ANALYSIS: MingZhu Logistics Posts Positive Financial Results as It Prepares for IPO
MingZhu Logistics intends to raise $11.5 million in gross proceeds from a U.S. IPO. The firm is producing good financial results and IPO valuation will be important for investors to consider.
MingZhu Logistics Holdings Ltd. (YGMZ) has filed to raise gross proceeds of $11.5 million from a U.S. IPO, according to an F-1 registration statement.
The firm provides trucking-based cargo transportation services in China.
YGMZ is attempting to go public at a difficult time for small Chinese firms, though it has potential due to its solid financial results.
Company & Technology
Shenzhen, China-based MingZhu was founded in 2002 to provide freight trucking services to companies in China.
Management is headed by Chairman and CEO Jinlong Yang, who has been with the firm since 2009 and was previously an officer at the Exit and Entry Frontier Inspection Stations in Shenzhen.
MingZhu provides primarily Dedicated Truckload Services to logistics companies, freight forwarders and warehouse operators in mainland China through two terminals located in the Guangdong and Xinjiang regions and a fleet of 132 tractors and 90 trailers, wholly-owned.
Below is an overview graphic of the company's corporate structure:
(Source: Company registration statement)
During the fiscal years 2017 and 2018, MingZhu had 36 and 40 customers, respectively, and the top five of its customers accounted for approximately 63.9% and 71.4% of the company's total revenue, respectively.
Management claims that MingZhu Logistics has become the second-largest transportation service provider in the Guangdong region in China and is recognized and accredited by the China Federation of Logistics and Purchasing as a ‘3A-grade trucking service provider'.
Customer Acquisition & Market
The firm markets its products primarily through a dedicated marketing team that is tasked with contacting customers to maintain good business relationships and expand the company's network by soliciting new customers through referrals from existing ones.
Sales and marketing expenses as a percentage of revenue have been remarkably tiny and stable.
Average revenue per customer has risen by almost 21% in 2018 versus 2017.
According to a 2019 market research report by IBIS World, the China freight trucking industry is projected to reach $122 billion in 2019, a 5.2% increase year-over-year.
This represents an annual growth rate of 7.3% between 2014 and 2019.
Road transportation services accounted for about 36% of total transportation volumes in terms of freight turnover volumes in ton-kilometers in 2016.
Major competitors that provide freight trucking services in China include:
SF Express Co.
Deppon Logistics Co.
HOAU Logistics Group
Shanghai CNEX Express Co.
Shanghai ANE Juchuang Supply Chain Management Co.
Financial Performance & IPO Details
MingZhu'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
As of December 31, 2018, the company had $648,103 million in cash and $7.4 million in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended Dec. 31, 2018, was $3.8 million.
MingZhu has filed to raise $11.5 million in gross proceeds from an IPO of its ordinary shares, not including customary underwriter options.
Typically, foreign firms offer U.S. investors shares in the form of ADS, American depositary shares, to reduce the administrative burden, so the absence of this feature is a signal that the firm doesn't wish to provide this convenience to investors, and is generally a negative signal.
Per the firm's latest filing, the firm plans to use the net proceeds from the IPO as follows:
Management's presentation of the company roadshow is not available.
The sole listed underwriter of the IPO is ViewTrade.
MingZhu is attempting to raise U.S. investment capital at a difficult time in the IPO market due to increased overall stock market volatility and growing market scrutiny of Chinese IPOs, especially those of smaller firms such as MingZhu.
The firm's financials are only through the end of 2018 and do not show the effects in 2019 of China's slowing domestic economy.
While the older financials reveal a company that has grown revenue, gross profit and net results, I'm skeptical that this picture has been as positive since the end of 2018.
Sales and marketing expenses as a percentage of revenue are tiny and the firm's average revenue per customer grew markedly in 2018 versus 2017.
The market opportunity for over-the-road freight operations in China is uncertain given the domestic economy's challenging growth environment and continued trade frictions with the U.S. weighing on manufacturers.
MingZhu's prospect of successfully floating its shares on U.S. markets in the current environment may be difficult, but the IPO's pricing and valuation assumptions will be critical to determining its desirability as a potential investment.
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