ANALYSIS: Molecular Data Seeks $69 Million U.S. IPO
MKD has grown quickly but its growth rate is decelerating. It operates in a large market to fuel its future growth prospects.
Molecular Data (MKD) has filed to raise $69 million in an IPO of its ADSs representing underlying Class A shares, according to an F-1 registration statement.
The firm operates an online marketplace for the chemicals industry in China.
MKD has grown quickly in a very large market but hasn't shown a path to profitability and its growth rate is decelerating.
Company & Technology
Shanghai, China-based MKD was founded to develop an online marketplace to enable chemical industry market participants to list, buy, sell and arrange for transportation and warehousing of industrial chemicals.
Management is headed by Founder and Chairman Dr. Dongliang Chang, who has extensive industry experience and previously published over 30 articles, has received 11 patents and obtained his biology doctorate from the Swiss Federal Institute of Technology in 2004.
The firm provides a range of e-commerce capabilities from within its website and service, as shown in the graphic below:
MKD has received at least approximately $75 million from investors including Cool Emotion International, Trustbridge, Max Smart, Greatest Investments, Vangoo, Sinovation Ventures and TR Grand Fund.
The company provides its services through its marketplace as well as through a direct sales model where it acquires chemicals and resells them on its marketplace.
For its financial solutions, the firm partners with banks and non-bank providers to provide financing options for users.
The group has also developed warehousing and logistics solutions and service provider relationships in order to facilitate buyer and seller transactions on its platform.
Sales and marketing expenses as a percentage of revenue have been dropping as revenues have increased.
The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, dropped to a still very high 33.1x in the most recent nine-month period.
Market & Competition
According to a 2019 report by McKinsey & Company, the market for chemicals in China reach $1.5 trillion in 2017, representing almost 40% of the worldwide chemical industry.
However, the Chinese chemical market has slowed and is projected to be below China's GDP growth levels for the foreseeable future, as the chart below shows:
The main drivers for this expected growth are an industrial policy, Made in China 2025, that is serving to prioritize high-tech industries such as aerospace, electronics, electric vehicles and batteries as well as increased consumer demand for specialty chemical products.
Management says its business model is unique and that its offerings cover the entire value chain in the chemical industry.
However, the firm has direct competitors, such as www.1688.com and others as well as chemical retail firms and traditional chemical distribution companies.
Financial Performance & IPO Details
MKD's recent financial results can be summarized as follows:
Increasing topline revenue, but at a decelerating rate of growth
Growing gross profit, also decelerating; reduced gross margin
Fluctuating operating losses
Uneven cash use in operations
As of September 30, 2019, MKD had $10.6 million in cash and $76.3 million in total liabilities.
Free cash flow during the twelve months ended September 30, 2019, was a negative ($15.8 million).
MKD intends to raise $69 million in gross proceeds from an IPO of its ADSs representing underlying Class A shares, although the final amount may differ.
Class A shareholders will be entitled to one vote per share and the company founder, who will be the sole Class B shareholder, will be entitled to ten votes per share.
The S&P 500 Index no longer admits firms with multiple share classes into its index.
Parent firm MOLBASE will retain a controlling interest after the IPO.
Management says it will use the net proceeds from the IPO as follows:
- approximately 35%, to invest in logistics and warehousing capabilities;
- approximately 20%, to enhance our technology and retain qualified personnel;
- approximately 30%, to make strategic acquisition and cross-border investment; and
- the remaining amount for general corporate purposes, including general marketing and administrative purposes.
Management's presentation of the company roadshow is not available.
Listed bookrunners of the IPO are AMTD, Fosun Hani, and Boustead Securities.
MKD is seeking U.S. investment to continue its expansion plan within the extremely large Chinese chemicals industry.
The company's financials indicate the firm has grown its gross merchandise volume quickly in recent periods, but that growth is decelerating significantly.
Sales and marketing expenses have dropped as revenues have increased, a good sign; its sales and marketing efficiency rate has dropped but remains at a very high level.
The market opportunity for bringing the large chemical trading market online is undoubtedly very large, so MKD has a significant addressable market.
AMTD is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 1.4% since their IPO. This is a mid-tier performance for all major underwriters during the period.
Like many Chinese firms seeking to tap U.S. 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. Prospective investors in the IPO would need to factor in this important structural uncertainty.
MKD has produced fluctuating losses and cash burn from operations, so is not yet showing a clear path to profitability, which is important to note.
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