Top Numerical Tools Up For Hong Kong IPO

The company hopes to cash in on domestic substitution by manufacturers to boost sales of its high-end machine tools

Key Takeaways:

• Top Numerical has filed for a Hong Kong IPO, reporting it moved into the black last year with a profit of 8.88 million yuan
• The maker of high-end machine tools says it has launched the world's first carbon fiber composite five-axis product

Many understand the precision of a jet engine turbine blade makes all the difference behind the stability and flight safety of airplanes worth millions of dollars. But far less are aware of the five-axis computer numerical control (CNC) machine tools used to achieve such crucial precision in manufacturing. China was largely absent from the battlefield for such machine tools for a long time, despite its manufacturing prowess, relying heavily instead on imports from Germany, Japan and the U.S.

Yet today, a cohort of Chinese five-axis CNC makers are rapidly catching up, emerging as a new force for China's high-end manufacturing workshop. Among them, Shanghai Top Numerical Control Technology Co. Ltd. applied to list in Hong Kong late last month, in an offering that would make it first in its class to sell shares to global investors.

Five-axis CNC machine tools have five-axis simultaneous functionality. Those include three traditional X, Y and Z linear axes, while the other two are A, B, or C axes that can rotate around different axes, enabling the cutting tool to approach the workpiece from multiple angles. Compared to three- or four-axis machine tools, five-axis CNC machine tools allow for more complex curved surface machining, higher precision and greater efficiency. Their high sophistication and precision makes five-axis machine tools preferred in fields such as aerospace, medical equipment and automobiles.

According to its listing application, Shanghai-based Top Numerical was established in 2007 and specializes in the development and production of five-axis CNC machine tools, starting with a focus on high-end applications in the aerospace sector and gradually expanding into other industries such as automotive, energy, and healthcare. The company ranked first in China's aviation and aerospace five-axis CNC machine tool market last year with 11.6% share, and was third among domestic suppliers in China's overall five-axis CNC machine tool market, according to third-party research in the listing document.

World's first carbon fiber five-axis machine tool

Top Numerical believes that technical prowess is one of its core strengths. The company has five key technological pillars, including precision mechanical design, CNC systems, and self-developed controllers, which have collectively secured over 80 patents. It says it has also launched the world's first five-axis machine tool made of full carbon fiber composite material components. It says that technical capability lays the foundation for it to compete against other established global five-axis giants such as German-Japanese joint venture DMG Mori (6141.T), Japan's Makino (6135.T), and America's Haas Automation.

Top Numerical's business is also growing fast. Its revenue surged from 136 million yuan ($22 million) in 2022 to 532 million yuan last year, roughly doubling each year. Its profitability has also improved dramatically, reflected in a gross margin that swung from negative 18.3% to positive 37.6% over that time. The company also turned an 8.88 million yuan profit last year, reversing losses in the previous two years. Its net margin last year was a slim 1.3%, though even that looks reasonable given its high growth, high R&D spending and ongoing capacity buildup.

The company is still largely reliant on the aerospace industry, which accounts for 95% of its revenue. It began scaling up its general-use five-axis products in 2023, leading revenue for that segment to rise nearly seven-fold last year, though the figure was still quite small at just 23.84 million yuan. Still, keeping up such rapid growth could reflect Top Numerical's desire to transition from a niche product provider to one with broader potential.

Top Numerical isn't the only Chinese company looking to enter the global race to make high-end machine tools, and faces significant pressure from similarly rising domestic rivals. While the domestic five-axis machine tool market is still dominated by foreign products, local manufacturers, such as Qinchuang Machine Tool (000837.SZ) and Haitian Precision (601882.SH), are also on the up-and-up. Unlike Top Numerical, these companies are often backed by state-owned capital or large private investors that can more easily open doors for their products at big state-run manufacturers. Haitian Precision has seized on such connections to grow rapidly, helping to lift its stock more than tenfold since its 2016 IPO.

Cash crunch

Competition aside, Top Numerical is also grappling with high leverage and short-term liquidity pressures. Its debt-to-equity ratio stood at about 83% last year, and its cash reserves slid from 346 million yuan at the end of 2022 to just 133 million yuan at the end of last year. Such tight finances may be a primary driver behind the timing for the company's new IPO bid. It says it plans to use proceeds from the listing mostly for R&D and sales channel expansion, with the remainder earmarked for debt repayment and operations.

High-end precision machine tools are a cornerstone of high-end manufacturing, as well as a crucial part of China's self-reliance strategy, and a key element of the country's "new quality productive forces" policy. The market for such products is expected to reach 27 billion yuan by 2029, growing 20% between now and then, according to Top Numerical's listing document. Such growth could easily lift the company, though success hinges on its ability to navigate through high-end manufacturing capital cycles, retain core customers and overcome regular industry bottlenecks.

Top Numerical wants to convince the world it's a technical leader based on its pioneering position in carbon fiber composite machine tools that differentiate it from its peers. Such a technology-driven narrative may help to boost its valuation if investors buy in. The company could also benefit from its first-mover status, since no other five-axis CNC machine tool manufacturers currently trade in Hong Kong. That scarcity factor could provide some needed grease for Top Numerical's valuation, as it seeks to woo investors to its made-in-China, high-tech manufacturing story.