Huang Yi, Harbor Business Observer

On May 13th, Galleinphi Inc., the holding company of Jiale Technology Co., Ltd. (hereinafter referred to as "Jiale Technology"), officially submitted a public prospectus to the SEC, applying for a listing on Nasdaq under the ticker symbol "GALE". It is reported that the company had already submitted a confidential application to the SEC on December 21, 2023.

According to information from Tianyancha, the largest shareholder of Jiale Technology is Huzhou Anjia Kaiyue Technology Partnership (Limited Partnership), and its operating entities also include Hangzhou Jiale Hengya Technology Co., Ltd., Jingdezhen Jiale Ningya Technology Co., Ltd., among others.

The prospectus shows that Jiale Technology is primarily engaged in the wholesale of consumer electronics products.

01

Significant Impact from iPhone, Resulting in Order Reduction

Jiale Technology revealed in its prospectus the company's recent situation. Since July 2023, Jiale Technology has launched a retail approach on a well-known online shopping platform in China. By establishing an online business, the company can strengthen strategic relationships with existing partners and pave the way for future expansion of product catalogs and customer networks.

Jiale Technology's plan is to create a sales platform within WeChat, one of the most popular communication applications in China. This platform will allow the company's customers to purchase electronic devices and household appliances on their mobile phones and stay updated on the latest promotional activities. The company envisions this platform as a centralized hub for its products. In other words, Jiale Technology intends to expand into the C-end market.

Currently, Jiale Technology's competitors mainly include e-commerce platforms such as JD.com and Alibaba; other electronic device wholesalers, such as Huitongda Network Co., Ltd.; and electronic device retailers, such as Apple stores and Gome Electrical Appliances. Additionally, Jiale Technology's product line includes high-demand products such as Apple-branded mobile devices, Xiaomi-branded televisions, Midea-branded air conditioners, and Xiaomi smartphones.

The prospectus shows that in fiscal years 2022, 2023 (ending June 30th), and the first six months of fiscal year 2024 (ending December 31, 2023) (during the reporting period), Jiale Technology's revenues were US$77.0157 million, US$104 million, and US$48.7325 million, respectively. Among them, fiscal year 2023 saw a year-on-year growth of 35.0%; while the first six months of fiscal year 2024 saw a year-on-year decline of 25.3%. Net profits were -US$81,000, US$2.1103 million, and -US$902,600, respectively. Among them, fiscal year 2023 saw a year-on-year growth of 2828.4%; while the first six months of fiscal year 2024 saw a year-on-year decline of 222.1%.

It is evident that the double growth in revenue and net profit in fiscal year 2023 failed to continue into the first half of fiscal year 2024, both declining. The instability in performance presented during the reporting period makes it difficult to estimate the success rate of Jiale Technology's listing.

Regarding this, Jiale Technology pointed out that the decline in revenue in the first half of fiscal year 2024 was due to a reduction in electronic device revenue of approximately US$15.2 million and a reduction in other product revenue of approximately US$1.3 million.

The prospectus shows that Jiale Technology engages in the sale of electronic devices, mainly including mobile phones, televisions, air conditioners, and other types of electronic products with high demand in the market.

During the reporting period, revenues from electronic devices were US$76.1443 million, US$102 million, and US$48.5724 million, accounting for 98.87%, 98.49%, and 99.67%, respectively. Fiscal year 2023 saw a year-on-year growth of 34.5%; while the first six months of fiscal year 2024 saw a year-on-year decline of 23.8%. Revenues from other sources were US$871,400, US$1.5734 million, and US$160,100, respectively. Fiscal year 2023 saw a year-on-year growth of 80.6%; while the first six months of fiscal year 2024 saw a year-on-year decline of 89.4%. It is evident that Jiale Technology's reliance on electronic devices has deepened, and its revenue from other sources has declined significantly.

Regarding the decrease in revenue from electronic products, the latest prospectus shows that compared to sales in the first half of fiscal year 2023, electronic device revenue in the first half of fiscal year 2024 decreased by approximately US$15.2 million, or 23.8%. The main reason for this decline is the reduction in mobile phone sales revenue.

Specifically, during the first half of fiscal year 2024, due to the fierce competition from Huawei phones and existing inventory of iPhone 13 in the market, the market price of iPhone 14 experienced significant fluctuations before the launch of the new iPhone 15. Therefore, Jiale Technology reduced its procurement of mobile devices, especially iPhone-related products, to avoid any potential inventory losses in the first fiscal quarter of 2023. The reduction in procurement led to a decrease in electronic device sales. Additionally, the decrease in revenue was also due to the depreciation of the RMB against the US dollar by 2.8% in the six months of 2023 compared to the six months of 2022.

Regarding the sharp decline in sales of other products in the first half of fiscal year 2024, Jiale Technology pointed out that sales of other products mainly include medical supplies, furniture, non-metallic mineral products, and other items. Sales of other products are based on customer demand and are not Jiale Technology's main business. Compared to the first half of fiscal year 2023, Jiale Technology received fewer orders in the first half of fiscal year 2024, resulting in a decrease in revenue from other products.

Liu Chunsheng, an associate professor at Central University of Finance and Economics, pointed out to Harbor Business Observer, "Jiale Technology has experienced significant fluctuations in revenue and net profit over the past few fiscal years. This instability may raise some concerns among investors, worrying about the company's future profitability and sustainability, especially during the IPO stage, when investors are very concerned about the company's future development prospects. Instability in performance may reduce their confidence, thereby affecting the success rate of the IPO. As the world's largest securities market, Nasdaq has certain requirements for the performance and stability of listed companies. Although specific standards may vary depending on factors such as the industry and size of the company, generally speaking, Nasdaq hopes to see listed companies with stable profitability and good development prospects. Therefore, during the IPO process, Jiale Technology needs to fully demonstrate to investors the stability of its business model and future growth potential."

02

Substantial Concessions to Major Suppliers, Severe Dependence on Top Five Customers

Regarding the sales share of mobile phone brands, data released by market research firm BCI on December 24, 2023 showed that in terms of cumulative sales share from the 1st to 50th week of 2023, the top five vendors in the Chinese mobile phone market were Apple Mobile Devices (17.1%), VIVO (16.7%), OPPO (16.0%), Honor (15.3%), Xiaomi (14.7%), and Huawei (11.9%).

The prospectus shows that Jiale Technology mainly procures devices through two channels. The first is authorized first-tier distributors, who are distributors that work closely with major manufacturers of Apple mobile devices. The second is e-commerce platforms, and Jiale Technology regularly contacts large e-commerce platforms, especially when they offer Apple mobile devices at prices more favorable than the prevailing market prices.

Among them, although Apple mobile devices rank first with a share of 17.1%. However, in terms of specific market share, the Apple brand has not been able to pull away from the subsequent mobile phone brands. For this reason, Jiale Technology's current procurement of mobile devices from only the Apple and Xiaomi brands has certain limitations. Referring to the actual situation in the market, this procurement arrangement is also relatively unreasonable, which also reflects the limitations of Jiale Technology in procurement channels.

The prospectus shows that during the reporting period, a major supplier accounted for 93.48%, 93.46%, and 47.9% of Jiale Technology's total procurement, respectively.

This supplier is Hangzhou Quanshi Technology Co., Ltd. (hereinafter referred to as "Hangzhou Quanshi"), which mainly provides Apple mobile devices to Jiale Technology. Hangzhou Quanshi was a previous shareholder of Jiale Technology, and its ownership ended on December 22, 2021.

It is worth noting that Jiale Technology and Hangzhou Quanshi signed a framework cooperation agreement on September 15, 2021, with a validity period of three years. Under this agreement, the major supplier committed to providing procurement rebates amounting to 0.5% to 0.7% of Jiale Technology's annual total procurement amount from the supplier. Subsequently, on August 15, 2023, Jiale Technology and Hangzhou Quanshi signed the first supplementary agreement, adopting more favorable procurement rebates amounting to 6% to 8% of the annual total procurement amount.

In other words, not only does Jiale Technology have a limited number of supplier channels, but it has even continuously increased the concession margin to suppliers.

At the same time, Jiale Technology also faces a high degree of dependence on customers.

According to Jiale Technology's disclosure of customers with sales exceeding 10%, the number of qualifying customers between different fiscal years is inconsistent. Among them, the main customers in fiscal year 2022 were 2, with sales shares of 76.00% and 18.77%, respectively, totaling 94.77%; the main customers in fiscal year 2023 were 4, with sales shares of 25.68%, 17.93%, 14.31%, and 12.01%, respectively, totaling 69.93%; the main customers in the first half of fiscal year 2024 were 2, with sales shares of 55.02% and 18.56%, respectively, totaling 73.58%.

In addition, during the reporting period, the top five customers accounted for 98.9%, 79.5%, and 95.1% of total sales, respectively.

It can be seen that in fiscal year 2023, Jiale Technology's sales to major customers were relatively healthy, with no severe dependence on a single customer. However, in the first half of fiscal year 2024, dependence on the largest customer has increased again.

Although Jiale Technology is in a passive position in both upstream and downstream relationships, with suppliers and customers being relatively dominant, the company's sales expenses are increasing day by day.

The prospectus shows that from fiscal year 2022 to fiscal year 2023 and March 31, 2024, Jiale Technology had 23, 40, and 41 employees, respectively. Among them, there were 3, 2, and 2 employees in management; 5, 6, and 10 employees in administration; 15, 27, and 24 employees in sales; and 0, 5, and 5 employees in technology. The sales department of the company has the largest number of employees.

During the reporting period, sales expenses were US$60,400, US$443,500, and US$166,000, respectively, with a year-on-year growth of 634.6% in fiscal year 2023 and 34.0% year-on-year growth in the first six months of fiscal year 2024.

03

Received Supplementary Materials from Regulatory Authorities, Second Largest Shareholder's Equity Frozen

In addition, Jiale Technology has also received supplementary material requests from regulatory authorities for this listing submission.

On May 17th, the China Securities Regulatory Commission issued the "Announcement on Supplementary Material Requirements for Overseas Issuance and Listing Filing (May 10, 2024 to May 16, 2024)." The CSRC issued supplementary material requirements to five companies, including Jiale Technology. Among them, the CSRC requested Jiale Technology to clarify matters such as equity structure, equity transfers, and operational compliance.

Specifically, the CSRC requested Jiale Technology to provide supplementary explanations on the following matters, and request lawyers to conduct inspections and issue clear legal opinions:

I. Regarding the equity structure, please explain: (1) the reasons for the inconsistency between the shareholding ratio of domestic operating entities and company-level shareholders, whether there is equity holding on behalf of others in the relevant arrangements, and explain the possible equity disputes, risks to control stability, and countermeasures; (2) conclusive opinions on the legality and compliance of foreign exchange registration, overseas investment, foreign investment, and other regulatory procedures involved in building offshore structures and return investments overseas.

II. Regarding equity transfers, please explain: (1) the reasons and compliance of Jingdezhen Zhongsheng Venture Capital Partnership (Limited Partnership)'s capital contribution to Jiale Technology in September 2023 being earlier than the fulfillment of internal decision-making procedures; (2) the pricing basis and compliance of equity transfers of domestic operating entity Dejiahongzhi in November 2021, January 2022, and April 2022, and whether there are situations such as holding on behalf of others and interest transfer.

III. Regarding operational compliance, please explain: (1) the relationship between Hangzhou Quanshi Technology Co., Ltd. and the company, and issue a clear conclusive opinion on the authenticity and compliance of related trading activities; (2) the reasons and compliance of the unregistered capital of some major domestic operating entities, and whether it has a significant adverse impact on the company's business operations and solvency.

In terms of legality and compliance, according to Enterprise Warning Tong and Tianyancha, on May 15, 2024, in the case of (2024) Yue 0305 Min Chu No. 4977, the executed person Zhu Jiayang (a natural person shareholder of Jiale Technology holding 14.9328%, the second largest shareholder) had his equity in Jiale Technology, with a target amount of 3.767176 million yuan, frozen by the Nanshan District People's Court of Shenzhen City, Guangdong Province.

On March 24, 2024, Zhejiang Dejiahongzhi Technology Co., Ltd. (51% owned by Jiale Technology) was included in the list of abnormal operations by the Hangzhou Gongshu District Market Supervision Administration due to being unable to contact through its registered residence or place of business. (Produced by Harbor Finance)