Analysis of Whether Changzhou Bairuiji Biomedical Co., Ltd.'s High Dealer Inventory Involves Earnings Management

Based on the audit inquiry letters and company response documents I searched, I will conduct a detailed analysis for you on whether Bairuiji’s high dealer inventory involves earnings management.

According to the reply to the audit inquiry letter for the Beijing Stock Exchange (BSE) listing application documents, Bairuiji’s dealer inventory situation is as follows[1][2]:

From the data,

The audit inquiry focused on the inventory issue of Beijing Xinherui Technology Co., Ltd. [2]:

• Revenue Growth
  : Increased from RMB 3.6111 million in 2022 to RMB 12.4127 million in 2024, a significant growth of 243.7%
• Inventory Amount
  : Increased from RMB 1.4372 million to RMB 5.8752 million, a growth of 308.8%
• Inventory Ratio
  : The ratio of ending inventory to procurement amount at each period-end was 35.20%, 43.13%, and 41.81%

The company’s explanation is: Xinherui was originally a dealer in Beijing, expanded to the Tianjin market in 2022-2023, and expanded to the Hebei market in 2024, so the inventory increase is reasonable in terms of business operations.

The average stock-up cycle of Bairuiji’s key dealers is about 4 months [1], compared with peer listed companies:

Bairuiji’s stock-up cycle is within the normal industry range.

The sponsor and reporting accountant reached the following conclusion after the following verification procedures [2]:

1. Verification of Dealer Purchase, Sales and Inventory
   : The proportion of dealer revenue with obtained purchase, sales and inventory data to total dealer revenue is 83.44%-88.15%
2. Inventory Count
   : Actually counted 47 dealers, and there is no significant difference between the rolled-back count results and the purchase, sales and inventory ending data
3. Terminal Penetration Verification
   : The proportion of dealer revenue for which terminal sales process documents were inspected is 53%-70%
4. Post-period Verification
   : Dealers with large inventory did not have returns after the period, and 100% of accounts receivable were collected

Although intermediary institutions did not find obvious problems, attention still needs to be paid to the following risk points:

1. Significant Change in the Number of Dealers
   : Decreased from 381 in 2022 to 284 in 2024 [1]
2. Some Dealers Refused to Cooperate with Inventory Count
   : Some dealers refused the count due to trade secret considerations
3. Stock-up Cycle is at the Upper End of the Industry
   : Bairuiji’s 4-month stock-up cycle is close to the maximum of some peer companies
4. Risk of Reliance on a Single Product
   : The revenue from cross-linked sodium hyaluronate gel for uterine cavity accounts for more than 60% [3]

Based on the analysis of existing information,

• ✅ The inventory ratio has remained stable at around 40%, with no significant abnormalities
• ✅ The stock-up cycle is within the reasonable industry range
• ✅ Intermediary institutions have implemented relatively sufficient verification procedures
• ✅ Post-period sales performance is good, with no large-scale returns

However, investors still need to pay attention to:

• The reason for the sharp decrease in the number of dealers
• The sustainability of high inventory of some dealers
• The risk of reliance on a single product

It is recommended to continue paying attention to the progress of subsequent audit inquiries and the improvement of the company’s dealer management system when making investment decisions.

[1] Reply to the Audit Inquiry Letter for the Public Offering of Stocks and Listing Application Documents of Changzhou Bairuiji Biomedical Co., Ltd. on the Beijing Stock Exchange (https://pdf.dfcfw.com/pdf/H2_AN202512021792591875_1.pdf)

[2] Reply to the Second Round of Audit Inquiry Letter for the Public Offering of Stocks and Listing Application Documents of Changzhou Bairuiji Biomedical Co., Ltd. on the Beijing Stock Exchange (https://pdf.dfcfw.com/pdf/H2_AN202512021792591872_1.pdf)

[3] Prospectus (Submission Draft) of Changzhou Bairuiji Biomedical Co., Ltd. (https://pdf.dfcfw.com/pdf/H2_AN202412261641439039_1.pdf)