Changpeng Wan
Key Highlights
– Aux Group distributed $538 million (¥3.794B) dividends in 2024 despite 84.1% debt ratio, with founder Zheng Jianjiang’s family receiving $519 million (¥3.656B)
– The air conditioner maker files for Hong Kong IPO after failed mainland attempts, while receivables surged 110% and payables grew 91% since 2022
– Consumer complaints include product fires, electric shocks, and $16.7 million patent infringement payouts to rivals
– Overseas sales now comprise 57% of revenue as domestic market stagnates, but R&D investment lags competitors by 10x
Crossroads at the Hong Kong Exchange
Aux Electric Co., Ltd. stands at a pivotal moment as it files its second Hong Kong IPO application, a move shadowed by financial contradictions. Founder Zheng Jianjiang’s (郑坚江) decade-long listing pursuit includes failed attempts on China’s A-share market (2015), a brief New Third Board stint (2016), and aborted 2023 mainland listing. This latest bid emerges alongside startling financial decisions: a $538 million dividend payout during record-high 84.1% debt levels, with Zheng’s family capturing 96% of the distribution. The juxtaposition of aggressive shareholder rewards and capital-raising needs frames critical questions about governance priorities and sustainable growth in China’s hyper-competitive appliance sector.
Financial Performance: Growth Versus Stability
Revenue Expansion and Market Shifts
Aux demonstrates impressive top-line growth, with revenue climbing from $27.5B (¥195B) in 2022 to $42.1B (¥298B) in 2024—a 52.8% three-year surge. Net profits doubled to $4.1B (¥29.1B) during this period. This expansion hinges on overseas success:
– 2022: $11.8B (¥83.9B) international revenue
– 2024: $20.7B (¥146.8B) international revenue
– Q1 2025: Overseas contribution reaches 57% of total sales
Mounting Financial Pressures
Beneath surface growth, concerning trends emerge. Trade receivables ballooned from $2B (¥14.28B) to $4.2B (¥30B) between 2022-2024, extending payment cycles from 25.2 to 37.4 days. Simultaneously, payables skyrocketed 91.2% to $14.7B (¥103.95B), indicating strained supplier relationships. These metrics contrast sharply with competitors:
– Aux 2024 debt ratio: 84.1%
– Midea Group: 62.33%
– Gree Electric: 61.55%
The Dividend Dilemma
Unpacking the $538 Million Payout
Despite its high debt and massive dividends, Aux executed a $538 million (¥37.94B) shareholder distribution in 2024—exceeding that year’s $4.1B (¥29.1B) net profit by 30%. The payout equaled 55% of cumulative 2022-2024 earnings. Founder Zheng Jianjiang’s family, holding 96.36% ownership, received $519 million (¥36.56B). Prospectus disclosures confirm this drew directly from cash reserves, worsening the company’s net liability position.
Legal Justifications and Investor Concerns
Citing Cayman Islands legal advice, Aux asserted dividend legality based on sufficient “realized/unrealized profits” and ability to service debts. However, the timing raises governance questions: Why extract capital during high debt and massive dividends before seeking public funding? For context, Zheng Jianjiang ranked #213 on the 2024 Hurun Rich List with $31.7B (¥225B) wealth. This financial maneuver risks eroding investor trust in the IPO’s stated purpose: “strengthening financial position” and “funding working capital.”
Product and Competitive Vulnerabilities
Quality Control Incidents
Consumer complaints reveal systemic quality issues across Aux’s product lines:
– Air conditioners failing within days of installation
– Tea makers catching fire during operation
– Water dispensers leaking electricity
– Blenders “self-exploding” during use
Over 6,383 complaints appear on consumer platforms, with recurring themes of denied warranty claims and manufacturer-retailer responsibility disputes. These incidents stem from Aux’s historic low-cost strategy. Founder Zheng, a former auto mechanic who entered appliances in 1994, famously published the “Air Conditioner Cost White Paper” in 2002, slashing prices 30% to disrupt incumbents.
Innovation Investment Gap
Aux’s $1.16B (¥1.16B) patent infringement payments to Gree Electric—after losing 27 consecutive lawsuits—highlight R&D shortcomings. Comparative innovation investment:
– Aux 2022-2024 total R&D: $236M (¥1.675B)
– Gree 2024 alone: $9.7B (¥69B)
– Midea 2024: $22.8B (¥162B)
With 20% gross margins (below industry average), Aux struggles funding innovation amidst its high debt and massive dividends approach. Meanwhile, market leaders accelerate channel expansion into lower-tier cities, squeezing Aux’s domestic footprint.
Strategic Crossroads
Overseas Reliance and Market Shifts
Export markets now drive over half of Aux’s revenue, reaching 57% in early 2025. This dependence creates vulnerability to trade barriers and currency fluctuations. Domestically, China’s appliance sector faces saturation, with air conditioner ownership exceeding 130 units per 100 urban households. The competitive landscape now favors premiumization and smart technology—areas where Aux’s budget positioning struggles.
The IPO Imperative
The Hong Kong listing seeks $650-$800 million according to financial analysts, earmarked for:
– Production facility enhancements
– Southeast Asian market expansion
– Working capital relief
Yet prospectus risk disclosures acknowledge unresolved challenges: “We cannot guarantee our measures will prevent future intellectual property litigation.” This funding quest follows years of financial engineering, including the controversial high debt and massive dividends episode that transferred nearly three years’ profits to insiders.
Beyond the Listing Lifeline
Aux Group’s Hong IPO represents more than capital access—it’s a credibility test. The company’s simultaneous cash extraction via dividends and capital-raising ambitions reveal tension between shareholder enrichment and sustainable growth. For investors, critical evaluation points include:
– Receivables/payables trajectory post-IPO
– R&D budget reallocation evidence
– Quality control overhaul timelines
– Founder share lock-up provisions
Market observers should scrutinize the final prospectus for corporate governance enhancements and dividend policy revisions. In China’s evolving appliance sector, where giants like Midea and Gree dominate through innovation, Aux must transcend its “price butcher” legacy. The true measure of this IPO won’t be fundraising success, but whether capital fuels genuine transformation rather than subsidizing financial engineering.
