Best Performance Sees Improving Results but Significant Drop in Gross Margin: Declining R&D Expense Ratio, Continuous Dividends Exceeding Tens of Millions

$SSI New Material (Zhenjiang) Co., Ltd. (811055.HK)$

Recently, Zhenjiang Best New Material Co., Ltd. (hereinafter referred to as Best) is striving for a listing on the main board of the Hong Kong Stock Exchange, with Guotai Junan International as the sole sponsor.

As a national-level specialized and innovative enterprise focusing on electronic functional enhancement materials, Best has maintained steady growth in recent years thanks to its market position in acoustic enhancement materials and electronic ceramic materials. However, issues exposed in the prospectus such as downward fluctuations in gross margin, high concentration of customers and suppliers, and a declining R&D expense ratio have added uncertainty to its IPO journey in Hong Kong.

Steady Growth in Performance, Significant Pressure on Gross Margin

According to the prospectus and Tianyancha, Best was founded in 2017, with core businesses covering four major segments: acoustic enhancement materials, electronic ceramic materials, electronic adhesives, and energy enhancement materials. Its products are widely used in fields such as smartphones, smart wearable devices, new energy vehicles, and the photovoltaic industry. With technological accumulation in niche markets, the company has built three core technology platforms and holds a significant position in the global market. Based on revenue in the first half of 2025, its global market share for acoustic enhancement materials reached 18.1%, ranking first, while its market share for alumina ceramic materials for LIB separator coatings was also 18.1%, ranking second.

Financial data shows that the company’s performance has demonstrated steady growth. In 2023, 2024, and January-September 2025 (hereinafter referred to as the reporting period), Best achieved revenues of 320 million yuan, 355 million yuan, and 460 million yuan respectively. Net profits during the same periods were 96.156 million yuan, 113 million yuan, and 118 million yuan, while net profits attributable to parent company shareholders were 97.321 million yuan, 114 million yuan, and 117 million yuan respectively, maintaining an overall good level of profitability.

In contrast to the growth in performance, the company's comprehensive gross margin showed a fluctuating downward trend. During the reporting period, the comprehensive gross margins were 54.0%, 56.1%, and 46.1% respectively. Although there was a slight recovery in 2024, the gross margin in January-September 2025 declined by nearly 8 percentage points compared to 53.7% in the same period last year.

Looking at the business segments, the gross margin for the core business of acoustic enhancement materials remained at a high level of around 80%, but the gross margin for energy enhancement materials fluctuated dramatically. Due to intensified competition in the photovoltaic industry, the gross margin for energy enhancement materials in January-September 2025 was only 0.8%, a sharp decline from 11.1% in 2023, becoming the main factor dragging down the overall gross margin. During the reporting period, the gross margins for acoustic enhancement materials were 76.1%, 83.5%, and 81.8%, while those for energy enhancement materials were 11.1%, 8.3%, and 0.8% respectively.

One of the core reasons for the fluctuation in gross margin is the pressure of rising raw material costs. During the reporting period, raw material costs accounted for 72.1%, 79.9%, and 75.9% of total cost of sales respectively. The main raw materials for the company’s products include silver powder, aluminum oxide powder, and glass powder, among which silver powder, as the core raw material for photovoltaic conductive paste, is significantly affected by fluctuations in the global precious metals market. From 2023 to the first half of 2025, the average selling price of silver powder increased from 5,855.2 yuan per kilogram to 8,448.3 yuan per kilogram, directly raising production costs.

Regarding this, renowned economist Song Qinghui stated, 'Best’s comprehensive gross margin in the first three quarters of 2025 dropped significantly from previous high levels to 46.1%, a decrease of 10 percentage points, a change that deserves close attention. First, it needs to be assessed whether there are temporary factors based on changes in product mix. For example, the company’s business spans consumer electronics and new energy sectors; if revenue shifts toward segments with more intense price competition or if阶段性让利策略are adopted to secure top-tier clients, these could suppress gross margin. Second, fluctuations in raw material prices, enhanced customer bargaining power, and a general decline in industry prosperity may also erode profit margins. Particularly against the backdrop of slower-than-expected recovery in consumer electronics demand, upstream material companies often face dual pressures on volume and pricing.'

More notably, significant fluctuations in gross margin may reflect that the company’s ability to maintain premium pricing for core technologies still requires validation. If the gross margin fails to recover to previous levels above 50%, it would indicate a shift in the profit model from 'high technology premium' to 'scale-driven,' requiring corresponding adjustments to valuation logic. Therefore, investors should focus on the company’s subsequent ability to optimize its product mix and changes in the proportion of high value-added products.

High concentration of customers and suppliers, with accounts receivable continuing to grow

Another major challenge faced by Best is the high concentration of both customers and suppliers, putting supply chain stability to the test.

On the customer side, the company’s revenue heavily relies on a few core clients. In 2023, 2024, and January-September 2025, sales to the top five customers accounted for 88.2%, 82.3%, and 79.0% of total revenue respectively. Although showing a yearly downward trend, the figures remain high at over 70%, with the largest client contributing 28.4%, 20.9%, and 23.1% of revenue respectively.

The prospectus warns that the high customer concentration exposes the company to significant client dependency risks, especially against the backdrop of severe volatility in the consumer electronics market and the continuously shortening product life cycles. Changes in procurement strategies, deteriorating operating conditions, or termination of cooperation by a single core client could significantly and adversely impact the company's performance.

On the supplier side, procurement concentration remains high. During the reporting period, purchases from the top five suppliers accounted for 91.3%, 76.8%, and 66.8% of total purchases/cost of sales respectively, with the largest supplier’s share being 41.3%, 35.9%, and 28.2% respectively.

Best candidly admits that due to the limited selection of core raw material suppliers such as silver powder and aluminum oxide powder, and the price fluctuation risks associated with some raw materials, excessively high supplier concentration may place the company at a disadvantage in procurement negotiations. If key suppliers experience supply disruptions or price hikes, it will directly affect the continuity of the company’s production and operations.

Notably, the company’s business model has certain particularities, including direct sales after procurement for some products like photovoltaic cell additives and certain photovoltaic conductive pastes. The company explains that while this model allows for rapid response to market demands, it also further intensifies reliance on upstream suppliers; additionally, there is partial overlap between the identities of the company’s customers and suppliers, exemplified by companies like Shanghai Yada Automotive Plastic Products Co., Ltd. Such dual relationships could lead to potential conflicts of interest, affecting the independence and stability of the supply chain.

Moreover, during the reporting period, Best’s trade receivables, notes receivable, and other receivables continued to grow. As of December 31, 2023, the balance of this account was 171 million yuan, increasing to 207 million yuan by the end of 2024, primarily driven by the acquisition of Zhejiang Aike completed at the end of 2024, which expanded the consolidation scope and led to an increase in related receivables. By the end of September 2025, the balance further rose to 270 million yuan, attributable to the company’s ongoing market expansion and growing sales scale across various business units.

In terms of asset quality, the company’s provision for impairment losses on receivables remained relatively stable. As of December 31, 2023, December 31, 2024, and September 30, 2025, provisions for impairment losses on trade receivables were 3.3 million yuan, 3 million yuan, and 4.8 million yuan respectively.

In terms of turnover efficiency, the days outstanding for trade receivables and notes receivable extended from 134 days in 2023 to 188 days in 2024, mainly affected by the acquisition of Zhejiang Aike — since the acquisition was completed at the end of 2024, the full-year revenue of Zhejiang Aike was not included in the consolidated financial statements for that year, resulting in an artificially prolonged turnover period. In the first three quarters of 2025, this metric returned to 139 days, reverting to a normal range, primarily because the full-year revenue of Zhejiang Aike was incorporated into the consolidated scope starting from 2025, achieving a more reasonable match between revenue and receivables.

Post-period collection data shows that as of November 30, 2025, approximately 156 million yuan (representing about 60.0%) of the trade receivables as of September 30, 2025, had been settled, with the collection progress aligning with general industry standards.

R&D expense ratio declines, continuous dividend payouts exceed hundreds of millions

In this IPO, Best plans to allocate the net proceeds towards capacity expansion, R&D center construction, potential acquisitions, sales network expansion, and working capital replenishment.

In terms of production and operation, the company's current capacity utilization rate shows significant differentiation: acoustic enhancement materials, as the core business, achieved a capacity utilization rate of 96.7% from January to September 2025, approaching full load; the capacity utilization rate for electronic ceramic materials was 75.7%, for electronic adhesives it was 83.3%, while energy enhancement materials reached 66.7%. Although this is an improvement from before, there is still room for further capacity release.

The differentiation in capacity utilization reflects the imbalance in the company's product structure. Acoustic enhancement materials, as a key strength, benefit from the demand for updates and iterations in consumer electronics and smart terminals, maintaining consistently high capacity saturation. In contrast, businesses such as energy enhancement materials are affected by intensified industry competition and market demand fluctuations, resulting in slower capacity release. If future market demand falls short of expectations, new capacity may face underutilization risks, thereby impacting the efficiency of return on investment.

In terms of research and development, despite the company's emphasis on technological innovation and its establishment of three core technology platforms,As of September 30, 2025, the company owns 240 patents, including 133 invention patents and 62 international patents, but the R&D expense ratio has shown a declining trend. During the reporting period, the company’s R&D expenditures were 37.6 million yuan, 39.4 million yuan, and 32.8 million yuan respectively, with R&D expense ratios of 11.7%, 11.1%, and 7.1%. For the first nine months of 2025, compared to 12.9% for the same period last year, it dropped by 6.8 percentage points.

Best explained that there are two core reasons behind this change: First, against the backdrop of intensifying competition in the photovoltaic industry, the company implemented a more prudent capital allocation strategy and did not make additional investments in the R&D of energy efficiency materials during this period. Second, after completing the acquisition of Zhejiang Aike, the company prioritized improving operational efficiency and advancing business integration in the initial phase, without immediately increasing funding for R&D.

Song Qinghui believes: 'Although Best has built three core technology platforms and holds a significant number of patents, the R&D expense ratio dropped significantly to 7.1% in 2025, deviating somewhat from its positioning as a ‘technology-driven enterprise.’ Theoretically, the core competitive advantage of material companies lies in continuous iteration capabilities and technological leadership. If the proportion of R&D investment continues to decline, it may weaken long-term competitiveness. However, two scenarios need to be distinguished: One is rapid revenue growth diluting the expense ratio passively, which can be acceptable if absolute investment remains stable; the other is the company actively controlling expenses to optimize profit performance during its IPO push, which requires cautious interpretation of this ‘profit-oriented contraction.’ In the new materials industry, technological leadership often translates into higher gross margins and stronger customer loyalty. If R&D slows, the company could face pressures of product homogenization and price competition in the future. Therefore, what the market cares about most is whether the company has the strategic determination to sustain high-intensity R&D investment, rather than relying solely on existing patent reserves. The trend in R&D expense ratio may become a key indicator for assessing its long-term growth potential.'

Meanwhile, the company's sales expenses remained relatively stable. During the reporting period, the company's sales expenses were 9.254 million yuan, 10.5 million yuan, and 13.679 million yuan respectively, with sales expense ratios of 2.9%, 3.0%, and 3.0%.

In terms of dividends, the company declared and paid dividends of 34.6 million yuan to equity shareholders in 2023, 40.8 million yuan in 2024, and 40.8 million yuan as of September 30, 2025, totaling 116 million yuan.

Based on shareholding proportions, Lin Lijun is the main controlling shareholder of Best, receiving approximately 43 million yuan in dividends. Through holding 99.90% of Shanghai Zenith Joy, he controls Shanghai Lejin, which wholly owns Zenith Virtue, and Zenith Virtue directly holds about 37.72% of Best's total issued share capital, giving him control of approximately 37.68% of the company's total issued shares. Zenith Virtue, Shanghai Lejin, and Shanghai Zenith Joy are all investment vehicles of Zenith Joy Capital, a research-driven private equity firm founded by Lin Lijun, who has served as its executive director and general manager since its establishment in June 2015. (Produced by Harbor Finance)

Xu Huijing, Harbor Commercial Observer

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