F-1/A: Zhengye Biotechnology Holding Limited Files for $7.5 Million IPO Amid Regulatory Scrutiny

Zhengye Biotechnology Holding Limited, a Cayman Islands-based veterinary vaccine company with operations primarily in China, is seeking to raise $7.5 million through an initial public offering on the Nasdaq Capital Market, facing potential regulatory hurdles and operational risks.

Summary

• Zhengye Biotechnology Holding Limited has filed an amendment to its Form F-1 registration statement with the SEC for an IPO of 1,500,000 Ordinary Shares.
• The company expects the initial public offering price to be in the range of $4.00 to $5.00 per Ordinary Share.
• The offering is being made on a firm commitment basis by Kingswood Capital Partners, LLC.
• The company has applied to list its Ordinary Shares on the Nasdaq Capital Market, but approval is not yet final.
• Zhengye Biotechnology Holding Limited is incorporated in the Cayman Islands and conducts its operations through a principal subsidiary in China.
• The company faces legal and operational risks associated with being based in and having the majority of its operations in China, including regulatory actions and cybersecurity review measures.
• The company's PRC counsel believes that it is required to complete the filing procedures with the CSRC in connection with the offering and listing.
• The company's auditor, WWC, P.C., is headquartered in San Mateo, California, and has been inspected by the PCAOB.
• The company's revenue for the fiscal years ended December 31, 2023 and 2022 was RMB211.7 million ($29.8 million) and RMB260.3 million ($36.7 million), respectively.
• The company intends to use the proceeds from this offering to acquire vaccine production companies and conduct research and development projects.
• Following the completion of this offering, Mr. Zhenfa Han, will hold approximately 91.09% of the aggregate voting power of the company's issued and outstanding Ordinary Shares, assuming no exercise of the Underwriters over-allotment option.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While the company is pursuing growth strategies and has competitive strengths, it also faces significant regulatory and operational risks in China, as well as a decline in revenue from 2022 to 2023. The sentiment is neutral, reflecting both positive and negative aspects.

Positives

• The company has a diversified product range of veterinary vaccines.
• The company has strong research and development capabilities.
• The company has an extensive distribution network.
• The company has an experienced management team and employees.

Negatives

• The company faces legal and operational risks associated with being based in and having the majority of its operations in China.
• The company is subject to uncertainties in the interpretation and enforcement of PRC laws and regulations.
• The company may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against the company or its management.
• The company's Ordinary Shares may be prohibited from trading on a national exchange under the HFCA Act if the PCAOB is unable to inspect the company's auditors for two consecutive years.
• The company's revenue decreased by 18.7% from 2022 to 2023.

Risks

• Changes in China's economic, political, or social conditions or government policies could have a material adverse effect on the operating entity's business and operations.
• Uncertainties in the interpretation and enforcement of PRC laws and regulations and changes in policies, rules, and regulations in China, which may be quick with little advance notice, could limit the legal protection available to you and us.
• You may experience difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against us or our management named in this prospectus based on foreign laws.
• Any actions by the Chinese government, including any decision to intervene or influence the operations of the operating entity or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of the operating entity, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
• Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering.
• The Opinions recently issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject us and the operating entity to additional compliance requirements in the future.
• Recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offerings.
• To the extent cash or assets in the business are in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of our Company, our subsidiaries, or the operating entity by the PRC government to transfer cash or assets.
• Increases in labor costs in the PRC may adversely affect the operating entity's business and profitability.
• PRC regulations relating to offshore investment activities by PRC residents may subject our PRC resident beneficial owners or the PRC subsidiaries to liability or penalties, limit our ability to inject capital into the PRC subsidiaries, limit the PRC subsidiaries ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
• PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of offshore offerings to make loans or additional capital contributions to the PRC subsidiaries, which could materially and adversely affect their liquidity and their ability to fund and expand their business.
• Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
• Under the PRC Enterprise Income Tax Law, we may be classified as a PRC resident enterprise for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.
• We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
• The PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.
• Governmental control of currency conversion may affect the value of your investment and our payment of dividends.
• There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of the PRC subsidiaries, and dividends payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.
• If we become directly subject to the scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price, and reputation.
• The approval of the CSRC may be required in connection with this offering under the PRC law.
• The M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
• Chinese regulatory authorities could disallow our holding company structure, which may result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or become worthless.

Future Outlook

The company intends to develop its business and strengthen brand loyalty by developing high-demand products, expanding its sales and distribution network, enhancing its ability to attract and retain talented professionals, increasing investment in production lines, and increasing research and development investment.

Industry Context

The veterinary vaccine industry in China is highly-competitive and rapidly evolving, with many new companies joining the competition in recent years and few leading companies.

Comparison to Industry Standards

• According to Frost & Sullivan's analysis, among domestic veterinary vaccine companies, the operating entity, Jilin Zhengye Biological Products Co., Ltd. (ZYBIO) has the most comprehensive product portfolio.
• In 2022, ZYBIO generated revenue of RMB260.3 million.
• In 2022, the annual growth rate of ZYBIOs veterinary vaccine revenue reached 21.4%.

Related Party Transactions

• The operating entity purchased inventory from Jilin Huazheng Agriculture and Animal Husbandry Development Co., Ltd., which is controlled by Mr. Zhenfa Han, the principal shareholder, director, and chairman of the board of the Company, in the amount of RMB65,423 (US$9,215), RMB90,556 (US$12,755), and RMB126,573 (US$17,827) respectively for the years ended December 31, 2021, 2022, and 2023.
• For the year ended December 31, 2023, the operating entity sold a motor vehicle to Beijing Hanzhenyuan international hotel Co., Ltd. (Beijing Hanzhenyuan), a company controlled by a shareholder of the Company, with a net carrying value of RMB737,713 (US$103,905).

Stakeholder Impact

• Shareholders face potential dilution and market volatility.
• Employees may benefit from company growth and expansion.
• Customers may benefit from new and improved products.
• Suppliers may benefit from increased orders.

Next Steps

• The company intends to use the proceeds from this offering to acquire vaccine production companies and conduct research and development projects.

Key Dates

Keywords

IPO, Zhengye Biotechnology, Veterinary Vaccines, China, Nasdaq, CSRC, Kingswood Capital Partners, Regulatory Risks, Financial Performance, Ordinary Shares