Core Perspective: Are Wolong Electric Group Co.,Ltd.'s performance figures genuinely robust ahead of its Hong Kong listing? First, the company's continuously rising revenue scale includes a significant proportion of other businesses, with trading activities emerging prominently. Second, major clients in the company's trading business surprisingly include entities controlled by the actual controller outside the listed company—does this "self-dealing" practice compromise the authenticity of financial statements? Additionally, a subsidiary previously sold by the company was implicated in financial fraud at Red Phase Inc., potentially creating obstacles for its Hong Kong listing.

Recently, Wolong Electric Group Co.,Ltd. officially submitted its application for Hong Kong stock listing.

According to the prospectus, the core allocation of IPO proceeds includes: expanding production capacity and enhancing the intelligence level, efficiency, and global coverage of production infrastructure; strengthening global R&D capabilities; increasing investment and business development in emerging fields such as electric aviation and robotic components; developing global sales and service networks; and maintaining general working capital for flexible business deployment.

Notably, Wolong Electric Group Co.,Ltd.'s stock price has surged threefold since the 924 market rally. On one hand, the company has capitalized on the robotics concept through its joint investment with Tencent in Zhiyuan Robotics, gaining significant market attention for its embodied intelligence initiatives. On the other hand, as a key supplier of electric aviation propulsion systems, the company has benefited from continued positive developments in the low-altitude economy, further catalyzing stock price appreciation.

However, deeper analysis reveals potentially questionable financial reporting behind the company's diversified business operations. First, trading business activities appear to involve related parties, raising questions about potential self-dealing and inflated performance. Second, the company's involvement in financial fraud cases may further erode investor confidence in its financial reporting.

Questionable Financial Reports? Suspected "Self-Trading" Activities and Significant Accounting Error Adjustments

The prospectus indicates that Wolong Electric Group Co.,Ltd. focuses on R&D, production, sales, and services of electric drive system products and solutions. Main business segments include five core areas: explosion-proof electric drive system solutions, industrial electric drive system solutions, HVAC electric drive system solutions, new energy transportation electric drive system solutions, and robotic components and system applications for global customers.

Currently, the primary revenue contributors are explosion-proof electric drive system solutions, industrial electric drive system solutions, and HVAC electric drive system solutions, accounting for 28.9%, 25%, and 28.3% respectively in 2024.

According to Frost & Sullivan reports, in 2024, the company ranked first globally in explosion-proof electric drive system solutions with a 4.5% market share; fourth globally in industrial electric drive system solutions with a 2.8% market share; and fifth globally in HVAC electric drive system solutions with a 2.0% market share.

The prospectus shows that from 2022-2024 and the first halves of 2024 and 2025, the company's revenues were approximately 14.266 billion, 15.567 billion, 16.247 billion, 7.978 billion, and 8.031 billion yuan respectively; net profits were approximately 839 million, 553 million, 832 million, 409 million, and 548 million yuan respectively. The company demonstrates characteristics of "continuously rising revenue but fluctuating profitability."

Particularly noteworthy is the high proportion of other business revenue. From 2022 to 2024, other business revenues were 840 million, 1.442 billion, and 2.052 billion yuan respectively, representing 5.9%, 9.3%, and 12.6% of total revenue. The company's other business revenue has been continuously rising.

What exactly constitutes the company's other business? The prospectus explains that it primarily includes revenue from energy storage systems, photovoltaic power generation, and raw material and component sales. The company states that it completed the sale of energy storage and photovoltaic power generation related businesses to an affiliated entity controlled by the controlling shareholder in March 2025.

Based on historical company announcements, the rise in other business at Wolong Electric Group Co.,Ltd. includes trading activities. According to disclosure materials, the company primarily conducted trading in copper concentrate, textiles, and electrolytic copper in 2021; silicon steel and electrolytic copper in 2022; and aluminum ingots, silicon steel, enameled wire, and electrolytic copper in 2023. From 2021 to 2023, trading business revenues were 917 million, 1.009 billion, and 336 million yuan respectively.

From these business characteristics, the company shows low gross margins with abnormal fluctuations. Why does the company engage in trading business?

Industry insiders suggest that business scale may benefit corporate financing. According to public information, due to high credit ratings, more comprehensive information access, and easier access to credit enhancement and guarantee institutions, large enterprises with over 10 billion yuan in revenue have average credit bond financing costs of only 4.75%, lower than traditional bank loan average costs (approximately 6.6%). Listed companies under 500 million yuan have average credit bond financing costs of 6.70%, significantly higher than larger enterprises.

From the company's financing structure perspective, indirect financing represents a large proportion, with cumulative indirect financing of nearly 7 billion yuan since listing. As of the first half of this year, short-term borrowings were 2.316 billion yuan, non-current liabilities due within one year were 2.263 billion yuan, and long-term borrowings were 1.622 billion yuan.

With such volatile gross margins in business operations, are there underlying issues? We discovered that major clients in the company's trading business include subsidiaries of the controlling shareholder.

In 2023, among the top ten clients in trading business, Wolong Electric Yantai Dongyuan Transformer Co., Ltd. was the sixth largest trading business client.

It's important to note that this major trading business client is a company under controlling shareholder Wolong Holdings, with Wolong Holdings holding 100% ownership of Wolong Electric Yantai Dongyuan Transformer Co., Ltd.

Among major trading business clients in 2022, Zhejiang Jufa International Trading Co., Ltd., established just in 2022, conducted transactions worth nearly 30 million yuan with the company. Notably, this client has zero insured employees.

Regarding why the company engages in trading business, the company states that its trading business aims to integrate scattered raw material procurement demands in electric motor manufacturing, leveraging collective purchasing advantages, industry experience, and price fluctuation judgment to obtain cost-effective, modularized products and services for small and medium enterprises and downstream users in the electric motor industry chain, enhancing user market competitiveness while reducing market costs for supply-side enterprises.

Due to Wolong Electric Group Co.,Ltd.'s adoption of gross method recognition for trading business, inaccurate financial reporting led to accounting error adjustments.

In June 2024, the company issued a prior period accounting error adjustment announcement. The announcement indicates that this prior period accounting error correction will simultaneously reduce operating revenue and operating costs in the company's 2023 third quarter report, 2023 interim report, 2022 annual report, and 2021 annual report by 356,446,414.61 yuan, 105,093,714.32 yuan, 732,087,529.67 yuan, and 301,450,856.94 yuan respectively. These accounting error adjustments primarily involved revenue originally recognized using net method being recognized using gross method.

Notably, companies previously divested by Wolong Electric Group Co.,Ltd. had shown revenue recognition inaccuracies long ago, yet the company failed to adjust related matters promptly.

The announcement shows that in January 2022, the company sold Wolong Mining (Shanghai) Co., Ltd. (simplified as "Shanghai Mining") to Wolong Real Estate, also involving trading business divestiture. According to administrative regulatory measures received by Wolong Real Estate, Shanghai Mining's partial rare earth trading business in 2022 lacked sufficient basis for gross method revenue recognition, leading Wolong Real Estate to make accounting error corrections, adjusting related business to "net method" revenue recognition, reducing 2022 operating revenue by 503 million yuan.

Following these accounting errors, the company did not promptly adjust related data until June 2024, when it addressed business with insufficient revenue recognition basis.

Divested Company Previously Involved in Financial Fraud

In September 2024, the company received an administrative regulatory measure decision letter "Decision on Issuing Warning Letters to Wolong Electric Drive Group Co., Ltd. and Related Personnel," primarily stating:

On April 3, 2024, Red Phase Inc. received "Administrative Penalty Decision" and "Market Ban Decision" ([2024] No. 1) from the Xiamen Bureau of China Securities Regulatory Commission, determining that Wolong Electric Yinchuan Transformer Co., Ltd. (simplified as "Yinchuan Wolong") failed to meet restructuring agreement performance commitments from 2017 to 2019, requiring the company to compensate Red Phase Inc. for a total amount of 186,053,400 yuan. On April 25, 2024, the company issued a "Performance Commitment Letter" to Red Phase Inc., committing to the above compensation matters. The company failed to issue interim announcements regarding this matter.

The company's above actions constitute information disclosure violations, resulting in warning letters issued to Chairman Pang Xinyuan, President Li Ming, and Board Secretary Dai Qin, with records entered into securities and futures market integrity archives.

It's important to note that the underperforming target Yinchuan Wolong was an asset previously sold by Wolong Electric Group Co.,Ltd., determined by regulators to have committed financial fraud. According to public information, in September 2017, Red Phase Inc. acquired 100% equity of Yinchuan Wolong from Wolong Electric Group Co.,Ltd. and three natural persons (Xi Ligong, He Dongwu, Wu Guomin) through share issuance and cash payment, with a transaction price of 1.17 billion yuan and appreciation rate of 192.6%.

Wolong Electric Group Co.,Ltd. predicted and committed to Yinchuan Wolong's net profits for 2017, 2018, and 2019, promising net profits of 90 million yuan in 2017, 106 million yuan in 2018, and 120 million yuan in 2019, totaling 316 million yuan for 2017-2019.

However, Yinchuan Wolong's operating revenue and profits from 2017-2022 contained false records. From 2017 to 2019, Yinchuan Wolong inflated net profits by 48.6932 million, 70.6187 million, and 56.9544 million yuan respectively, totaling 176 million yuan in false increases. Ultimately, actual performance totaled 130 million yuan, with real performance completion rate of only 41.12%.

This raises questions: First, as a former subsidiary of Wolong Electric Group Co.,Ltd., why did Yinchuan Wolong need to rely on performance fraud to meet targets after being sold, suggesting the asset itself might have been inflated? Second, with Yinchuan Wolong's performance inflation tied to Wolong Electric Group Co.,Ltd.'s performance commitments, might the company have been aware?

Coincidentally, Wolong Electric Group Co.,Ltd. precisely found private equity buyers to cash out just before Red Phase Inc.'s scandal broke.

In May 2023, Red Phase Inc. received a case filing notice from China Securities Regulatory Commission. However, the company found private equity buyers just before Red Phase Inc.'s case filing.

On February 2, 2023, Wolong Electric Group Co.,Ltd. signed a "Share Transfer Agreement" with private equity company Guangzhou Kangqi Asset Management, transferring 19,896,653 unlimited tradable shares of Red Phase Inc. to Kangqi Asset Wuwei No. 2 through agreement transfer, representing 5.50000% of Red Phase Inc.'s total share capital as of February 1, 2023. The transfer price was 17.30 yuan per share, approximately 87.59% of the listed company's closing price on the trading day before agreement signing, with total transfer proceeds of 344 million yuan.

This raises another major question: might this impact the company's Hong Kong listing? According to "Interim Measures for Overseas Issuance and Listing of Securities by Domestic Enterprises," Article 8 clearly states that domestic enterprises under legal investigation for suspected crimes or major violations without clear conclusions cannot pursue overseas listing.