There are many family businesses in the capital market, but most of them are owned by family members. However, relatives of actual controllers such as Shanghai Xihua Testing Technology Service Co., Ltd. (hereinafter referred to as "Xihua Testing") are rare in shareholders, suppliers, and multiple internal positions.

The prospectus shows that Xihua Testing is a pharmaceutical R & D outsourcing service provider with bioanalysis and drug analysis as its core, and plans to be listed on the Shenzhen Stock Exchange's Growth Enterprise Market. On December 13, the company has replied to the second round of inquiry letter, the sponsor is CITIC Securities.

Before the IPO, Xihua Testing conducted several rounds of capital increase and share conversion, but the difference in equity trading prices in similar periods was puzzling, and after equity penetration, a number of relatives of the real controller and the sponsor CITIC Securities emerged behind a shareholder.

After several rounds of capital increase and share conversion, within a year and a half, the valuation of Xihua Testing also rose from 1.445 billion yuan in September 2020 to 5.455 billion yuan in March 2022, after the rise in PE is much higher than the industry's leading listed companies.

in addition, the company of the actual controller's relatives became the largest supplier of Xihua testing the following year, but the number of participants in the company will still be 0 in 2022. In addition, many relatives of the actual controller worked in key departments such as Xihua testing and procurement, government affairs, and the rationality was questioned by the Shenzhen Stock Exchange.

Equity trading prices vary widely in similar periods, with P/E ratios exceeding industry leaders

The controlling shareholder and actual controller of Xihua Testing is Xing Jinsong. According to the prospectus, Xing Jinsong directly holds 21.25 percent of the shares of Xihua Testing and controls a total of 35.77 percent of the shares of Xihua Testing through indirect holding and signing of a long-term action agreement.

Xihua Testing has a large number of shareholders. As of June 30 this year, Xihua Testing has a total of 37 shareholders, most of whom have invested in shares during the reporting period (the first half of 2020-2023).

However, it is worth noting that the equity trading prices of different institutions and enterprises in similar periods are quite different.

In September 2020, Xihua Testing conducted the first capital increase during the reporting period, which was subscribed by external institutions such as Shanghai Yuhan Equity Investment Fund Partnership (hereinafter referred to as "Shanghai Yuhan") for a total of 0.145 billion yuan, with a capital increase price of 38.81 yuan/registered capital. Based on this calculation, the post-investment valuation of Hiwa Testing is $1.445 billion.

In October 2020, Xiamen Xidi Jiu Investment Partnership transferred its 0.6920 per cent stake in Xihua Testing to Xiamen Xidi Shix Investment Partnership at a price of $10 million, at a price consistent with the capital increase price of the previous month, both of which were $38.81 per registered capital. In the same month, Shen Xiaomin (Director of Human Resources of Xihua Testing) transferred 1.8913 of his equity to an external organization at a price of 56.8 yuan/registered capital. Lishui Xikang Network Technology Partnership (hereinafter referred to as "Lishui Xikang") transferred 0.4255 of its equity to Shanghai Yuhan, and the price rose to 63.11 yuan/registered capital.

At the same time, in October 2020, Xihua Testing also carried out a second capital increase, the new capital contribution by a number of external institutions contributed a total of 0.2 billion yuan to subscribe, the capital increase price of 63.11 yuan/registered capital.

As mentioned above, in October 2020, there were a number of capital increase and equity transfer transactions, but the transaction prices varied widely, with different prices of $38.81/registered capital, $56.8/registered capital, and $63.11/registered capital. At a price of 63.11 yuan/registered capital, the post-investment valuation of Xihua Testing at this time is 2.353 billion yuan, up 62.83 percent from the valuation after the capital increase a month ago.

In March 2022, Xihua Testing conducted its third capital increase, which was subscribed by a number of external institutions with a capital contribution of $0.545 billion, at a capital increase price of $90.92/registered capital and a post-investment valuation of $5.455 billion. After a year and a half of multiple rounds of capital increase and share conversion, the valuation of Xihua Testing has soared from 1.445 billion yuan to 5.455 billion yuan.

however, it is strange that one year later, in March 2023, heihua testing carried out the second equity transfer. Shanghai heihong biological and pharmaceutical technology co., ltd., controlled by the father of the director of human resources, withdrew from heihua testing and transferred its 57.033 million shares (corresponding to 14.4035 per share) to 10 external shareholders at a total of 0.605 billion yuan at a transfer price of 10.61 yuan per share, the valuation corresponding to Xihua Testing was reduced to 4.2 billion yuan. There is also a valuation regression in the Xihua Testing equity transaction.

in the reply document of the first round of inquiry letter, Xihua testing said that in March 2023, the pre-investment valuation of the company's old shares was 4.2 billion yuan, and the PE (rolling price-earnings ratio) calculated according to the net profit of the non-returning parent in 2022 was 67.14 times. As no comparable companies in the same industry had any primary market financing during the same period, Xihua Testing confirmed the valuation with reference to the secondary market PE situation.

Despite the setback in valuation, the valuation of the test is still at a high level. In the reply document of the first round of inquiry letter, Xihua Testing listed the PE (rolling price-earnings ratio) of comparable companies in the same industry on February 28, 2023, such as Yao Ming Kant (603259.SH), Kang Long Huacheng (300759.SZ), Medi Xi (688202.SH) and sunshine Nuo and (688621.SH), which were 34.04 times, 48.51 times, 45.96 times and 61.51 times respectively, lower than Xihua Testing's PE. Among them, WuXi AppTec and Kanglong Chemical are the leaders in the CRO industry, and the reasonableness of pricing and valuation at the time of the Xihua Testing equity transaction is in doubt.

the relatives of the real controller and the sponsor institution are floating behind a shareholder

The aforementioned shareholder, Lishui Xikang, who pushed the October 2020 equity trading price of Xihua Testing to a high of $63.11, has a strong relationship with the actual controller and the sponsor.

Through equity penetration, the shareholders behind Lishui Xikang emerged as Citic Securities, the sponsor of the IPO. In the first round of inquiry letters, the Shenzhen Stock Exchange asked Xihua to explain the change in the time and proportion of shares indirectly held by CITIC Securities through Lishui Xikang, the time of the sponsor company and the time of the indirect shares, and whether the shareholders of the company made improper transfer of benefits with the company's shares.

Xihua Testing said that CITIC Securities set up the sponsorship project for this issue and listing in March 2021 and signed the sponsorship and underwriting agreement with the company on June 21, 2023, both later than the time when Fuzhou Taihong took a stake in Lishui Xikang. Therefore, when the company and Lishui Xikang took a stake in Fuzhou Taihong, they did not know that such a stake would cause intermediaries to indirectly passively hold shares in the company through multi-level institutions.

as to whether CITIC Securities' becoming a sponsor of Xihua testing is related to its stake in Lishui Xikang, Xihua testing has no relevant explanation. The participation of sponsors has always been the focus of IPO review. Whether CITIC Securities can perform its duties and ensure fairness during the sponsorship process remains to be seen.

The relationship between Lishui Xikang and Xihua Testing is more than that. According to the prospectus, Lishui Xikang was established on November 13, 2017. Its founders include Yu Jiayi, Zhou Kefu, Xing Jinzhu, Chu Li, Yu Min and other natural persons. Many founders are relatives of the actual controller of Xihua Testing. Among them, Lishui Xikang's executive partner Yu Jiayi is the brother-in-law of Xihua Testing's actual controller Xing Jinsong, and Lishui Xikang, Yu Jiayi and Xing Jinsong are concerted actors.

among the remaining relatives of the actual controller, Chu Li, Zhou Kefu, Yu Min, Zhou Yun, Zhou Feng, Zhou Yu, Wu Haitang and Xing Jinzhu took a stake in the actual controller through platforms such as Suzhou Xikun and Lishui Xikang. however, strangely, the specific kinship between the above-mentioned natural persons and the actual controller was not disclosed in the prospectus.

in addition, the funds for the relevant relatives to take a stake in Lishui xikang will not be paid until the partners obtain the dividends from Lishui xikang in 2020. in the second round of inquiry letters, Shenzhen stock exchange inquired about the reasonable compliance of the above behaviors. Whether there is any contradiction with the stated purpose of supporting Xing Jinsong's entrepreneurship by relatives and friends, and whether there is any benefit transfer.

Xihua Testing responded that Zhou Kefu, Yu Min, Zhou Feng and Zhou Yu took a stake in Lishui Xikang because they supported the real controller Xing Jinsong as relatives. In October 2020, Lishui Xikang sold some of its shares in the company to obtain 10 million yuan of investment income and distributed dividends to all partners according to the proportion of subscribed capital contributions. The net income of all partners after deducting personal income tax totaled 8 million yuan, such income is the partner's personal investment income (own funds) and the partner has the right to dispose of it at his or her own disposal. Therefore, the partners who have not yet completed the paid-in capital contribution to Lishui Xikang totaled 5.85 million yuan, and Lishui Xikang received such money and paid it to the company to fulfill its obligation to pay the investment to the company.

the nephew company of the real controller became the largest supplier the following year, and the number of insured persons was 0

In addition to the indirect shareholding of the relatives of the actual controller, there are related transactions between Hiwa Testing and the relatives of the actual controller.

the prospectus shows that Yu yang (son of Yu jiayi), the nephew of the actual controller of Xihua testing, holds 50% of the shares of Shanghai yixunfu pharmaceutical science and technology center (hereinafter referred to as "yixunfu"). during the reporting period, yixunfu has been the top five suppliers of Xihua testing, providing clinical research services for biological sample collection to Xihua testing.

2020-2022, the amount of Xihua Testing's purchases from related parties, Yizunfu, are $5.1248 million, $6.6488 million and $6.2501 million, respectively, with a cumulative three-year total of $18.0237 million, which accounts for 13.40 percent, 9.80 percent and 7.12 percent of the total purchases, respectively.

according to the eye check, yishunfu was established in July 2019 and became a supplier of Xihua testing the following year.

The prospectus shows that in the first half of 2020-2023, Yisunfu was the top five suppliers of Xihua Testing, of which 2020 and the first half of 2023 were the largest suppliers. But the strange thing is that in 2019-2022, the number of insured people in Yisunfu is 0, 0, 0, and 3, respectively.

According to the data disclosed in the second round of inquiry letters, from 2020 to 2022, the total amount of purchase payments from Hihua Testing to Yizunfu is 20.4385 million yuan, accounting for 89.21 percent of Yizunfu's receipts during the above period, and Yizunfu's business is almost centered on Hihua Testing.

in the first round of inquiry letters, Shenzhen stock exchange said that Xihua testing did not fully explain the rationality of the above-mentioned related procurement, and asked Xihua testing to explain the main business, main customers, quotations from suppliers in similar service markets, and the rationality and fairness of the procurement.

according to the reply of Xihua test, it mainly purchases the single-case collection service of biological samples from yisenfu at a price of 6800~8000 yuan, while it purchases the single-case collection service from unrelated ones.The price range of single-case collection costs for the procurement of similar samples is 6000 to 12000 yuan.

The comparison found that the price range for Hiwa Testing to purchase from unrelated parties was on the high side. The Shenzhen Stock Exchange requires Xihua to test whether the company and the relevant personnel of the board of directors and supervisors control or take a stake in the company whether there is a substitute cost, capital in vitro circulation and other benefits transfer situation.

In addition to Yi Xunfu, Xihua Testing also purchased employee meals from Shanghai Zhenlu Catering Management Co., Ltd. (hereinafter referred to as "Shanghai Zhenlu"), which is operated by the real controller's nephew Yu Yang. From 2020 to 2022, Xihua Testing paid a cumulative purchase amount of about 3.8191 million yuan. However, it is strange that Shanghai Zhenlu was canceled on June 27, 2023, which happened to be three days before Xihua Testing submitted its prospectus.

in addition, in the internal management structure of hiwa detection, the real controller's relatives have a complex root system. According to the statistics of the second round of prospectus, a total of 8 people from Xing Jinsong's collateral blood relatives and in-laws worked in Xihua Testing.

in the second round of inquiry letters, the Shenzhen stock exchange pointed out that the relatives of the actual controllers worked in the departments of the Xihua testing department involved in procurement, government affairs, DMPK business and bioanalysis business, and asked to explain the rationality and matching degree of the relatives' employment, whether it affected the effectiveness of internal control, etc.

according to the reply document of the inquiry letter, the resumes of most relatives tested by hihua are relatively matched with their positions, but at the same time, there are also cases where some relatives do not match. for example, Yu min, the niece of the actual controller, is a nursing major and serves as a purchasing specialist, while Yu min and Yu yang are brother/sister relations, and the employee meals tested by hihua are purchased from enterprises that hold 50% of Yu yang.

Xihua Testing believes that the employment of the relevant relatives of the actual controller in the company matches and is reasonable and does not affect the effectiveness of the company's internal control; the aforementioned persons have nothing to do with their employment in the company through Lishui Xikang.