Huaming Equipment, the world's second-largest tap changer manufacturer, files listing application with HKEX: Cash flow ‘gap’ amid high dividends and overseas expansion

ZC Asia has learnt that Huaming Equipment (002270.SZ), the world's second-largest transformer tap changer manufacturer, has recently submitted its listing application to the Main Board of the Hong Kong Stock Exchange. The company plans to establish an H-share financing platform following its A-share listing, with J.P. Morgan Securities (Far East) Limited and Haitong International acting as joint sponsors.

According to Frost & Sullivan data, Huaming Equipment holds a 17.9% global market share in tap changers by revenue in 2024, ranking second worldwide. Within China's market, it maintains an 80% sales share, securing the industry's top position. The prospectus indicates that from 2023 to 2025, the company's revenue is projected to increase from RMB 1.946 billion to RMB 2.412 billion, with profits rising from RMB 551 million to RMB 720 million during the period. The gross profit margin and net profit margin are expected to reach 53.9% and 29.8% respectively.

Cash Flow Pressures Coincide with High Dividends

However, behind this impressive performance, several dimensions of the company's financial data present noteworthy signals.

By 2025, net cash flow from operating activities is projected at RMB 604 million, representing a 32.1% decline from RMB 889 million in 2024. Operating cash flow will no longer suffice to cover profits during this period. Concurrently, by the end of 2025, trade receivables and notes receivable are anticipated to reach RMB 1.256 billion, accounting for 24.1% of total assets.

Amidst this cash flow strain, Huaming Equipment maintained substantial cash dividends. The prospectus reveals that from 2023 to 2025, the company realised cumulative profits of approximately RMB 1.891 billion, while distributing dividends totalling RMB 1.849 billion – representing 97.8% of the aggregate profits during this period. Calculated based on shareholding ratios, the entities controlled by actual controller Xiao Yi and his concerted parties received dividends exceeding RMB 800 million over the past three years. During the same period, the company's total liabilities increased from RMB 1.276 billion to RMB 2.036 billion, while its debt-to-asset ratio climbed from 25.6% to 39.1%.

In response to these developments, Huaming Equipment stated to media that its recent cash dividend distributions align with its shareholder return commitments and constitute concrete implementation of policies encouraging listed companies to distribute cash dividends. As of the end of 2025, the company's debt-to-asset ratio stood at approximately 39.1%, remaining within a stable and healthy range for the power equipment manufacturing sector.

Strategic Contraction of Power Engineering Operations

Beyond its core tap changer business, the power engineering operations expanded since 2015 incurred losses in 2025. The prospectus indicates this segment recorded revenue of RMB 28.89 million that year, a 89.9% decline from RMB 287 million in 2024. Its share of total revenue fell to 1.2%, with gross profit margin turning negative to -28%, resulting in a gross loss of RMB 8.085 million. The company explained that, having decided to strategically retrench and gradually exit the lower-margin power engineering business, it made a one-off downward adjustment to the estimated revenue from power engineering projects in 2025.

Overseas market expansion continues to face multiple challenges

The primary use of funds raised from this Hong Kong listing is directed towards overseas market expansion. The prospectus indicates that the company's overseas revenue from power equipment grew by approximately 47% year-on-year in 2025. The company plans to utilise H-share financing to upgrade overseas bases in Singapore, Indonesia, and Turkey, while expanding into core markets such as Europe, North America, and Saudi Arabia. Huaming Equipment stated that although domestic revenue has maintained growth in recent years, the pace has been slow, with relatively stable grid demand. The company's revenue growth over the past two years has primarily been driven by overseas operations, necessitating accelerated investment and development in international business, which requires an international financing platform.

The global tap changer market has long been dominated by Germany's MR, holding approximately 60% global market share, while Huaming Equipment accounts for around 30%. During recent investor briefings, the company's management candidly acknowledged that its Mexico expansion may primarily target the US market. However, transporting goods from Mexico to the US involves export and tariff considerations, making direct localisation in the US more preferable. Geopolitical factors, however, necessitate a relatively cautious approach. Additionally, management indicated in February this year that assembly capacity is currently relatively saturated. Should domestic and international orders experience explosive growth in the short term, delivery pressures could become a tangible bottleneck constraining revenue growth.

Huaming Equipment stated that the company aims to generate higher profits through continuous development while delivering greater returns to shareholders.

Disclaimer: The content herein is for reference only and does not constitute any form of investment advice. Should any information contained herein prove inaccurate, incomplete, or potentially misleading, please refer to the company's official announcements. Market risks exist; investment requires caution.