In recent years, the transformation and growth of the Chinese industrial landscape have been prominently symbolized by the emergence of key players in high-tech sectorsAmong these is the Dual Ring Transmission Corporation, which has managed to establish itself as a dominant force within the gear component industryNow celebrating 14 years since its inception, the company boasts a remarkable market share exceeding 70%, effectively positioning it as a monopolistic leader in its field.

The rise of the new energy sector in recent years has been a significant contributing factor to Dual Ring Transmission's explosive growth, leading them to establish long-term partnerships with industry giants such as Huawei, BYD, and NIOThis partnership not only solidified their customer base but also catapulted their performance metrics into a realm of striking success.

As of the third quarter of this year, Dual Ring Transmission reported a net profit of 738 million RMB, achieving growth for 15 consecutive quartersThe company’s market capitalization has seen a staggering fivefold increase over three yearsThis dual surge in performance and market value has imbued the company with a renewed sense of confidence, prompting considerations for expanding its business footprint.

This strategic ambition led to a significant announcement on November 25, when one of its subsidiaries, Huan Dong Technology, received approval for its initial public offering (IPO). Should the IPO process proceed smoothly, it could mark the beginning of a larger empire for Dual Ring Transmission.

The anticipation surrounding Huan Dong Technology's listing raises critical questions about the potential ripple effects on its parent company and the strategic intent behind this moveWhat will be the implications of this separation, and how does it set the stage for future growth?

One of the primary motivations behind this split is to enhance financing capabilitiesHistorical precedents exist for such maneuvers, akin to the legendary military leader Qin Liangyu, renowned for leading troops at the age of sixty, and now the seventy-two-year-old Chairwoman Chen Jinhua aims to pilot financial success through her leadership.

Stabilizing talent and extending corporate activities are paramount

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The history of Dual Ring Transmission can be traced back to 1980 when it was co-founded by Yan Shanqun and Chen JinhuaFrom its early dealings in the motorcycle and automotive sectors, the company has evolved significantly over the decades.

However, after 2016, due to health issues, Yan began to step back from daily operations, leaving Chen to manage the company’s directionRecognizing the need for bright, specialized talent to support her daughter and son-in-law, she identified Zhang Jing, an individual with a Ph.D. and extensive experience as the head of R&D, as an ideal candidateWith a rich understanding of robotics, he emerged as a crucial asset, warranting a hefty annual salary of 1.76 million RMB and a 13.53% stake in Huan Dong Technology.

While retaining Zhang’s expertise is undoubtedly a motivation for the split, the overarching goal remains clear: securing additional fundsDespite impressive growth figures, Dual Ring Transmission has been grappling with increasing accounts receivable that have outpaced its revenue growthThe pressures on cash flow have reached a critical point that necessitates greater financial flexibility.

For the third quarter of this year, Dual Ring recorded a total debt of 5.589 billion RMB, with interest-bearing liabilities comprising a staggering 41%. With only 1.05 billion RMB in cash available, current assets cannot meet these obligationsThe need to alleviate debt pressures has become a priority.

Over the years, Dual Ring Transmission has successfully leveraged various financing mechanisms beyond its IPOThe cumulative financing totals have reached nearly 5 billion RMB, giving it the required capital to maneuver through financial challengesHowever, moving forward with further issuance of shares will not be feasible within the regulatory guidelines, which restrict public companies from exceeding a 20% total share issuance.

However, the independent listing of Huan Dong Technology holds promise

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Its capital-raising efforts, anticipated to total 1.408 billion RMB, feature not only the augmentation of liquidity but also the repayment of debtIt is notable that, while many share offerings primarily supplement operational funds, Huan Dong’s IPO carries the additional burden of loan repayment.

Investors are particularly intrigued by the prospect of coming on board with Huan Dong Technology, largely due to its distinctive position within the sectorThe company specializes in manufacturing critical components for industrial robotics, specifically gear reducers, which represent a substantial cost component in robotic systems.

Huan Dong's market position has significantly improved, capturing a remarkable 18.82% share of the global gear reducer market by 2023, ranking second worldwide and first in ChinaThis maneuver not only substantiates the company's ability to replace foreign imports but positions China as a strong player in the robotics industry — a strategic shift that garnered considerable attention from investment capitals, including state funds and notable firms like Hillhouse Capital.

The anticipated future demand is bolstered by the nature of the RV gear reducers, which are poised to overtake existing technologies like harmonic and planetary gear reducers, primarily due to their enhanced load-bearing capacities and relevant applications in key industrial sectors such as automotive and logistics.

Lastly, as Huan Dong Technology operates in a high-demand sector, its ability to cash in on this wave of enthusiasm could prove advantageous as the market continues to expandAlthough challenges exist, particularly with evolving customer needs and pricing pressures, the overall outlook remains optimistic as Huan Dong harnesses its competitive advantages in technology and capability.

To summarize, the underlying motives for Dual Ring Transmission’s decision to separate and launch a subsidiary IPO extend beyond mere funding

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