Rare earths drive a major turnaround in performance? Huahong Technology: Actual controller fully pledged shares, cash flow draining and hard to stop bleeding!

How does Huahong Technology’s cross-border mergers and acquisitions shape the rare earth business landscape?

Financial fragility, alarm bells ringing.

Author | Bai Mao
Editor | Xiao Bai

The capital market has never lacked cross-border players, but those who can continuously hit the cycles and switch repeatedly between different tracks, Huahong Technology definitely counts as one.

Fengyunjun found that this veteran scrap steel equipment manufacturer has, over the past decade since its listing, moved from elevator components to automobile dismantling, and then made a big gamble on rare earth recycling, effectively transforming itself into a rare earth concept stock.

After enduring goodwill explosions and performance pains, thanks to the recovery of the rare earth market, Huahong Technology (002645.SZ) delivered an impressive turnaround performance in 2025.

However, upon reviewing the financial report, the high pledge ratio from the controlling shareholder and the still tight cash flow remind us that things are not that simple.

Today, Fengyunjun will take everyone through the data to clear the fog and re-examine the fundamentals of this company.

Latest performance reversal, rare earths and magnetic materials take the lead

In 2025, Huahong Technology’s net profit attributable to shareholders of the listed company is expected to be between 190 million to 260 million yuan, successfully achieving a significant turnaround in annual operating performance.

(Huahong Technology performance forecast)

Looking back to the first three quarters of 2025, the company achieved total operating revenue of 5.46 billion yuan, a year-on-year increase of 34.9%.

During the same period, the net profit attributable to shareholders of the parent company reached 200 million yuan, a staggering increase of 71 times year-on-year.

This achievement is hard-earned. Reflecting on the past few years, the company’s performance has shown significant cyclical fluctuations: in 2021, the net profit attributable to the parent company reached 530 million yuan, but fell to 410 million yuan in 2022, and turned into a loss of 160 million yuan in 2023.

By 2024, the company’s net profit attributable to the parent company further deepened to a loss of 360 million yuan. The reason for this can be traced back to the risks from previous cross-border acquisitions—specifically, a 330 million yuan impairment provision for goodwill related to the acquisition of Jiangsu Weierman.

Now that the goodwill impairment risk has been partially cleared, the core of this performance rebound lies in the strong recovery of the rare earth business. From the revenue structure in the first half of 2025, the comprehensive utilization of rare earth resources, which includes rare earth recycling, accounted for 49.6% with a gross margin of 6.8%; the magnetic materials segment accounted for 23.8% with a gross margin of 7.6%.

The comprehensive utilization of rare earth resources mainly involves the recycling of corner waste generated during the production of rare earth permanent magnetic materials and the recycling of scrapped old permanent magnetic materials to produce high-purity rare earth oxides.

The rare earth magnetic materials business is the company’s extension into downstream application fields centered around the rare earth industry, mainly focusing on the research, production, and sales of rare earth permanent magnetic materials.

These two rare earth-related businesses combined contributed over 70.0% of revenue, becoming the absolute performance backbone of the company.

(Huahong Technology semi-annual report)

Supported by national industrial policies and improved supply and demand patterns, domestic rare earth prices have stabilized and rebounded, coupled with a significant increase in sales of high-performance magnetic materials for permanent magnet motors in the company’s market, which directly boosted the overall recovery of the company’s profitability.

(2025 performance forecast)

Core profit logic: cross-border mergers and acquisitions to build the rare earth industry chain

Tracing Huahong Technology’s development trajectory, the main strategy is “engage in one industry, acquire another.” As of the end of the third quarter of 2025, the goodwill on the books reached 750 million yuan.

Starting from scrap steel processing equipment, in order to smooth out the effects of the steel cycle, in 2015, the company made a high-premium cross-border acquisition of an elevator components company. This acquisition briefly boosted profits, but the business remained lukewarm and later became the main culprit for significant goodwill impairment.

After realizing this mistake, the company returned to digging for gold in the renewable resources sector but this time went bigger. Starting in 2020, riding the wave, the company successively acquired Xintai Technology and Jiangxi Wanhong, forcefully entering the rare earth waste comprehensive utilization track.

Next, it extended downstream, engaging in rare earth permanent magnetic materials through Zhejiang Zhonghang New Materials, thus creating a complete industry chain of “recycling old magnetic materials—producing high-purity rare earth oxides—manufacturing rare earth permanent magnetic materials.”

Currently, Huahong Technology’s core profit logic is betting on rare earths.

In terms of production capacity, the company’s recycled rare earth oxide capacity has reached 12,000 tons/year, placing it in a leading position in the industry; the magnetic materials capacity has also reached 15,000 tons/year. The high-performance magnetic materials produced by the company have been integrated into high-tech fields such as electric vehicle motors and industrial robot motors.

(2025 semi-annual report)

As for the previously market-concerned export control policies, since all rare earth oxides are sold domestically and the export share of permanent magnetic materials is also very low, the actual impact is minimal.

Paper wealth, weak cash generation capability

The profit and loss statement looks glamorous, but has the money actually been secured? Fengyunjun looked at the cash flow statement and found that the company’s cash generation capability is indeed somewhat lacking.

In the first three quarters of 2025, Huahong Technology recorded a net cash flow from operating activities of -360 million yuan. In fact, its operating cash flow has been quite unstable, amounting to 190 million yuan in 2021, dropping to -360 million yuan in 2022, returning to a positive 550 million yuan in 2023, and only reaching 90 million yuan in 2024.

The long-term mismatch between net profit and cash flow indicates that paper profits have not smoothly transformed into real cash. Where did the money go?

Inventory and accounts receivable consumed a large amount of cash. As of the end of the third quarter of 2025, the company’s inventory accounted for 35.7% of total assets.

This is due to both the long manufacturing cycle of scrap steel equipment and the need to prepare elevator components in advance, as well as the large-scale stocking of rare earth raw materials and magnetic materials. Meanwhile, notes receivable and accounts receivable accounted for 14.6%.

Combining these two factors, the funds are severely tied up. To maintain operations, the company’s short-term borrowing ratio has risen to 13.3%, and the interest paid on borrowed money is naturally significant.

While its main business is generating insufficient cash, the company has not hesitated to reach out to the capital market. Over the 15 years since its listing, the company has raised over 2.6 billion yuan in total. However, it has been stingy in returning to shareholders, with total dividends only amounting to 350 million yuan.

Dancing on the edge of a cliff: the actual controller’s near-full margin bet

In addition to cash flow concerns, there is also a looming threat above the company—a very high equity pledge ratio from the actual controller.

Latest data shows that the controlling shareholder Huahong Group and its concerted actors (Hu Shiyong, Hu Shiqing, Hu Shifa, etc.) hold a total of 230 million shares, accounting for 36.9% of the total share capital.

Alarmingly, as of December 27, 2025 (the latest data available from the announcement), the total number of pledged shares reached 230 million, accounting for 99.9% of their total holdings.

Specifically, the pledge ratio for Huahong Group is as high as 100.0%, while Hu Shiyong has a pledge ratio of 98.5%, and both Hu Shiqing and Hu Shifa also have pledge ratios of 100.0%. It can be said that the Hu brothers, the actual controllers, have put all their chips on the table, making a high-stakes bet.

(Huahong Technology: Announcement on the Partial Lifting and Re-pledging of Shares by the Controlling Shareholder 20251227)

The announcement explains that this massive pledge is primarily for Huahong Group to meet its own production and operational needs, and is not intended for the listed company.

(Huahong Technology: Announcement on the Partial Lifting and Re-pledging of Shares by the Controlling Shareholder 20251227)

Although the company insists that the pledge risk is within controllable limits and will not lead to a change in control, the data does not lie. As of the end of the third quarter of 2025, Huahong Group’s total assets were 8.66 billion yuan, while total liabilities soared to 7.37 billion yuan, resulting in a debt-to-asset ratio of 85.1%.

(Huahong Technology: Announcement on the Partial Lifting and Re-pledging of Shares by the Controlling Shareholder 20251227)

With nearly all shares pledged and high debts, should there be extreme fluctuations in the capital market, the actual controller will have very little room to maneuver.

Huahong Technology has successfully seized the opportunity presented by the recovery of the rare earth industry with its flexible acquisition strategies, executing a remarkable performance turnaround.

However, behind the glamorous net profit lies a series of glaring risk points: weak cash flow, high inventory, unsatisfactory dividends, and the actual controller’s precarious high-margin bet.

While embracing the cycle, the company’s financial fundamentals still need to withstand the long-term test of the market.

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