Analysis of the Impact of Fuyin New Materials' Related Party Transactions on Its Beijing Stock Exchange Listing Valuation

Based on the information I have collected, I will systematically analyze the impact of Fuyin New Materials’ related party transactions on its Beijing Stock Exchange (BSE) listing valuation.

According to public information, Fuyin New Materials has the following types of related party transaction issues [1]:

• Dongguan Xinyakaifu Machinery Co., Ltd.
  : Xu Bing, the actual controller of Fuyin New Materials, once held 37% of the company’s shares and exited in October 2023 [2]
• The procurement mainly covers production equipment and equipment technical improvements
• This transaction occurred shortly after the actual controller exited the equity, resulting in a short “de-affiliation” period for the related party transaction

According to the 7 major outsourcing manufacturers disclosed during the New Third Board listing, the following problems exist [1]:

• 3 outsourcing manufacturers
  have or have had affiliated relationships with shareholders, directors, supervisors, senior management, or subsidiary management personnel of Fuyin New Materials
• Ruilisen
  : Its controlling shareholder “Zhang Zhenggen” has the same name as a historical shareholder of Sinaikang, a former affiliated company of Fuyin New Materials
• Dongguan Juxin
  : Its shareholder “Xu Zhiyuan” has the same name as the cousin of Tu Zhibing, a shareholder of Fuyin New Materials

From 2022 to 2024, Fuyin New Materials’ gross profit margin was higher than the average level of peer comparable companies, and its year-on-year upward trend was contrary to that of peers [1]. This phenomenon has raised questions about whether related party transactions involve interest transfer.

According to the requirements of the BSE’s “Guideline No. 1”, the focus of related party transaction review includes [3][4]:

• Financial status and operating conditions of related parties
• Rationality of revenue and total profit generated from related party transactions
• Whether it affects the operating independence of the issuer
• Whether there are situations where revenue, profit, or costs are adjusted through related party transactions
• Whether there are situations of interest transfer to the issuer

Compared with the Shanghai and Shenzhen Stock Exchanges, the BSE

and focuses more on controlling related party transactions within a reasonable range [3].

• 3 outsourcing manufacturers are affiliated with the company’s shareholders, directors, supervisors, and senior management, which may raise doubts about the company’s supply chain independence
• The fairness of pricing for related-party procurement needs to be fully demonstrated
• The actual controller exited the related party a short time ago (October 2023), and subsequent transactions still need to be verified [2]

• Gross profit margin is significantly higher than peers with an abnormal trend
• Outsourcing manufacturers have the same names as shareholders’ relatives, leading to ambiguity in the identification of affiliated relationships
• It is necessary to prove the consistency of transaction prices with third-party market prices [2]

• Whether the identification of related parties is complete
• Whether there are undisclosed related party transaction arrangements

• The production equipment has a high degree of customization, so choosing related suppliers has commercial rationality
• The equipment involves core secrets, so technical confidentiality requirements need to be considered [2]

• The BSE has no rigid quantitative requirements for the proportion of related party transactions
• There are cases where the proportion of related party transactions exceeded 50% but passed the review [3]

Risk Dimension	Risk Level	Explanation
Proportion of Related Party Transactions	Medium	Need to demonstrate rationality in combination with business model
Impact on Independence	Medium-High	Affiliated relationships with outsourcing manufacturers are relatively complex
Fairness of Pricing	Medium	Need to provide third-party price comparison evidence
Information Disclosure	Medium	There may be omissions in the identification of related parties

Based on the risks of related party transactions, the following adjustments to the valuation are expected:

• Base Valuation Discount
  : 10%-15% (Cost of standardizing related party transactions)
• If Independence Is in Doubt
  : Additional 5%-10% discount
• If Rationality Can Be Fully Demonstrated
  : The discount range can be narrowed to 5%-8%

The BSE Listing Committee may focus on the following issues:

1. Whether the
   related-party procurement pricing mechanism
   is consistent with that of third-party suppliers [2]
2. Whether the
   affiliated relationships with outsourcing manufacturers
   are fully disclosed
3. Subsequent transaction status after the
   actual controller exited the related party
4. Whether the
   measures to reduce related party transactions
   are practical and feasible [4]

• Obtain
  third-party price comparison materials
  for related-party procurement
• Verify the
  equity penetration status
  of outsourcing manufacturers
• Pay attention to the sustainability of
  post-period related party transactions
• Verify the commercial rationality explanation for
  abnormal gross profit margins

• The cost of standardizing related party transactions may affect short-term performance
• Review inquiries may lead to delays in the listing progress
• If there are undisclosed affiliated relationships, there may be risks of regulatory penalties

The related party transaction issues of Fuyin New Materials

, but the degree of impact depends on the following key factors:

1. Whether sufficient evidence of fair pricing can be provided
2. Proportion of related-party procurement and its impact on revenue and profit
3. Proof of substantive independence in the company’s operations
4. Specific measures to reduce related party transactions and their implementation status

Considering the

of the BSE for innovative small and medium-sized enterprises, as long as the related party transactions have a reasonable commercial background, fair pricing, and complete information disclosure, , but the valuation may face a 10%-15% risk discount [3].

[1] Jinzhen Research - Analysis of Fuyin New Materials’ Related Party Transactions

[2] Response to BSE Review Inquiry Letter

[3] King & Wood Mallesons - Differentiated Market Positioning and Review Standards of the Beijing Stock Exchange

[4] Global Law Office - Interpretation of BSE Listing Rules and Key Review Points for the TMT Industry