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ANALYSIS: Asia Times U.S. IPO Is Richly Valued

Asia Times has filed for a small, "best efforts" U.S. IPO. The tiny firm is profitable and growing, but the IPO is pricey.

Donovan Jones
    Feb 24, 2019 5:10 AM  PT
ANALYSIS: Asia Times U.S. IPO Is Richly Valued

Quick Take

Asia Times Holdings Ltd. (Nasdaq: ATIF) has filed to raise gross proceeds of up to $20 million from a "best efforts" U.S. IPO, per an F-1/A registration statement.

The firm provides financial consulting services to companies in China seeking to list their company stock on public exchanges.

ATIF is a profitable but very small firm. Management has placed a high valuation on the IPO requiring perfect execution to justify its high price.

Company & Technology

Shenzhen-based Asia Times was founded in 2015 to provide small- and medium-sized enterprises in China financial consulting services to enable them to go public on OTC markets and exchanges in the U.S., mainland China, and Hong Kong exchanges through its variable interest entity Qianhai Asia Times International Financial Services.

Management is led by President, CEO and Chairman Qiuli Wang, who has been with the firm since 2018 and was previously CEO at Shenzhen Haorong Guarantee.

In August 2018, Asia Times launched a financial consulting service in Shenzhen named AT Consulting Center and in September 2018, the company acquired CNNM, a China-based outlet providing financial news and information.

The firm plans to expand its offerings to other Asian countries by the year 2020, including Malaysia, Vietnam, and Singapore.

Client Acquisition

ATIF says it has built long-term relationships with local government, academic institutions, and local business associations to drive client acquisition.

The company markets its services through sales and marketing campaigns and existing customer referrals as well as through online social media channels such as WeChat or Weibo.

Sales and marketing expenses as a percentage of revenue have been dropping as revenues have increased, per the table below:

    

Selling Expenses

Expenses vs. Revenue

Period

Percentage

FYE July 31, 2018

33 %

FYE July 31, 2017

63 %

(Sources: Company registration statement, IPO Edge)

Market

According to a 2017 market research report by Consultancy Asia, the China management consulting market grew from about $3.5 billion in 2013 to $4.5 billion in 2016, posting a 12 percent year-over-year growth.

The China management consulting market was projected to grow to $5.4 billion in 2017 as can be seen in the chart below:

Primary factors expected to drive management consulting market growth are the adoption of digital technologies, economic growth, and favorable regulation.

ATIF operates in the financial consulting services sector which accounted for nearly one-third of the overall China total management consulting market.

China's consulting market grew at the fastest rate of 12 percent in 2016 and has room to grow further, as the following graphic highlights:

(Source: Consultancy Asia)


Management believes that Asia Times offers a full suite of services that cover all stages of a company's process of going public and that differentiates it from its competitors who outsource a majority of the work to third-party service providers.

Financial Performance

ATIF's recent financial results can be summarized as follows:

  • Increasing topline revenue from a small base

  • Positive operating profit

  • Growing operating margin

  • Increasing EBITDA

  • Increased cash flow from operations

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


Total Revenue



Period

Total Revenue

Percent Variance vs. Prior

FYE July 31, 2018

$ 5,307,891

46.0 %

FYE July 31, 2017

$ 3,635,371





Operating Profit (Loss)



Period

Operating Profit (Loss)

Percent Variance vs. Prior

FYE July 31, 2018

$ 2,727,679

194.9 %

FYE July 31, 2017

$ 925,065





Operating Margin



Period

Operating Margin


FYE July 31, 2018

51.4 percent


FYE July 31, 2017

25.4 percent





EBITDA



Period

EBITDA


FYE July 31, 2018

$ 2,663,699


FYE July 31, 2017

$ 857,985





Cash Flow From Operations



Period

Cash Flow From Operations


FYE July 31, 2018

$ 2,036,439


FYE July 31, 2017

$ 153,718


(Sources: Company registration statement, IPO Edge)


As of July 31, 2018, the company had $72,965 in cash and $1.7 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended July 31, 2018, was $2.0 million.

IPO Details

ATIF has filed to raise up to $20.0 million in gross proceeds from a ‘best efforts' IPO of its common stock, excluding customary underwriter options.

The firm will try to sell between 2 million and 5 million shares at a price of $4.00 per share and the transaction will not occur unless a minimum of 2 million shares have been sold.

It is unusual that management has chosen not to provide for the sale to U.S.-based investors of ADSs, which is typical for a foreign registered firm going public on U.S. markets.

At IPO, the company's enterprise value would approximate $220 million.

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

(Source: Registration statement)

The sole listed underwriter of the IPO is Boustead Securities.

Below is a table of relevant capitalization and valuation metrics for the firm:

Measure [TTM]

Amount

Market Capitalization at IPO

$220,000,000

Enterprise Value

$219,927,035

Price / Sales

24.60

EV / Revenue

24.59

EV / EBITDA

62.45

Earnings Per Share

$0.05

Total Debt To Equity

0.86

Float To Outstanding Shares Ratio

9.09 %

Proposed IPO Midpoint Price per Share

$4.00

Net Free Cash Flow

$2,148,427


(Sources: Company registration statement, IPO Edge)

Commentary

ATIF is a small consulting firm that wants to access U.S. capital to expand its business of helping Chinese companies list on various capital markets.

Management has expanded its original focus from U.S. markets to mainland China and Hong Kong.

ATIF's financials show topline revenue growth, profits, and positive cash flow, which are all to the good. Selling expenses have dropped as revenues have increased.

Going forward, the market opportunity for consulting with Chinese companies to go public in the U.S. is unknown. IPO markets tend to be sporadic and highly sensitive to overall market volatility, leading me to question the consistency of its revenue-generation model over time.

Boustead is the sole underwriter for the IPO. There is no data on the firm for the past 12 months and Boustead is not a significant player in the U.S. IPO space.

It is likely ATIF selected the firm as few other firms will handle small, "best efforts" IPOs and Boustead appears to be developing a niche by seeking to underwrite Chinese firms to U.S. markets.

Like many Chinese firms wanting to tap U.S. markets, the firm operates within a VIE, or Variable Interest Entity, structure. 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. Prospective U.S. investors in the IPO would need to factor in this important structural uncertainty.

As to valuation, management is asking IPO investors to pay an EV / Revenue multiple of nearly 25x for modest topline revenue growth in absolute terms.

While the firm is profitable, its scale is small, the IPO has several non-standard aspects, is quite highly valued, and has only a 9 percent share float, which makes it susceptible to high volatility.

If the IPO occurs, I expect to sit it out and watch the stock price action in the open market. Perhaps a lower entry point will present itself post-IPO.

Expected IPO Pricing Date: To be announced.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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