Jowell Global Ltd. (JWEL) aims to raise $26 million in an IPO of its common stock, according to an F-1 registration statement.

Shanghai, China-based Jowell was founded to develop a membership-based online platform to sell products directly to consumers as well as facilitate third parties to operate their own online stores.

Management is headed by Chairman and CEO Mr. Zhiwei Xu, who has been with the firm since 2019 and has served at Chairman of Jiangsu Longrich Group and Shanghai Juhao Information Technology Co, a subsidiary of the company.

The company’s primary offerings include:

  • Online Direct Sales
  • Authorized Retail Store Distribution
  • Third-party Merchants
  • Live streaming marketing

Jowell has received at least $4.2 million from investors.

The company pursues customers via online search optimization and marketing efforts.

In addition, the firm advertises via outdoor media and cooperative advertising arrangements with some of its vendors.

Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Marketing spend, was an extremely high 62.7x in the most recent reporting period.

According to a 2020 market research report by Tenba Group, the Chinese e-commerce market was an estimated $1.94 trillion in 2019.

This represents a forecast That amount represents a 27% year over year growth rate and 25% of the country's total retail sales volume.

The report estimates growth in e-commerce in China in 2020 as a result of the Covid-19 pandemic and a shift in consumer behavior toward more online purchasing.

Also, mobile commerce generates the strong majority of e-commerce sales, with 80% of e-commerce activity coming from smartphones. The global average is 64%, per the report.

Major competitive or other industry participants include:

  • Jumei
  • Lefeng
  • Suning.com
  • Alibaba (BABA)
  • Amazon China (AMZN)
  • JD.Com (JD)
  • Vipshop Holdings
  • E-Commerce China Dangdang
  • Other online portals

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

  • Growing topline revenue, although at a decelerating rate
  • Increasing gross profit and uneven gross margin
  • Growing operating but lower operating margin
  • A swing to positive cash flow from operations

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

jowellpl

Source: Company registration statement

As of June 30, 2020, Jowell had $7.5 million in cash and $5.8 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $6.8 million.

Jowell intends to raise $26 million in gross proceeds from an IPO of its common stock, selling 3.7 million shares at a proposed midpoint price of $7.00 per share.

It is common for overseas firms to offer shares to U.S. investors in the form of American Depositary Shares, or ADSs, as a way to reduce administrative burden, so the absence of this typical feature is notable.

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

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $166.5 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 14.94%.

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

Approximately $5,000,000 to upgrade our online platform and its infrastructure construction with new technologies, especially artificial intelligence, big data, and cloud-based solutions;

Approximately $8,000,000 to expand our sales channel, network, number of LHH Stores and to increase the number of product categories on our platform; and

Approximately $5,000,000 to make potential acquisition of emerging technology platforms, although we currently do not have specific acquisition target; and

The remaining balance for general corporate purposes, which may include working capital requirements.

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

Listed bookrunners of the IPO are Network 1 Financial Securities.

Commentary

Jowell is seeking U.S. public market capital for its growth plans within China.

The company’s financials show continued revenue growth, albeit at a decelerating rate of growth so far in 2020.

Marketing expenses as a percentage of total revenue have dropped as revenues have increased; its Marketing efficiency rate has increased markedly to a very high 62.7x.

The market opportunity for e-commerce transactions in China is enormous, but it is also dominated by large firms that enjoy significant economies of scale and drawing power for retailers.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm’s operational results.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Network 1 Financial Securities is the sole underwriter and the only IPO led by the firm over the last 12-month period has generated a return of negative (54.5%) since its IPO. This is a bottom-tier performance for all major underwriters during the period.

It is unclear to me how Jowell differentiates itself against the major online players in any meaningful way.

Their number one priority appears to be developing its retail store network to sell more cosmetics and other beauty products through that channel.

As to valuation, compared to a basket of Retail (Special Lines) publicly held companies in the U.S. aggregated by the NYU Stern School in January 2020, Jowell is asking investors to pay an Enterprise Value / Revenue multiple of 2.27 versus the basket multiple of 1.19x, a premium of nearly two times.

For a company that is essentially focusing on a retail strategy but with topline revenue growth decelerating markedly, I can’t justify that valuation.

So, while the firm is growing revenue and producing slight earnings and positive operating cash flow, my opinion on the IPO is NEUTRAL.

NEUTRAL

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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