IPO Preview: Jiuzi Holdings Seeks $29 Million U.S. IPO

IPOStreet

Jiuzi Holdings (JZXN) intends to raise $28.75 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm has developed a mostly franchised car dealer network in China for primarily electric and hybrid transportation vehicles.

JZXN suffered sharply reduced revenue in the most recent period due to Covid-19 pandemic franchisee store closings.

Hangzhou, China-based Jiuzi was founded to create a network of car dealerships in third and fourth tier cities in China.

The firm primarily sells new energy vehicles through a franchising business model and stores are typically sized in the range of 5,000 to 12,000 square feet.

Jiuzi currently has one corporate owned store and 18 franchise operated locations in China.

Management is headed by Chairman and CEO Mr. Shuibo Zhang, who was previously Chairman of Shandong Ruixing New Energy Vehicles Company.

Below is a brief overview video of China's electric vehicle market:

Source: Bloomberg Markets and Finance

The company sources vehicles through over twenty manufacturers, such as BYD, Geely and Chery, and various battery manufacturers.

In addition, Jiuzi has relationships with capital partners to provide financing options for franchisees to their car buyers.

Jiuzi has received at least $700,000 from investors including Jiuzi is 79.5% owned by Chairman Zhang.

The company obtains franchise operators through its outreach efforts, with the initial franchise fee is $575,500, payable over time and ongoing royalties are 10% of net income.

The firm is also developing an online platform to provide a 'multi-dimensional service platform and one-stop experience covering online vehicle selection and purchase and off-line vehicle delivery and maintenance.'

Selling and Marketing expenses as a percentage of total revenue have been increasing from a tiny base as revenues have increased.

The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing spend, turned sharply negative in the most recent reporting period as revenue dropped.

According to a 2019 market research report by IBISWorld, the market for car dealers in China grew at an annualized rate of 1.2% from 2014 to 2019, reaching $462.8 billion in total estimated annual value.

In the near term, the industry hopes to recover from the ill effects of the Covid-19 pandemic and lower tier Chinese cities are expected to rebound due to a greater distribution of wealth among consumers.

Downward price pressures are expected to continue due to import tariff reductions and ongoing efficiency gains.

The relatively high level of air pollution in areas of China along with favorable government policies is expected to push consumers toward new energy vehicles.

Major competitive or other industry participants include:

  • China Grand Automobile Service
  • Dalian Zhongsheng Group
  • Lei SHing Hong Group
  • Sinomach Automobile
  • Pang Da Automobile Trade
  • Heng Xin De Long Industry
  • Shanghai Yongda Group
  • Yuantong Mechanical & Electrical Equipment
  • China ZhengTong Auto Services

Jiuzi’s recent financial results can be summarized as follows:

  • Sharply contracting topline revenue
  • Reduced gross profit and gross margin
  • A swing to operating loss and negative operating margin
  • Reduced cash used in operations

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

jiuzipl

Source: Company registration statement

As of April 30, 2020, Jiuzi had $105,342 in cash and $2.5 million in total liabilities.

Free cash flow during the twelve months ended April 30, 2020, was negative ($142,423).

Jiuzi intends to raise $28.75 million in gross proceeds from an IPO of its ordinary shares, although the final amount may differ.

Normally, foreign firms offer their shares in the form of American Depositary Shares, or ADSs, in order to reduce administrative burden on U.S. shareholders, so the absence of this common consideration is a negative.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

approximately 15% -20% of the net proceeds will be used for marketing and "Jiuzi" brand image enhancing; we will use a portion of proceeds to expand our market scale and strengthen Jiuzi brand recognition, including developing first/second-tier city show rooms and distribution centers, and hosting Jiuzi life club events;

approximately 40% - 50% of the net proceeds will be used for new franchisee stores launching in third/fourth/fifth-tier cities, as well as to support and provide training to existing franchisees, and expand vehicle procurement and inventory;

approximately 20% - 30% of the net proceeds will be used for developing online technology platform, including apps, which will allow our vehicle buyers to browse among different NEVs and place orders online; and

the remainder proceeds will be used for general working capital purpose.

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

The sole listed bookrunner of the IPO is Boustead Securities.

Commentary

Jiuzi is seeking U.S. public investment to fund its expansion plans within China.

I find it perplexing that the company needs 40% - 50% of the proceeds ‘for new franchisee stores launching in third/fourth/fifth-tier cities,’ when the whole point of the franchise model is to have the franchise put up the capital for their store.

The company’s financials show sharply contracting revenue in the most recent reporting period, due to many franchisees closing their locations resulting in no sales and therefore no profit sharing flow through to Jiuzi.

Selling and Marketing expenses as a percentage of total revenue are tiny; its Selling and Marketing efficiency rate swung sharply into negative territory as a result of the drop in total revenue due to Covid-19 pandemic closures.

The market opportunity for selling new energy vehicles in China is large and expected to grow, however the market has proven uneven due to changing government incentive policies for electric vehicles.

I believe only the well capitalized dealer networks will be able to successfully navigate the uncertainties ahead, in terms of government policy changes and the effects of the Covid-19 pandemic on retail operations.

Boustead Securities is the sole underwriter and the firm has not led an IPO over the last 12-month period.

When we learn more about the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(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. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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