IPO Preview: Car House Holding Files For $37 Million U.S. IPO

IPOStreet

Car House Holding (CARH) intends to raise $37 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm operates as a B2B and B2C automotive accessories marketplace for merchants in China.

CARH has grown revenue but has been negatively affected by the pandemic and I’m not convinced the company has any meaningful differentiation in a fragmented or otherwise gated marketplace.

Dongguan, China-based Car House was founded to facilitate the sale of automotive accessories as well as sell its own-sourced products of auto perfume and air fresheners.

Management is led by Chairman and CEO Mr. Haitao Jiang, who has been with the firm since July 2004 and was previously General Manager of the Dongguan Gele Electronics Co.

The company has a sales and investment partnership with Autobacs, a supplier of automotive oil products.

Car House has received at least $8.6 million as of June 30, 2019 from investors including Ocean Wave, Autobacs, GAT Power, Lotus Ray Holding and IFresh International.

The company acquires customers primarily through word of mouth and referrals.

CARH intends to seek relationships with social media outlets in China in order to enhance its marketing reach.

According to a 2019 market research report by ResearchAndMarkets, the Chinese market for automotive aftermarket parts was valued at approximately $290 billion in 2017 and is expected to reach nearly $524 billion in 2025.

This represents a forecast CAGR of 7.7% from 2018 to 2025.

The main drivers for this expected growth are the growth of vehicles in operation in China from 185 million to over 400 million as well as a change to the two-child policy and rising discretionary incomes.

The Covid19 pandemic will have a dampening effect on this growth potential, at least for 2020.

There are more than 100 independent automotive supply platforms in China, so the market is highly fragmented.

Management says its platform is the largest of the independent systems, although major Internet firms (Alibaba, Tencent, Baidu) no doubt enable consumers to purchase automotive accessories through their proprietary systems.

Car House’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Uneven gross profit and gross margin
  • Variable operating profit and operating margin
  • A swing to positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

carhousepl

Source: Company registration statement

As of December 31, 2019, Car House had $7.2 million in cash and $14.6 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2019, was $605,628

Car House intends to raise $37 million in gross proceeds from an IPO of its ordinary shares, although the final amount may differ.

It is typical for foreign firms seeking to sell shares in the U.S. to offer them in the form of ADSs to reduce the administrative burden. The absence of this element is a negative signal to prospective investors.

Management says it will use the net proceeds from the IPO for enhancing data analysis and operational capacity of its e-commerce platform, for marketing and promotion of our brand and products, for upgrading its manufacturing facility and equipment, and for general administration and working capital.

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

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Commentary

Car House is seeking funding to increase its system capacity.

Management says its Q1 2020 sales has declined by 14.2%. It responded by adding a disinfecting version of its in-car products and sold a significant number of these units.

The company’s financials are only through December 31, 2019 and do not include detailed figures for the six months ended through that date, so are missing some information.

The market opportunity for selling automotive products online in China would appear to be large but fragmented or otherwise gated by the major Internet companies which largely control distribution.

However, I’m not certain what inherent advantages Car House has over other market participants in what is likely an intensely price-competitive business.

Network 1 Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (45.3%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

When we learn more details about the IPO’s pricing and valuation, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 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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