ANALYSIS: Fangdd Network Readies U.S. IPO Amid Challenging Market

Fangdd Network has filed proposed terms for its $98 million U.S. IPO, but faces a choppy IPO market due to overall stock market volatility and concerns about post-IPO returns.

Donovan Jones
    Oct 29, 2019 7:05 PM  PT
ANALYSIS: Fangdd Network Readies U.S. IPO Amid Challenging Market
author: Donovan Jones   

Short Take

Fangdd Network Group (DUO) has filed to raise $98 million in an IPO of its ADSs, per an amended F-1/A registration statement.

The company has developed an online real estate marketplace for consumers and industry professionals in China.

DUO has grown impressively, is generating profits, is cash flow positive and the IPO appears reasonably valued, but the firm faces many external uncertainties.

Company & Technology

Shenzhen, China-based Fangdd was founded in 2011 to improve the workflow of real estate agents through an online-to-offline (O2O) real estate platform that enables brokers to add their listings.

Management is headed by co-founder, director, CEO and chairman Yi Duan, who graduated from the China Europe Business School prior to co-founding Fangdd.

Below is an overview graphic of the company's business model, which seeks to provide a range of value-add services to agents, agencies, and other real estate service providers:

(Source: Company registration statement)

Management claims that Fangdd operates China's largest online real estate marketplace as measured by the number of registered agents, or over 911,000 of the 2 million total estimated agents in the country as of the end of 2018, according to a Frost & Sullivan report commissioned by the firm.

Investors in Fangdd included FountainVest Partners, Vision Knight Capital, CDH Investments, Lightspeed China Partners, Descend Capital, and Jason Zeng, according to Crunchbase.

Customer/User Acquisition

Fangdd has a sales team that is responsible for engaging with real estate agents and marketing its products and services as well as providing experience in the internet, real estate and finance industries.

As of the end of June 2016, per the company registration statement, the firm employed 1,655 employees, among which 474 were software and product development personnel and 933 were sales and marketing personnel spread across 24 cities and headquarters in 17 cities.

Sales and marketing expenses as a percentage of revenue have been low and uneven.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was an extremely high 20.5x in the most recent six-month period.

Market

According to a 2019 market research report by IBIS World, the real estate agent market in China reached a total revenue of $32 billion in 2019, growing at an annual growth rate of 5.2% between 2014 and 2019.

The main factors driving forecast market growth are the large population of the country, the accelerating urbanization process, rising household disposable income as well as continued economic growth.

Major firms that operate in the Chinese real estate market include:

  • Beijing Homelink Real Estate Co.

  • Centaline [China] Property Consultants

  • E-House [China] Holdings (HKG:2048)

  • Shenzhen World Union Properties Consultancy Co. (SHE:002285)

(Source: Sentieo)

Financial Performance and IPO Details

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

  • Sharp and accelerating growth in topline revenue and gross profit

  • Fluctuating gross margin

  • Increasing operating profit and operating margin

  • Positive but uneven cash flow from operations

As of June 30, 2019, the company had $113.8 million in cash and $336.2 million in total liabilities. (Unaudited, interim)

Free cash flow during the 12 months ended June 30, 2019, was $2.8 million.

DUO intends to sell 7 million ADSs representing 175 million Class A ordinary shares at a midpoint price of $14 per ADS for gross proceeds of approximately $98 million, not including the sale of customary underwriter options.

Class A shareholders will be entitled to one vote per share and Class B shareholders, which are senior management, will be entitled to ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO would approximate $1.18 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 11.7%.

Per the firm's most recent regulatory filing, the firm plans to use the net proceeds as follows:

 - approximately 40% of the net proceeds to enhance its research and product development capabilities and invest in technology;

 - approximately 20% of the net proceeds to invest in sales, marketing and branding; and

 - the rest of the net proceeds for working capital and general corporate purposes, including funding potential investments and acquisitions of complementary businesses, assets and technologies.

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

Listed underwriters of the IPO are Morgan Stanley, Citigroup, UBS, CICC, and AMTD

Commentary

DUO is seeking U.S. public capital at a challenging time for the U.S. IPO market and Chinese companies in particular.

Many Chinese firms have performed poorly post-IPO, for a variety of reasons, both internal to their operations as well as beyond their control.

DUO's financials show a firm that is growing topline revenue and gross profit impressively and has produced comprehensive income and positive cash flow from operations in the most recent period.

Sales and marketing efficiency is quite high, as one would expect from a marketplace operator.

The market opportunity for transforming real estate deals to an online marketplace in China is quite large, as citizens there are increasingly comfortable using the internet for a wide variety of e-commerce.

As to valuation, compared to U.S.-based Redfin, the DUO IPO appears reasonably valued given the firm's higher growth rate and profits, uneven as they are.

The track record for Chinese companies going public in the U.S. has been somewhat negative in recent years, largely due to reasons beyond their control such as U.S.-China trade tensions and local regulatory actions against firms.

If Fangdd can continue to grow as a prominent online real estate marketplace, perhaps it can turn around a growing perception problem among U.S. investors in Chinese firms.

(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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