The steel trading platform Zhaogang Group, which has been transitioning towards a supply chain model in recent years, reported a record high in revenue for last year. However, this was accompanied by a significant expansion of its losses, highlighting severe challenges to its profitability.
Key takeaways: * Revenue grew 36.7% last year to 2.12 billion yuan, but losses surged more than sevenfold. * The company is actively promoting overseas expansion and an AI-driven transformation, with international and non-steel businesses accounting for over 60% of revenue last year. AI-related revenue grew by 217.5%.
The trend of domestic internet trading platforms extending their services up and down the supply chain has become increasingly pronounced. The traditional revenue model, reliant on commissions from facilitating transactions, is increasingly insufficient to support sustainable business growth. While this shift from a light-asset to a heavier model diversifies income sources, it often comes at the cost of declining profitability. This dynamic is evident in the steel industry.
As one of China's largest third-party digital steel trading platforms, Zhaogang Group primarily connects fragmented steel suppliers, traders, and end-users through its online platform. It facilitates inquiries, matches parties, and completes transactions while collecting commissions, once being hailed as the Alibaba of the steel industry. However, as the industry matures, growth potential from pure transaction facilitation has plateaued. Steel demand is influenced by macroeconomic and property cycles, leading to increased transaction volatility. Fierce competition among platforms makes it difficult to sustainably increase commission rates.
Against this backdrop, the company has accelerated its transformation. It has repositioned itself as a "technology services company based on real industrial transaction data and centered on AI Agents," emphasizing a shift from a matching platform to an integrated model of "smart transactions, smart logistics, and supply chain services." The two main drivers of this transformation are global expansion and artificial intelligence.
For global expansion, the company aims to build an overseas operation equivalent to its domestic business within three years, accelerating its presence in Middle Eastern and Southeast Asian markets. A steel processing plant in Dubai Industrial City commenced operations, with plans to develop it into a regional supply chain hub. In AI, the company has launched fee-based AI procurement and trading assistants, attempting to turn AI from an internal tool into a revenue stream, and has proposed an "Agent to Agent" trading concept. Additionally, the company has expanded into transactions of non-steel products like electronic components and industrial electrical goods, indicating a broadening focus from a pure steel platform to a wider industrial supply chain.
The company's latest annual report reveals the impact of this transition. Revenue increased 36.7% year-on-year to 2.12 billion yuan, a recent high. However, gross profit fell 11.1% to 379 million yuan, implying a gross margin of approximately 17.9%, a significant decline from 27.5% in the previous year. The annual net loss widened from 68.66 million yuan to 590 million yuan, a surge of 761%.
The company attributed part of the expanded loss to non-cash factors such as costs related to its de-SPAC listing and share-based payments. However, even after adjusting for these items, its EBITDA turned negative, indicating that profitability pressures are linked to the transformation itself. The core of this contrast lies in the change in revenue structure. The company is replacing its originally high-margin platform revenue with low-margin supply chain and trading businesses, reflecting a business model shift from a light-asset platform focused on facilitation to one involving product sales and fulfillment.
Last year, revenue from international transaction business, which carries a gross margin of only 7.9%, grew 71.5% annually to 1.017 billion yuan, increasing its share of total revenue to 48%. Revenue from non-steel transaction business reached 322 million yuan, up 74.6% year-on-year, accounting for 15.2% of revenue, but with an extremely low gross margin of 3%. Transaction support services, accounting for about 23% of revenue, also had a modest gross margin of 6.1%. In contrast, revenue from transaction services, which boasts a high gross margin of 88.2%, fell 16.1%, reducing its share to 12.4%. Technology subscription services, with a 93% gross margin, accounted for only about 1.4% of revenue.
AI currently represents one of the few businesses with the potential to enhance value-added services. The company noted that AI-related revenue reached 335 million yuan last year, surging 217.5% and accounting for approximately 15.8% of total revenue. However, based on the company's disclosures, AI currently functions more as a tool to improve transaction efficiency and expand product categories, and has not yet demonstrated an ability to independently support high margins in the short term.
For comparison, ZKH, which has also moved towards a supply chain model, maintained a relatively stable gross margin of 14.8% in the last quarter. In contrast, YMM, which remains primarily a matching platform, sustains gross margins above 60%. Zhaogang's current gross margin of around 18%, while between these two, is clearly closer to that of a supply chain enterprise.
From a valuation perspective, the company currently trades at a price-to-sales ratio of about 0.77x, higher than ZKH's 0.37x but significantly lower than YMM's 4.78x. This suggests the market largely views it as a supply-chain company rather than a high-margin platform.
Following the earnings announcement, the company's share price fell approximately 4% to HK$1.20. Over the past six months, the stock has declined more than 50%, indicating persistent market concerns over its weakening profitability and the uncertainties of its transformation. Although the current valuation is low, Zhaogang's core issue is an unstable profit model. If supply chain and international businesses continue to suppress gross margins, and the AI business remains unable to provide effective support in the short term, a valuation recovery appears challenging.