The company abruptly delisted from Beijing just a year after selling shares there, and now aims to become Hong Kong's first publicly traded caviar producer

image credit: Bamboo Works

Key Takeaways:

• Xunlong Sci-Tech has applied to list in Hong Kong, after its applications to list in Shenzhen were rejected three times
• The caviar maker previously drew scrutiny over suspicious related-party transactions and accounting

When you think of caviar, you inevitably think of Russia and assume someone there is king of the sturgeon world. Yet the world's top producer is neither Russian nor even European. Instead, that distinction goes to China's Hangzhou Qiandaohu Xunlong Sci-Tech Co. Ltd.

Just a year after delisting from the thinly traded National Equities Exchange and Quotations (NEEQ) market in Beijing, Xunlong has wasted no time in filing to relist on the more global Hong Kong Stock Exchange, filing its IPO application last week. The company produces caviar at its aquaculture farms through artificial breeding of sturgeon, using a standardized processing pipeline. Beyond supplying its products to overseas boutiques and fine food companies, it also boasts its own caviar brand, Kaluga Queen.

Caviar leader

Despite its relatively short history of just 23 years, Xunlong has managed to dethrone rivals from caviar powerhouse Russia, a feat linked to founder Wang Bin. An aquaculture graduate of Dalian Ocean University, Wang began scientific research on sturgeon breeding in Beijing as early as 1998. His previous jobs included general manager of the Sturgeon Breeding Technology Engineering Center under the Chinese Academy of Fishery Sciences. When Wang founded his company in 2003, the Fishery Sciences Academy provided substantial support and even held a 30% stake in the venture.

Xunlong flourished under Wang, reaching the pinnacle of the global market just 12 years after its founding. According to third-party market data in its prospectus, Xunlong has ranked first globally in caviar sales for 11 consecutive years since 2015. Its market share has consistently exceeded 30% over the past five years, hitting 36.1% last year.

The company has proven a strong swimmer in its class. Its revenue rose from 577 million yuan ($84 million) in 2023 to 769 million yuan last year, while its profit climbed from 270 million yuan to 363 million yuan over that time. Its net cash from operating activities also increased slightly from 260 million yuan to 270 million yuan.

As Xunlong was hitting its stride, Wang's ambitions turned to the capital markets, where he hoped to raise big money to take his company to new heights. Yet it was that IPO process that ultimately undermined the company, exposing its shortcomings.

Related party transactions, fraud allegations

In 2011, Xunlong applied to list on the ChiNext board in the Southern city of Shenzhen that targets high-growth startups. However, regulators soon learned that one of its major suppliers at that time, Zixing Liangmei, held 4.99% of the company. The listing committee ultimately rejected the application over concerns that income from certain related party transactions contributed to the company's revenue and profit.

Xunlong tried again in 2014, but collided with another brick wall after the China Securities Regulatory Commission (CSRC) questioned its overseas sales, inventory levels, and ownership structure.

As all that was happening, Xunlong and Zixing Liangmei went to court over a dispute involving product quality. Zixing Liangmei was ultimately ordered to refund a 470,000 yuan deposit, but the legal proceedings revealed that a January 2012 breeding inventory table it provided had been falsified to comply with Xunlong's IPO demands. The revelation caused an uproar, drawing sharp rebukes over Xunlong's integrity lapses.

After the commotion died down, the company mounted a third listing bid in 2022, this time targeting the Shenzhen Stock Exchange's main board. But that application faced prolonged delays without ever being approved, nor did Xunlong receive any opinions or feedback about reasons for the delay. As time dragged on without any progress, Xunlong ultimately abandoned the effort.

Following those three failed attempts, the company settled for the lower-threshold NEEQ, where high barriers to entry for investors result in thin trading and low liquidity. It finally secured its coveted listing on the NEEQ in March 2024, only to quickly lose enthusiasm and abandon the market last August.

Integrity concerns draw scrutiny

Despite a buoyant IPO market in Hong Kong over the past year, investors may inevitably harbor some reservations towards Xunlong. A major concern could involve the company's integrity, given its history of suspected financial misdeeds. Such actions may raise red flags for some investors, leaving them skeptical about the credibility of its revenue, profits and other financials.

Even if the company emphasizes that its historical issues are in the past, investors may also still wonder why Xunlong's three listing attempts in Shenzhen all ended in failure. They may wonder as well whether the company still harbors other hidden problems.

Furthermore, biological assets from the company's sturgeon farming account for a massive proportion of its value. Over the past three years, such assets were worth 1.39 billion yuan, 1.55 billion yuan, and 1.75 billion yuan, representing 92.5%, 84.6%, and 83.1% of its net assets, respectively. But some may question whether those figures truly represent the fair value of those biological assets, noting that the fair value of biological assets is measured according to level 3 of the fair value hierarchy, based on a discounted cashflow technique using significant unobservable inputs.

Beyond operational and financial hurdles, geopolitics poses another challenge for the company. More than 80% of its revenue currently comes from overseas, with the U.S. alone accounting for nearly 30%. Given persistent Sino-U.S. trade tensions and Washington's fondness for imposing new tariffs on Chinese goods, the company's heavy reliance on international markets adds another layer of uncertainty to its outlook.

All that said, potential investors should tread carefully even if Xunlong clears the Hong Kong Stock Exchange's approval process and finally succeeds in listing on a major bourse. Some may want to hold off to see how its business and shares progress once it starts releasing regular reports before plunging into the stock.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.