ANALYSIS: Dragon Jade International Seeks IPO Amid Chilly U.S. Market Environment
Dragon Jade International has filed for a $10 million U.S. IPO, although recent U.S. market volatility may negatively impact the firm's prospects as will increased exchange scrutiny of small Chinese IPOs.
Dragon Jade International (DGJI) has filed to raise gross proceeds of $10 million from a U.S. IPO, according to an F1/A registration statement.
The firm has two lines of business - one that produces and distributes Chinese health supplements as well as one that engages in wine distribution.
DGJI is a small company with significant losses and is seeking U.S. investment at a time of greater exchange scrutiny of small Chinese companies.
Company & Business
Hong Kong-based Dragon Jade was founded in 2008 to market health supplements "without any limitation or restriction as to customer size, industry or business."
Management is headed by CEO and Director Yat Man Lai, who has been with the firm since 2012 and was previously founder of the United Asia Medical Network Company, where he serves as a Chairman.
Dragon Jade operates by and through Alpha Ultimate [AU] and United Asia Medical Network Company [UAM], the latter of which has a business network across Asia, including in Hong Kong, mainland China, Taiwan, Japan, Korea, Singapore, Malaysia and Thailand.
UAM believes that through combined use of traditional Chinese medicine and modern western medicine in treatment as well as experience in market experience, it is able to provide helpful nutritional products and medical services to consumers.
The company also has a professional medical team that provides medical consultation, advice on new drugs and a global hospital referral service in China in order to assist clients in overcoming geographical and language barriers by providing a visa application service and medical record translation service.
Management says that due to the need for up-to-date cancer therapeutics, Chinese patients with cancer are willing to look for cross-border solutions for their health problems.
In 2019, Dragon Jade began distributing wine products to hotels, private clubs and restaurants across the Hong Kong and Macau SARs, with about 500 active private customers and 1,500 active on-trade and off-trade customers across different verticals, including food and beverage, private membership clubs, hotels, wedding banquet organizers, supermarkets and retail wine shops.
Management claims that it has introduced "many" exclusive wine brands to the Chinese markets and plans to continue doing so.
According to a 2019 market research report by Reports and Data, the global dietary supplements market was valued at $124.8 billion in 2018 and is projected to reach $210.3 billion by 2026, growing at a CAGR of 6.4% between 2019 and 2026.
The main factors driving forecasted market growth are the developing economies and consequent increase in income of consumers, increasing awareness about the importance of nutrition, increasingly hectic lifestyles, a growing geriatric population, as well as an increase in incidence of chronic illnesses.
Other factors include the massive impact of mass media communications and advertising in the pharmaceutical and retail sectors, as well as the rise in e-commerce sales.
The Asia Pacific region is expected to grow at the highest CAGR of 9.2% during the period due to the rise in disposable incomes of individuals in developing nations, such as China and India.
Financial Performance & IPO Details
DGJI's recent financial results can be summarized as follows:
Growth in topline revenue from a tiny base
Increasing gross profit but decreasing gross margin
Reduced operating losses and negative operating margin
Lowered cash used in operations
As of March 31, 2019, the company had $483,377 in cash and $1.3 million in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended March 31, 2019, was a negative ($4.7 million).
DGJI intends to raise $10 million in gross proceeds from an IPO of its ordinary shares.
For foreign domiciled firms, it is typical to sell U.S. investors American depositary shares, or ADSs, so the absence of this feature is a questionable signal.
Per the firm's latest filing, it plans to use the net proceeds from the IPO for R&D and promotion, regulatory compliance, advertising, marketing, and working capital.
DGJI is attempting to go public in the U.S. at a difficult time for Chinese firms seeking investor capital.
Small firms are especially challenged when seeking public investor capital in the U.S. as exchanges are placing them under increasing scrutiny.
The firm's financials show a company that has grown revenue sharply in percentage terms but from a tiny base.
Additionally, DGJI is generating high losses as it is still very early in its stage of development.
Selling, G&A expenses as a percentage of total revenue are extremely high but have dropped as revenue has risen.
The market opportunity for diet supplements is large, especially in China, but the firm faces significant competition from entrenched companies who have existing relationships with distribution partners.
DGJI may have a difficult road ahead in obtaining public investment from U.S. investors given a volatile overall stock market and continued trade tensions between the U.S. and China.
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