Company Structure and Regulatory Environment - ZKH Group Limited is a Cayman Islands holding company with operations primarily through its mainland China subsidiaries, posing unique risks to investors regarding foreign ownership limitations[29]. - The company has completed the necessary permissions and filings for its initial public offering, including a cybersecurity review by the Cyberspace Administration of China[44]. - Future securities offerings outside of mainland China will be subject to CSRC filing requirements, and failure to comply may result in sanctions, including fines and operational limitations[49]. - Under the Holding Foreign Companies Accountable Act, if the SEC determines the company has filed audit reports from a non-inspected firm for two consecutive years, trading of its shares may be prohibited in the U.S.[51]. - The PCAOB has not issued new determinations regarding its ability to inspect audit firms in mainland China, which may affect the company's status under the HFCAA[53]. - The PRC Enterprise Income Tax Law imposes a 10% withholding tax on dividends distributed by foreign-invested enterprises to their immediate holding company outside of mainland China[41]. - The regulatory framework for data protection is rapidly evolving, with significant implications for the company's operations and compliance costs[82]. - The PRC Cybersecurity Law requires network operators to implement security measures to protect against unauthorized access and data breaches, necessitating substantial resources for compliance[84]. - The PRC Personal Information Protection Law, effective November 2021, imposes strict rules on processing sensitive personal information, which may impact the company's data handling practices[92]. - The evolving regulatory landscape may require the company to adapt its business practices, potentially incurring substantial costs[99]. - The company has not been involved in any investigations related to cybersecurity review as of the date of the annual report, indicating a current lack of regulatory scrutiny[88]. - Uncertainties exist regarding the impact of the PRC Foreign Investment Law on the company's corporate structure and operations, which could affect business viability[223]. Financial Performance and Challenges - The company incurred net losses of RMB731.1 million in 2022, RMB304.9 million in 2023, and RMB268.0 million (US1,200.3 million) in 2024[68]. - Operating cash flow improved by RMB 797.0 million to a gain of RMB 229.1 million in 2024, compared to negative cash flow in previous years[104]. - Net cash used in operating activities was RMB 504.2 million in 2022, RMB 567.9 million in 2023, and net cash provided was RMB 229.1 million (US$31.4 million) in 2024[104]. - The company may need to raise additional funds to support its growth strategy, which could lead to significant additional funding needs if financing is not available on satisfactory terms[127]. - Future financing may be uncertain, impacting the ability to support business growth and operational needs[109]. Operational Risks and Challenges - The company faces significant risks related to customer retention and satisfaction, which are critical for its financial performance[61]. - The company faces challenges in maintaining customer experience and service quality, which could adversely affect customer retention and acquisition[64]. - The company is vulnerable to fluctuations in supply and demand for MRO products, which could impact trading volume and pricing on its platform[59]. - The online MRO procurement service industry in China is still in its early stages, with uncertainties regarding growth and profitability[66]. - The company operates under two business models: a product sales model and a marketplace model, with higher gross margins observed in the marketplace model[77]. - The company anticipates further expansion into overseas markets, which will increase operational complexity and resource strain[71]. - The company must continuously enhance its technology infrastructure to support growth and maintain system security[69]. - The company is exposed to risks related to geopolitical tensions and regulatory changes that could impact its operations and financial performance[66]. - The company faces risks related to the fulfillment of hazardous products, including potential liabilities from third-party service providers[115]. - The company relies on third-party suppliers for product sales, which poses risks to business performance if relationships are not maintained[105]. - The company is subject to potential government enforcement actions and investigations if it fails to comply with cybersecurity and data privacy requirements[88]. - The company faces risks related to the availability of products from foreign markets, which could adversely affect inventory levels and operating results[179]. - The company has limited insurance coverage, which may expose it to significant costs and business disruptions[204]. Market and Competitive Environment - The MRO procurement service industry in China is large and fragmented, with increased competition potentially leading to loss of market share and reduced profitability[128]. - Seasonal fluctuations in customer purchases have been observed, with generally fewer orders during public holidays, particularly during the Chinese New Year[141]. - Pricing decisions may adversely affect the company's financial performance and ability to attract and retain suppliers and customers[150]. - The company faces risks related to third-party online payment platforms, which could impact customer trust and result in a material adverse effect on business operations[138]. - The company is increasingly sensitive to environmental, social, and governance (ESG) issues, which may impose additional costs and risks, potentially affecting business operations and financial condition[218]. Technology and Data Management - The integration of artificial intelligence technologies is ongoing, but presents operational, compliance, and reputational risks due to the unpredictable nature of AI[120]. - The company has invested substantial resources in developing complex and innovative technology systems to enhance customer service and operational efficiency[153]. - The performance of the company's technologies is critical for supporting key functions such as online ordering and logistics information, but stability cannot be assured[153]. - The company relies heavily on internet infrastructure and telecommunications networks in China, with almost all access provided by state-owned operators[198]. - The company has processes in place to mitigate risks associated with open source software, but cannot guarantee all risks are managed effectively[196]. - The company is subject to evolving laws regarding online service provider liability, which could lead to potential legal challenges and financial penalties[201]. Human Resources and Internal Controls - Key employee retention is critical for success, with competition for talent in the MRO procurement service industry being intense[123]. - A significant risk exists due to the lack of sufficient and competent accounting personnel, leading to material weaknesses in internal control over financial reporting[206]. - The company has identified a material weakness in internal controls, which could affect investor confidence and market price of its ADSs[205]. Economic and Political Factors - Economic conditions in China and globally, including the impact of COVID-19 and geopolitical conflicts, could materially affect the company's financial condition[172]. - Changes in U.S. and international trade policies, particularly regarding China, may adversely impact the company's business and operating results[173]. - The slowing growth rate of the Chinese economy since 2012 may reduce demand for the company's products and services, adversely impacting business results[227]. - The PRC government maintains significant control over economic growth and resource allocation, which could introduce uncertainties for the company[226]. - Changes in China's economic, political, or social conditions could materially adversely affect the company's business and financial results[224].
ZKH(ZKH) - 2024 Q4 - Annual Report