IPO Radar | Earnings “Turnaround,” High Gross Margin, and the True Quality of Five-Star New Materials’ Leading Enterprise Still Needs to Be Verified

Ask AI · Are there hidden financial risks behind high gross profit margins?

Henan Wuxing New Materials Technology Co., Ltd. (hereinafter referred to as “Wuxing New Materials”) has filed its prospectus with the Shenzhen Stock Exchange’s main board and has received acceptance. As a leading company in China’s fine-structure graphite sector, this industry leader—with a market share in the fine-structure graphite field of over 34%—is trying to tell the capital market a capital story of “import substitution” and “strategic emerging industries.”

However, beneath the dazzling “leading company” halo, the data disclosed in Wuxing New Materials’ prospectus is not so impressive: its performance “flipped” sharply, its gross margin is five times that of its high-margin peers, and after launching large cash dividends in a targeted manner, it then attempted to “refuel” through fundraising.

Under the dual shadows of a cyclical downturn in the photovoltaic industry and the deterioration of its own financial indicators, the “invisible champion” Wuxing New Materials in the special graphite industry is facing severe scrutiny from the market regarding the quality of its business and its motivations for going public.

Weak growth after the high-demand period cooled

For many consecutive years, Wuxing New Materials’ output, quality, and sales of special graphite products have remained at the top among domestic peers. According to statistics from the China Carbon Industry Association, from 2022 to 2024, the special fine-structure graphite produced by the company accounted for 29.55%, 33.06%, and 34.41% of the domestic total production.

Data source: Prospectus

During this period, Wuxing New Materials’ operating revenue was RMB 1.27B, RMB 1.77B, and RMB 1.28B, while net profit was RMB 457 million, RMB 714 million, and RMB 422 million, respectively. It can be seen that compared with 2023, the company’s 2024 revenue and net profit both fell sharply by 27.44% and 40.87%, respectively.

Data source: WIND

For the “braking” of performance in 2024, Wuxing New Materials mainly attributes the cause to structural supply-demand imbalance in the photovoltaic industry. Starting in May of that year, multiple silicon wafer material (polysilicon) producers reduced output and shut down, directly leading to a decline in demand for special graphite. However, this in turn exposes the company’s weakness: it is overly dependent on the cyclical benefits of a single track. As the photovoltaic industry enters the capacity clearance stage, Wuxing New Materials’ “high-demand dividend” quickly fades. The downturn continued in 2025: in the first three quarters, the company recorded operating revenue of RMB 791 million and net profit fell to RMB 179 million.

It is worth noting that when industry demand is weak, Wuxing New Materials plans to significantly expand capacity through IPO fundraising. The prospectus shows that Wuxing New Materials plans to invest RMB 490 million to build the “Annual production of 20k tons of ultrafine, fine-structure, anisotropic high-purity graphite construction project.” After the project is completed, it will increase the company’s capacity by approximately 52%. This decision has raised questions in the market. In 2024, Wuxing New Materials’ annual output of fine-structure graphite was 38.4k tons, while the total annual production of fine-structure graphite by domestic producers above a designated scale was 111.6k tons. With the industry already showing signs of excess supply, how the additional capacity will be absorbed has become the core unanswered question.

“Expanding capacity against the trend during an industry downturn cycle is either based on absolute confidence in the future market, or it is an urgent need for funds to ease operating pressure.” Xu Yi, an institutional investor who has long followed the new materials industry, told a reporter from Jiemian News. “But from the current situation in the photovoltaic industry, the price war caused by the structural imbalance in 2024 has made companies across the supply chain generally lose money. If Wuxing New Materials expands capacity at this time, it will undoubtedly face huge pressure to digest capacity.”

Wuxing New Materials did not disclose whether this expansion project has reached preliminary cooperation intentions with downstream customers. It only vaguely mentions “achieving economies of scale with a complete industrial chain and rich industry experience.” Based on historical data, the company has a high reliance on the photovoltaic industry. When demand in that field is weak, the path for absorbing additional capacity is still unclear.

The photovoltaic industry is Wuxing New Materials’ most important downstream application area. After the photovoltaic industry experienced a supply-demand imbalance in 2024, the company’s performance adjusted sharply downward immediately, highlighting the operating risk of depending on a single industry.

To address this issue, Wuxing New Materials said it has started expanding into emerging fields such as electrical discharge machining (EDM), semiconductors, and 3D thermoforming glass. However, judging by actual results, the contribution from these emerging areas is not yet obvious. In the first three quarters of 2025, revenue from high-purity graphite products was RMB 12.59989 million, accounting for only 1.66% of revenue from its principal business. Moreover, this revenue mainly comes from sales of products in the emerging fields. This suggests that expanding into emerging fields requires long-term technical accumulation and customer cultivation, and it is difficult to form large-scale revenue in the short term.

Data source: Prospectus

Jiemian News reporters noted that competitors such as Chengdu Carbon Materials and Ningxin New Materials have been stepping up investments in fine-structure graphite capacity in recent years. Among them, Chengdu Carbon Materials and Hongji High Materials’ 2024 sales revenue was RMB 571 million and RMB 799 million, respectively, narrowing the gap with Wuxing New Materials. Against the backdrop of weakening industry demand, excess capacity may trigger a price war, further compressing industry profit margins.

Behind high gross margin

In addition to the contradictions between the performance decline and the capacity expansion, Wuxing New Materials’ financial data also contains multiple issues worth attention. The most prominent is the divergence between net profit and cash flow from operating activities. In the first three quarters of 2025, the company’s net profit was RMB 179 million, but the net cash flow generated by operating activities was negative RMB 79.8531 million, showing an abnormal situation of “making profits but not receiving cash.”

This divergence may mainly come from a surge in inventories. At the end of September 2025, Wuxing New Materials’ carrying value of inventories was RMB 20k, accounting for 31.56% of total assets. This increased from RMB 818 million at the end of 2024 by 32.76%. Meanwhile, the inventory turnover ratio fell from 1.12 in 2022 to 0.64 in the first three quarters of 2025, meaning the cycle from producing to selling the company’s products is becoming longer and product turnover is extremely slow. For the high level of inventories, Wuxing New Materials explained that it is “due to industry characteristics and production cycles.” However, against the backdrop of declining industry demand, the market is concerned that these inventories may include slow-moving or unsalable items. Special graphite prices are in a downward channel, and the inventory of up to RMB 1.0 billion faces a substantial impairment risk. If product prices continue to fall, Wuxing New Materials will have to recognize large asset impairment losses, which would then further hit its already weak net profit.

Besides the divergence between net profit margin and operating cash flow data, the most striking indicator of Wuxing New Materials is its gross margin, which far exceeds that of peers.

Data source: Prospectus

In the first three quarters of 2025, the average gross margin of comparable peer companies (Oriental Carbon, Ningxin New Materials, etc.) was 6.24%, while Wuxing New Materials’ consolidated gross margin was 39.82%, which is 5.38 times the average gross margin of peers. This difference is quite rare. Wuxing New Materials explained that the difference comes from “different product structures and application fields,” “leading positions and brand influence,” and the advanced process of “one bake and one chemical transformation,” but this still cannot fully dispel outside doubts.

Another more controversial point for Wuxing New Materials is its “contradictory” operations in capital deployment.

In this IPO, Wuxing New Materials plans to raise RMB 713 million. Of that, RMB 150 million will be used for “supplementing working capital.” However, during the reporting period (from 2022 to the first three quarters of 2025), the company did not “treat shareholders poorly.” It carried out three rounds of cash dividends in total, with amounts of RMB 100 million (fiscal year 2022), RMB 117 million (fiscal year 2023), and about RMB 102 million (in November 2025), totaling approximately RMB 319 million. “On one side, before going public, it distributes accumulated profits to original shareholders as dividends. On the other side, after going public, it asks public investors to provide cash to replenish liquidity by supplementing working capital. Logically, this doesn’t make sense.” A source in the investment community who wished not to be named said.

In addition, although Wuxing New Materials stated in its prospectus that it has cleared the performance-guarantee arrangements, a careful read shows that the so-called “clearing” is accompanied by a strong “restoration clause.”

Data source: Prospectus

From the table above, Wuxing New Materials’ listing looks more like a “recruitment order.” Once this IPO attempt fails, or if it still cannot list by the end of 2028, the parties obligated to repurchase will face enormous pressure to repurchase funds.