F-1/A: Carbon Zero Technologies International Files for Nasdaq IPO Amidst Revenue Decline and China Regulatory Scrutiny

Carbon Zero Technologies International Inc., a Cayman Islands holding company operating a renewable resources recycling platform in China, has filed an F-1/A registration statement for an initial public offering on Nasdaq, seeking to raise up to $45.8 million despite recent revenue contraction and significant regulatory risks in China.

Summary

• Carbon Zero Technologies International Inc. (CZTI), established in 2016, is a technology-driven renewable resources recycling company and system provider in China, operating on an Online-to-Offline (O2O) model.
• The company is positioned as the largest waste household appliance recycling platform in China with a market share of approximately 1.04% in 2023, having recycled approximately 21.8 million units of waste household appliances since inception to December 31, 2023, and 25.3 million units to June 30, 2024.
• CZTI's primary revenue streams are from the purchase and sale of recycled renewable resources, mainly waste ferrous metals and waste household appliances, and net service revenues from its O2O platform.
• Total revenues increased by 34.6% from RMB 2,978.2 million in 2022 to RMB 4,008.9 million (US$564.6 million) in 2023.
• However, for the six months ended June 30, 2024, total revenue decreased significantly by 17.6% to RMB 1,799.3 million (US$247.6 million) from RMB 2,183.9 million in the same period of 2023.
• The company reported a net income of RMB 2.8 million (US$0.4 million) in 2023, a substantial decrease from RMB 12.9 million in 2022, and a net loss of RMB 8.5 million (US$1.2 million) for the six months ended June 30, 2024, compared to a net loss of RMB 19.5 million in the same period of 2023.
• CZTI has experienced negative net cash flows from operating activities in 2022 (RMB 80.3 million) and 2023 (RMB 47.9 million), though it reported a positive net operating cash inflow of RMB 5.7 million (US$0.8 million) for the six months ended June 30, 2024.
• The company plans to offer a minimum of 2,500,000 ADSs and a maximum of 4,200,000 ADSs in its initial public offering, with an expected price range of $11.00 to $13.00 per ADS, aiming for net proceeds of approximately US$26.8 million to US$45.8 million.
• The offering is contingent on the listing of ADSs on the Nasdaq Global Market under the symbol CZTI, for which Nasdaq has not yet approved the application.
• The company's corporate structure involves a Cayman Islands holding company with substantially all operations conducted through subsidiaries in mainland China, which exposes it to unique regulatory and operational risks related to the Chinese government's oversight.

Sentiment

Score: 4

Explanation: The company shows strong strategic vision and market positioning in a growing industry, with a unique O2O model and technological innovation. However, recent financial performance (revenue decline, net loss in H1 2024, historical negative operating cash flow) and significant regulatory and political risks associated with operating in China, coupled with the uncertainty of the IPO listing and the 'best efforts' underwriting, introduce substantial caution. The dual-class share structure also concentrates voting power, limiting minority shareholder influence.

Positives

• Established an extensive nationwide recycling network covering over 500 cities with approximately 3,700 third-party recycling stations and over 34,000 registered recycling personnel as of June 30, 2024.
• Developed tech-driven innovations including Boolv ShouShou (mini-program for recycling information), Boolv Collect (app for on-site collection), and Boolv Sorting Center (app for inventory management and settlement).
• Implemented an industry-leading traceability system for renewable resources, providing ESG traceability capabilities and monitoring the full lifecycle of waste products, which has been recognized and promoted by China's Ministry of Commerce.
• Achieved significant revenue growth of 34.6% in 2023, reaching RMB 4.0 billion (US$0.6 billion).
• Successfully expanded into metallic resources recycling, which became the largest revenue contributor in fiscal years 2022 and 2023.
• Received National High Tech Enterprise title and was listed as a Key Enterprise for Resources Recycling by the Ministry of Commerce of China.
• Obtained Product Carbon Footprint Certification/PCF Certification of Registration in the PRC on September 11, 2023, aligning with ESG principles and future carbon trading opportunities.

Negatives

• Experienced a significant decrease in total revenue by 17.6% for the six months ended June 30, 2024, primarily due to decreased demand and prices for ferrous metals and waste household appliances.
• Reported a net loss of RMB 8.5 million (US$1.2 million) for the six months ended June 30, 2024, following a net income of RMB 2.8 million in 2023, indicating a recent decline in profitability.
• Had negative net cash flows from operating activities in 2022 (RMB 80.3 million) and 2023 (RMB 47.9 million), raising concerns about sustained financial performance.
• Faces challenges in the rapidly evolving Chinese renewable resources recycling industry, including limited established systems, absence of industry-wide pricing standards, and regulatory uncertainties.
• Relies heavily on third-party business partners (e.g., recycling stations, personnel, dismantling enterprises), and deterioration of these relationships could adversely affect operations.
• Has limited operating history with its current business model, making it difficult for investors to evaluate long-term prospects.
• Identified material weaknesses in internal control over financial reporting as of December 31, 2023, including a lack of sufficient competent financial reporting personnel and formal internal control policies.
• Has limited insurance coverage, lacking business interruption or product transportation insurance, which could expose the company to significant costs and business disruption.

Risks

• The evolving and uncertain regulatory environment in China, including potential changes in policies, laws, and enforcement, could materially and adversely affect business operations, financial condition, and the value of ADSs.
• The Chinese government may exercise significant oversight and discretion over the conduct of subsidiaries' businesses and may intervene or influence their operations at any time, potentially causing material adverse changes.
• The company is subject to the Holding Foreign Companies Accountable Act (HFCAA), which could lead to delisting of ADSs from U.S. exchanges if the PCAOB is unable to inspect the company's auditor for two consecutive years.
• Uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations, particularly new measures related to data security and anti-monopoly, could result in investigations, fines, or operational restrictions.
• Restrictions on the remittance of Renminbi into and out of China and governmental control of currency conversion may limit the ability to pay dividends and other obligations to the Cayman Islands holding company and investors.
• The company has negative net cash flows from operating activities, which may continue, potentially hindering future growth and business plans due to unforeseen expenses or challenges in generating revenue.
• The dual-class voting structure, where CEO Baitong Tang will control over 81% of voting power post-offering, limits other shareholders' ability to influence corporate matters and could discourage change-of-control transactions.
• The company may be classified as a PRC resident enterprise for PRC income tax purposes, which could result in unfavorable tax consequences, including a 10% withholding tax on dividends to non-PRC enterprise shareholders.
• The lack of a public market for ADSs prior to this offering and the best efforts nature of the offering mean there is no assurance an active trading market will develop or that ADSs will trade at or above the initial public offering price.
• Substantial future sales or perceived potential sales of ADSs by existing shareholders after lock-up periods could cause the price of ADSs to decline.
• The company relies on third-party payment service providers, and any limitations or disruptions to these services could materially and adversely affect the business.
• The company's leased properties in China have not been registered with relevant PRC government authorities, which may expose them to potential fines or require vacating the property.
• The company may be subject to intellectual property infringement claims, which could be expensive to defend and disrupt business operations.
• The company's operations are vulnerable to natural disasters, health epidemics (like COVID-19), and other outbreaks, which could disrupt operations and negatively affect financial results.

Future Outlook

The company plans to pursue rapid business growth by enhancing integrated system capabilities and expanding recycling categories and integrating business chain verticals over the next three to five years. This includes strengthening technology innovation, increasing R&D investments in data analysis, IoT, and digital supply chain technologies, expanding online and offline customer services to cover more cities and upstream supply channels, and increasing downstream distribution channels. CZTI also aims to expand recycling categories to include waste paper, plastic, and lithium-ion batteries, and to establish or acquire dismantling businesses to extend its value chain and increase gross profit margin. Additionally, the company plans to strengthen business collaborations with manufacturing enterprises and third-party systems, and to capitalize on collected data for carbon trading opportunities.

Management Comments

• "We intend to transform the entire renewable resources recycling business in China as we develop and deploy our Online to Offline system (O2O system) through online applications and offline sites in the traditional recycling business."
• "Our goal is to establish comprehensive, digitized, and standardized waste recycling services, covering all categories of recyclable materials."
• "We believe that our companys ability to create significant value for each player in our system means that every partner has an incentive to cooperate."
• "I believe that a robust and sustainable business is a good business, but a business that does good for society beyond generating shareholder return is a great business."
• "We believe that the value of a business lies in solving social problems and creating social value."

Industry Context

The Chinese renewable resources recycling industry has experienced steady growth, with recycled resources increasing from 283 million tons in 2017 to 418 million tons in 2022 (CAGR of 8.1%), primarily driven by iron and steel scrap. Waste household appliances and consumer electronics recycling also saw robust growth, increasing from 4.8 million tons in 2017 to 12.2 million tons in 2022 (CAGR of 20.2%). The industry is projected to reach 590.3 million tons by 2027. Key drivers include the emergence of online platforms to address information asymmetry and improve efficiency, expanding volumes of renewable resources, and favorable government policies promoting circular economy and carbon reduction goals. The industry is highly fragmented with over 90,000 companies in 2022, with individual recyclers historically dominating but online platforms gaining market share. Key success factors include control over supply-side resources, recycling and dismantling capabilities, online platform operations, and achieving scale effects.

Comparison to Industry Standards

• Carbon Zero Technologies International Inc. is identified as the largest waste household appliance recycling platform in China among all market players, holding a market share of approximately 1.04% in 2023.
• The company claims to be the only company in China to have fully connected the entire industry chain by establishing a nationwide recycling system and having comprehensive regional disassembly capabilities, differentiating itself from competitors who often focus on specific sub-sectors.

Management Changes

Corporate Governance

Legal Proceedings

• As of the date of the prospectus, neither the company nor any of its subsidiaries is a party to any pending legal proceedings, nor are they aware of any such proceedings threatened against them.

Related Party Transactions

• The company has various related party balances and transactions, including accounts receivable from Hubei Jinke (RMB 49,181 thousand as of June 30, 2024) for waste household appliance sales.
• Advance to suppliers from Tianjiu (RMB 541 thousand as of December 31, 2023) for regional service incremental cost amortization.
• Sales to and services provided for related parties, including Hubei Jinke (RMB 60,055 thousand in H1 2024) and ABGreen BJ (RMB 1,347 thousand in 2023).
• Purchases of products and services from related parties, including Henan ZYR (RMB 402 thousand in H1 2024) and Tianjiu (RMB 541 thousand in H1 2024).
• Due from related parties, including Hubei Jinke (RMB 2,274 thousand), Henan ZYR (RMB 13,800 thousand), and HNHY (RMB 400 thousand) as of June 30, 2024, primarily for unsecured, interest-free loans.
• Due to related parties, including Mr. Baitong Tang (RMB 544 thousand), Ms. Lanzhen Du (RMB 93 thousand), Zhoukou Bolv (RMB 3,823 thousand), SZ ARSC(LP) (RMB 2,898 thousand), and China Link (RMB 9,000 thousand) as of June 30, 2024, primarily for short-term working capital loans.
• Long-term loan payable to related parties (BJ ABGreen RSC) of RMB 100,738 thousand (US$13,862 thousand) as of June 30, 2024, maturing on June 30, 2028, with an annual interest rate of 5.5%.

Stakeholder Impact

• **Shareholders**: Potential for dilution from the IPO, limited influence on corporate matters due to dual-class voting structure, and reliance on price appreciation for return on investment as no dividends are expected in the foreseeable future. Subject to significant risks related to PRC regulations and potential delisting under HFCAA.
• **Employees**: Increased compensation and benefit packages, recruitment of high-level talent, and investment in vocational training are planned uses of IPO proceeds, potentially benefiting employees. However, increased labor costs are also identified as a risk.
• **Customers**: The O2O system aims to provide more convenient recycling methods and efficient services, potentially benefiting end-consumers and enterprise customers. Strategic partnerships with downstream companies ensure distribution channels.
• **Suppliers**: The extensive recycling network and O2O model aim to provide efficient sourcing and quick turnaround for recycling stations and personnel, potentially benefiting upstream suppliers.
• **Creditors**: The company has significant outstanding loans from banks, third parties, and related parties. The ability to repay these obligations depends on future cash flows and successful business operations, which are subject to various risks.

Next Steps

• Obtain Nasdaq Global Market listing approval for ADSs.
• Complete the initial public offering, selling a minimum of 2,500,000 ADSs.
• Update filing documents with the CSRC within three business days if any material or significant events occur between the Filing Completion Notice and the completion of the offering.
• Report offering information to the CSRC within 15 business days upon completion of the offering.
• Implement planned measures to remediate identified material weaknesses in internal control over financial reporting, including hiring qualified personnel and formulating U.S. GAAP accounting policies.
• Expand recycling operations into new categories such as waste paper, plastic, and lithium-ion batteries.
• Expand downstream operations, including establishing or acquiring dismantling businesses for household appliances, plastic granulation, lithium battery recycling, and automobiles.
• Strengthen technology innovation and R&D capabilities, focusing on data analysis, traceability management, IoT, LBS, and unique product identifiers.
• Expand online and offline customer growth by adding approximately 3,000 traditional offline recycling stations in the next three years, aiming for over 6,000 total.
• Strengthen business collaborations with major manufacturing enterprises and third-party systems (property management, appliance repair, home cleaning, charitable foundations).
• Participate in carbon trading markets by capitalizing on collected data to accumulate carbon quotas for future profit growth.

Key Dates

Recommendation

Keywords

Renewable Resources Recycling, Waste Management, O2O Model, China, SEC Filing, IPO, ADS, Environmental Technology, Ferrous Metals, Household Appliances Recycling, ESG, Nasdaq, PRC Regulation, HFCAA