024 and 150 million tons by 2028.

However, it is important to note that while the overall industry maintains a stable growth trend, Tongying Group faces numerous development challenges due to industry characteristics, cyclicality, and external environmental shocks.

On one hand, commodity prices fluctuate frequently and are easily affected by external factors such as supply and demand relationships, global economic conditions, policies and regulations, monetary policy, and geopolitical factors. If the company fails to effectively hedge against price risks, the value of inventory may shrink due to price declines, leading to a decrease in collateral value, limited financing capacity, and reliance on short-term borrowing. Additionally, commodity trading often involves prepayment of procurement funds (cash outflow) and long payment terms with downstream customers (delayed cash inflow), exacerbating liquidity pressure.

On the other hand, the industry has a high concentration and intense competition. International giants (such as Glencore and Trafigura) dominate the market through economies of scale and full industry chain layouts, while small and medium-sized traders are at a disadvantage in terms of resource acquisition and financing costs.

Moreover, the commodity industry also faces certain substitution risks and technological disruption risks. For example, the new energy revolution (such as electric vehicles replacing fuel vehicles) impacts traditional energy demand; digital technologies (such as blockchain) may reconstruct traditional trading models, posing challenges to slow-reacting companies.

In response to the above challenges, Tongying Group explicitly stated in its prospectus that in the future, the company plans to collect industrial resources through digital management, operations, and intelligent warehousing layouts to enhance corporate value and create an integrated trading ecosystem. For instance, in 2024, it plans to establish an online platform for the supply chain of chemical product raw materials ("CRMC platform") to achieve centralized online management of IoT product reception, debt confirmation, certificate storage, bills, and contracts. By 2026, it aims to build its own intelligent warehouse to achieve interconnectivity between the chemical supply chain and the Internet of Things.

In summary, the aforementioned "leveraging strengths and avoiding weaknesses" development strategy and the move to go public in the U.S. to alleviate funding pressure demonstrate Tongying Group's determination to actively seek change. However, whether the company can continue to maintain its growth momentum in the volatile commodity trading environment remains to be seen over time