Royole IPO – Part 2

Royole IPO – Part 2
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Earlier this month we noted that rumors that China’s Royole, the first company to produce a retail foldable device, was going to apply for listing on China’s STAR board in order to raise capital for a new OLED fab it intends to build.  We know that the application has been accepted by the board and is under review currently, but digging out the preliminary prospectus took a bit of time.  In fact the prospectus is 549 pages of detail, in Chinese, so we are taking some time to work our way through translation issues, but among the early pages is the typical ‘Risk Factors’ section, which gives some indication of what will follow in the full text.  Here are a few of the stated ‘Risk Factors’:

• Unprofitable or the risk of accumulated uncovered losses in 2017, 2018, 2019 and January-June 2020.
• The net profits of shareholders were -359,132,800 yuan ($-95.0m US), -802,179,700 yuan ($-120.9m US), -1,073,192,800 yuan ($-164.5m US)and -960,537,200 yuan ($-147.2m US), net profits attributable to ordinary shareholders of the parent company after deducting non-recurring gains and losses are -358,997,600 yuan, -78,619,700 yuan, -985.6494 million yuan, and -743.8969 million yuan during the reporting period.,
• The main reason for the company's continued loss is that the company's products are still in the market expansion stage and the sales are small and new products.  The R&D requires a lot of investment. It is expected that the company will continue to lose money. The company will continue to invest in large-scale research and development in the next few years, and the company’s sales scale is small and commercialized
• The company cannot guarantee profitability in the next few years, and may face the risk of delisting after listing.  There is a certain degree of uncertainty in the landing (listing?) and the unprofitable state may continue to exist after the listing. If the company triggers the delisting conditions stipulated in the "GEM Stock Listing Rules it may cause the company to trigger (listing) withdrawal.
• The company’s financial situation is under pressure, which will affect the distribution and growth of the company’s employee salaries, thereby affecting the company’s future and the introduction of talents and the stability of the existing team may hinder the realization of the company’s R&D and commercialization goals, and damage and harm the company’s ability to successfully implement business strategies.
• During the reporting period, the net cash flow generated by the company’s operating activities was -358,005,200 yuan ($-59.0m US), -611.8802 million yuan ($-93.8m US), -810.5213 million ($-124.2m US) yuan and -386,0919 million yuan ($-59.2m US).
• The company’s articles of association (draft) arrangements, holders of Class A ordinary shares can vote 4 votes per share, while holders of Class B shares can vote 1 vote per share.  At present, the actual controller Liu Zihong holds 38.61% of the company’s shares, (or) 61.98% of voting rights.

Fab Utilization rates, based on possible capacity vs. actual production were as follows:

​More to come over the next few days but it is the first time we have been able to clarify all of the hype surrounding the company.  The risks are as expected but the utilization rates were lower than expected.  The company did indicate that the COVID-19 pandemic caused some smartphone orders to be postponed, which seems to be an understatement based on the utilization rate.