The Rise of the Dual Circulation System

The evolution of private capital families within the stock market represents a captivating oscillation; as some clans gradually fade, others rise to prominence. It’s a story of resilience, ambition, and strategic maneuvering that paints a dynamic picture of the ever-evolving landscape of finance. A prime example of this phenomenon can be seen through the trajectory of the Ye and Chen families, who, 14 years ago, led Shuanghuan Transmission, a notable player in the A-share capital market, on a path of extraordinary growth.

Shuanghuan Transmission has managed to cultivate a robust operational presence spanning both domestic and international arenas. Over the years, their performance has markedly outstripped that of their peers, allowing them to continue propelling forward with confidence. This success laid the foundation for the family's aspirations to expand their empire in the robotics sector, specifically with plans to spin off Zhejiang Huandong Robotics Joint Technology Co., Ltd., or “Huandong Technology,” in hopes of establishing a robust "Shuanghuan System" in the market.

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After over a year of meticulous preparation, Huandong Technology announced on November 25 the acceptance of its IPO application for the Shanghai Stock Exchange’s Science and Technology Innovation Board. This notable achievement marks it as the first company to secure acceptance in the fourth quarter of the year, indicating solid talent and potential for growth. Since its inception in 2020, Huandong Technology has seen a rapid surge in its market share within the RV reducer sector, positioning itself as a formidable competitor against the industry giant Nabtesco, which holds a significant monopolistic position globally. However, the IPO process has laid bare the company’s substantial dependency on Estun Automation, presenting a challenge that remains to be addressed as they embark on their journey towards public offering.

Initially born out of the gears and machinery sector in the Yu Huan County's Zhenhua Gear Factory, the capital lineage stemming from the Ye and Chen families is expansive and illustrative of entrepreneurial spirit. Their journey weaves through the founding of Shuanghuan Group and the eventual establishment of Shuanghuan Transmission. Huandong Technology is now a closely linked subsidiary that seeks to chart its own independent course in the market. The acceptance of Huandong Technology's IPO signals a turning point for the company, projecting a fundraising goal of approximately 1.408 billion RMB to be allocated primarily towards establishing advanced manufacturing bases for precision reducers, a cutting-edge research and development center, with remaining funds intended to boost working capital and settle bank loans.

Huandong Technology operates under the umbrella of Shuanghuan Transmission, which maintains a 61.29% ownership stake, effectively making them the controlling shareholder. The family’s dynamics add an intriguing layer to this corporate structure; while the founding pair, Ye Shanqun and Chen Juhua, had long held sway over the business, changes over the years have shifted control primarily to Chen Juhua and her three sons-in-law.

However, this period of growth and aspiration is not without its complexities. Notably, as Huandong Technology approached the IPO phase, it revealed a growing dependence on its principal client, Estun. Reports indicated that sales to Estun constituted an alarming portion of Huandong's revenue— spiking from just over 12% to over 52% in recent quarters. This growing reliance raises flags for potential risks associated with customer negotiations and operational stability—if Estun were to pivot or encounter challenges, Huandong could face dire consequences.

Economist Yu Fenghui commenting on this phenomenon cautioned that an overreliance on a single client can lead to price pressures and reduced profit margins. Moreover, any operational hiccup on the part of the client could cascade into significant revenue declines, posing a critical risk to cash-flow stability. Investors tend to be wary of firms with such concentrated customer bases due to the inherent uncertainties involved.

In a bid to prepare for the IPO and mitigate financial risks, Huandong Technology has shown signs of adjusting its financial structure—reporting declines in their debt-to-asset ratios. A lower ratio could suggest improved financial health; however, exceedingly low levels could indicate a dangerous trade-off wherein financial stability is sacrificed for growth opportunities.

The emergence of Huandong Technology symbolizes a broader ambition from the Chen family to consolidate their "Shuanghuan System." Shuanghuan Transmission, having braved the capital market since 2010, has cultivated a narrative of resilience. The company originally focused on traditional gear production, yet has seamlessly transitioned toward high-precision gear manufacturing.

While enterprises like Shuanghuan Transmission experienced stable growth, its peers, such as Ningbo Dongli and Bota Industrial, have struggled with financial performance in recent years, making their achievements in the sector all the more compelling. Data points highlight that Shuanghuan Transmission has strengthened its profitability trajectory even amidst broader sectoral challenges— boasting significant profit margins that have, in contrast, evaded competitors.

The compelling narrative of Shuanghuan Transmission’s journey is matched by the rapid ascent of Huandong Technology, which, since its establishment, has reported robust profit growth. Yet, both companies stand on the precipice, facing numerous unknowns and market challenges as they seek to navigate their respective paths in an increasingly competitive environment.

As the capital markets evolve, the perception of both enterprises is being closely scrutinized. Despite potential for growth, concerns linger regarding Huandong’s IPO and its impact on Shuanghuan Transmission's market standing. Observers note that ongoing changes in the automotive sector, which significantly contributes to Shuanghuan's revenue, present additional layers of uncertainty, further compounded by Huandong's reliance on Estun as its primary customer.

Overall, the tale of the Shuanghuan System reflects a microcosm of the larger dynamics of private capital in today’s economy—littered with stories of success, adaptation, and challenges that testify to the very nature of market evolution. For the Ye and Chen families, what lies ahead is a blend of opportunity and risk, as the new chapter in their saga unfolds amidst the undulating tides of the capital market.