Analysis Fo Mini Ipo

Analysis fo mini ipo

Analysis fo mini ipo

Quick Take

Oriental Culture Holding (DFWH) has filed to raise gross proceeds of $10 million from a U.S.

IPO, according to an F-1 registration statement.

The firm operates as an e-commerce marketplace for collectibles and artwork focused on collectors, artists, art dealers in China.

DFWH is growing revenue and producing profits, but the U.S.

How to Evaluate an Initial Public Offering (IPO)

IPO market for Chinese firms is quite challenging due to generally poor post-IPO performance.

Company & Technology

Nanjing City, China-based Oriental Culture, conducting business as Jiangsu Yanggu Culture Development, was founded in 2018 to develop an e-commerce marketplace for collectors, artists and art dealers in China.

Management is headed by Director and CEO Yi Shao, who has extensive management and software development experience.

The firm consolidates the trading on its platforms that are owned by its subsidiaries in Hong Kong, namely China International Assets and Equity of Artworks Exchange Limited and HKDAEx Limited.

Additionally, Oriental Culture provides online and offline integrated marketing services as well as storage and technical maintenance solutions.

Customer Acquisition

The firm is marketing its products through participation in culture and art exhibitions and internet advertising, including search engine marketing and displaying advertisements on portal websites.

Additionally, the firm uses traditional offline channels to market its products, such as newspapers and magazines advertisements.

Selling and marketing expenses as a percentage of revenue have dropped sharply, per the table below:

Selling & Marketing

Expenses vs.

Revenue

Period

Percentage

Six Mos. Ended June 30, 2019

0.6%

2018

30.4%

Source: Company registration statement

The selling & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of selling & marketing spend, was 163.3x in the most recent six-month period, as shown in the table below:

Selling & Marketing

Efficiency Rate

Period

Multiple

Six Mos.

Ended June 30, 2019

163.3

2018

3.3

Source: Company registration statement

Market

According to a 2017 market research report by Art Basel and UBS, the global art market grew by 12% in 2017 after two consecutive declining years, in China growing by 14% to $13.2 billion.

The global market was dominated by the US and China and the UK, accounting for 42%, 21% and 20% of the total market share, respectively, or 83% of the global market.

The main factor driving forecast market growth is the growth in Chinese billionaires, which grew by nearly 25% to 637, compared with 537 billionaires in the US and 342 billionaires in the European Union.

Financial Performance

DFWH’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increasing gross profit and gross margin

  • Increased operating profit and operating margin

  • Growth in cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

Six Mos.

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Ended June 30, 2019

$ 7,851,515

2018

$ 5,352,700

Gross Profit (Loss)

Period

Gross Profit (Loss)

Six Mos. Ended June 30, 2019

$ 7,258,005

2018

$ 4,852,325

Gross Margin

Period

Gross Margin

Six Mos.

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Ended June 30, 2019

92.44%

2018

90.65%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2019

$ 6,296,778

80.2%

2018

$ 2,667,148

49.8%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

Six Mos.

Analysis fo mini ipo

Ended June 30, 2019

$ 6,190,994

2018

$ 2,534,876

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2019

$ 7,548,253

2018

$ 3,531,709

Source: Company registration statement

As of June 30, 2019, the company had $9.2 million in cash and $1.7 million in total liabilities.

(Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was $10.4 million.

IPO Details

DFWH has filed to raise $10 million in gross proceeds from an IPO of 2.5 million shares of its common stock at a midpoint price of $4.00 per share, not including customary underwriter options.

Most foreign firms sell their shares in the form of American Depositary Shares, ADSs, to reduce the administrative overhead for U.S. investors, so the lack of the element is a negative signal usually associated with tiny IPOs.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $87.6 million.

Per the firm’s latest filing, the firm plans to use the net proceeds from the IPO as follows:

We plan to use the net proceeds from this offering as follows: [i] $4 million to invest in information technology infrastructure and proprietary software; [ii] $3 million to develop new businesses, including our trading service business on our online platform under HKDAEx Limited; [iii] $0.7 million to promote our brand and service and for other general corporate purposes.

Management’s presentation of the company roadshow is not available.

The sole listed underwriter of the IPO is ViewTrade Securities.

Commentary

Oriental Culture is attempting to access U.S.

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capital markets investment at a challenging time for companies in general and an especially difficult period for Chinese firms.

Small IPOs are coming under increasing scrutiny from U.S. regulators, and investors have been disappointed in most Chinese IPO stock performance.

The company’s financials show revenue growth, profits and positive cash flow, but on a very small base.

The market opportunity for selling artworks online in China is significant, although I wonder at the firm’s ability to expand its marketing efforts with such a small IPO.

Like many Chinese firms seeking to tap U.S.

Analysis fo mini ipo

markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements.

Related Securities

Prospective investors in the IPO would need to factor in this important structural uncertainty.

It is difficult to become too enthusiastic about a small Chinese IPO in an unusual industry, despite the firm’s profitability and potential for growth.

I’ll be watching the IPO from the sidelines.

Expected IPO Pricing Date: To be announced.

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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions.

I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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