Years of Losses and Cash Flow Crisis!

Just a few weeks after successfully passing the Hong Kong Stock Exchange's hearings in early December, Yuetjiang Technology has once again found itself in the spotlight.

On December 23, Yuetjiang Technology debuted on the Hong Kong Stock Exchange under the stock code 2432.HK, proudly claiming the title of the "first cooperation robot stock." The initial public offering (IPO) price was set at HK$18.8 per share.

This was the lower limit of the price range of HK$18.8 to HK$20.8 as outlined in their prospectusSuch a conservative pricing strategy is relatively uncommon for companies going public, signaling a cautious approach by Yuetjiang TechnologyThe IPO involved issuing 40 million H shares with a total capital raising amount of HK$752 millionAfter deducting transaction fees of approximately HK$70.58 million, the net capital raised was around HK$681 millionThe public sale portion in Hong Kong was oversubscribed by 9.25 times, whereas the international part recorded a 2.64 times subscription rate.

Despite these seemingly positive outcomes, the investment community did not appear overly excited about Yuetjiang Technology's stock price trajectoryUpon opening, the stock commenced at HK$19.70, but dipped throughout the day, hitting a low of HK$18.78, ultimately closing at HK$18.94—a mere 0.74% increaseThis muted performance stood in stark contrast to the common “opening day gain” typically sought after by newly listed companies.

Founded by Liu Peichao and fellow alumni from Shandong University, Yuetjiang Technology specializes in the development, manufacturing, and commercialization of collaborative robots

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It is often recognized as one of the "three giants" in the cooperative robotics field, alongside Jiekai Robotics and Aobo RoboticsSince submitting its prospectus in June 2024, Yuetjiang Technology swiftly gained entry into the Hong Kong market, outpacing its rivals and earnestly awarded the title of "first collaboration robot stock."

Nevertheless, the capital markets do not appear to have provided Yuetjiang Technology a warm welcome.

The Struggle with 'Revenue without Profit'

The term "collaborative robot" describes a type of robot equipped with operational robotic arms, designed for direct human-robot interaction or cooperation in shared spaces, characterized by inherent capabilities such as safety standards, ease of use, flexibility, and collaboration within workplacesYuetjiang Technology's prospectus summarises these functions succinctly, emphasizing their applicability across diverse industries including manufacturing, commerce, healthcare, and education.

In 2015, Liu Peichao and four other university peers developed the first desktop-class lightweight intelligent robotic arm, during a crowdfunding campaign on Kickstarter, with over a thousand units ordered, raising nearly US$620,000. This initiative marked the official establishment of Yuetjiang Technology.

To date, the company has introduced four series containing 27 collaborative robotic models, with load capacities ranging from 0.25 kg to 20 kgAmong its notable clients are multinational corporations such as Foxconn, BYD, Toyota, Samsung, and Contemporary Amperex Technology Co. (CATL).

When delving into product categories, six-axis, four-axis collaborative robots, and complex robots serve as the main revenue streams for Yuetjiang Technology

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Notably, four-axis robots are primarily utilized in educational and light industrial sectors, while six-axis collaborative robots find applications across a broader scope, with uses in retail, medical sectors, chemicals, and beyond.

Given this framework, one might question the fundamental health of Yuetjiang Technology, particularly as it takes on the mantle of the "first collaborative robot stock." A scrutiny of its prospectus could provide insights.

Revenue figures for Yuetjiang Technology from 2021 to the first half of 2023 reveal a trajectory of HK$174 million, HK$241 million, HK$287 million, and HK$120 million respectivelyA significant shift in revenue structure is evident, with six-axis collaborative robots increasingly overtaking four-axis variants to become the dominant revenue source, making up over 50% as of the first half of this year, whereas revenue from four-axis robots has dramatically dwindled from 68.8% in 2021 to 30.5% this year.

Specifically, the revenues from six-axis collaborative robots have surged from HK$25.96 million in 2021 to HK$134 million in 2023, marking their contribution to total income as 14.9%, 43.5%, and 46.8% respectivelyConversely, four-axis robot revenues showed a decline, totaling HK$120 million, HK$101 million, and HK$99.52 million, collapsing from 68.8% down to 34.7%.

Yet, this growth in revenue has not translated to profit—quite the oppositeIn fact, Yuetjiang Technology has been in the red, with losses of HK$41.76 million, HK$52.48 million, HK$103 million, and a further HK$59.88 million in the first half of this year, resulting in a staggering total loss of over HK$250 million over the past three and a half years.

Two primary culprits contributing to these losses are the soaring sales expenses and dip in selling prices of core products

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According to their prospectus, sales and distribution costs skyrocketed from HK$63.63 million in 2021 to HK$127 million in 2023. In stark contrast, research and development expenses logged HK$46.87 million, HK$52.05 million, and HK$70.53 million over the same timeline, indicating a mismatch in investment and returns.

Despite substantially increasing sales expenses, Yuetjiang Technology did see an impressive rise in sales of its flagship six-axis collaborative robots, which jumped from 394 units in 2021 to 2,374 units in 2023. However, their profitability did not improve, indeed declining instead.

During this time period, the average selling price of the six-axis collaborative robots fell from HK$65,900 per unit to HK$56,600, a significant decline of 14.11%. By mid-2024, this average price dipped even further to HK$47,100.

In contrast, while the prices of four-axis collaborative robots held steady at the moderate price of over HK$8,000, their sales plummeted year-over-year from 14,600 units in 2021 to 11,800 units in 2023, hit by a further decline to 4,464 units in the first half of this year compared to the previous year.

Escalating Cash Flow Issues

Due to its inability to generate profits, Yuetjiang Technology opted for the "Chapter 18C" route to successfully go public.

In March 2023, the Hong Kong Stock Exchange introduced special listing rules under Chapter 18C for technology companies without previous earnings or profitability

This rule exempted enterprises from typical financial metrics like revenue, net profits, and cash flow requirements, therefore lowering the barriers to entry significantly by only focusing on market capitalization and R&D investments.

2024 marked the first time that three special technology stocks debuted on the Hong Kong market, with Yuetjiang Technology being one of them.

Prior to its application to the Hong Kong Stock Exchange, Yuetjiang Technology explored the possibility of an A-share listingIn January 2023, it entered into an advisory agreement with China International Capital Corporation to pursue its IPO aspirations on the Shanghai Stock ExchangeHowever, in mid-2024, the company reversed course and sought a listing in Hong Kong instead.

This strategic pivot to the Hong Kong exchange stemmed from mounting financial anxieties within the companyYuetjiang Technology had undergone nine rounds of financing before its IPO, with a cumulative fundraising total close to HK$700 million; the last round of financing occurred in November 2022. By the end of Q2 this year, the company reported cash assets of only HK$73 million, contrasted against a staggering HK$154 million in short-term borrowings, indicating severe liquidity stress.

Currently, Yuetjiang Technology is grappling with an acute cash flow crisisTheir prospectus disclosed that the net cash flow from operating activities was reported as HK$6.37 million, -HK$117 million, -HK$158 million in cash flows for 2021 to 2023, with Q1 of this year still in the negative at -HK$70.41 million.

The company acknowledged in its prospectus the substantial net losses and cash outflow mentioned above, indicating that there are uncertainties in at least the short term in achieving or sustaining profitability

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