Quhuo Limited (QH) intends to raise $27 million in an IPO of ADSs representing underlying Class A shares, according to an amended registration statement.

The company hires and manages personnel for on-demand companies in China.

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Beijing, China-based Quhuo was founded to provide staffing services to fast-growing companies in on-demand sectors within China.

Management is led by founder, Chairman and CEO Mr. Leslie Yu, who has been with the firm since and was previously general manager of SHanghai Origin Myway International Logistics and a senior business manager at DHL Supply Chain [China] Co.

Below is a brief overview video of China's delivery industry by a video funded by the Chinese government:

Source: CGTN

Quhuo’s partners or major customers include:

The company’s primary offerings include:

  • Food delivery
  • Ride hailing
  • Housekeeping
  • Bike sharing

Quhuo has received at least $148.1 million from investors including Quhuo Holdings, Baidu Online (BIDU), SBCVC, and ClearVue YummyExpress.

The firm obtains customers via a direct sales force that seeks relationships with large and medium sized firms.

QH has a nationwide footprint in 73 cities among 26 provinces including top tier provinces and lower-tier cities.For the three months ended December 31, 2019, the company had more than 40,800 on-demand, active workers.

G&A expenses as a percentage of total revenue have been dropping as revenues have increased.

According to a 2020 market research report, the global market for employment services is expected to reach over $659 billion by the year 2025.

China is expected to grow at '5% over the next couple of years and add approximately US$47.4 billion in terms of addressable opportunity.'

The main drivers for this expected growth are a steady shift towards a 'gig economy,' continued demand increase by consumers in an increasingly urban environment as populations shift from rural to urban centers, and increased digitization.

Management says the industry remains highly fragmented within each industry vertical and existing service suppliers have limited operational experience or smaller geographical coverage.

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

  • Sharply growing topline revenue
  • Increased gross profit but lower gross margin
  • Operating losses and operating margin approaching breakeven
  • Uneven but positive cash flow from operations

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

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Source: Company registration statement

As of December 31, 2019, Quhuo had $26.3 million in cash and $70.3 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was negative ($17,000).

QH intends to sell 2.7 million ADSs representing Class A shares at a midpoint price of $10.00 per share for gross proceeds of approximately $27.0 million, not including the sale of customary underwriter options.

An existing shareholder has indicated an interest to purchase shares of up to $2 million of the IPO.

Class A stockholders will be entitled to one vote per share and Class B shares will receive 15 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $509.6 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 5.26%. This is a very low float deal at IPO, so the stock may be subject to significant volatility in open market trading.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds ‘ for expanding our business in multiple industry settings, including ride-hailing, housekeeping and other services;...for upgrading our technology infrastructure;...for marketing and brand promotions; ...for funding potential strategic acquisitions, investments and alliances, although we do not presently have specific plans and are not currently engaged in any discussions or negotiations with respect to any such transaction; and the remaining balance for working capital and other general corporate purposes.’

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

Listed underwriters of the IPO are Roth Capital Partners, Valuable Capital Limited and Tiger Brokers.

Commentary

Quhuo is seeking a small U.S. IPO with two of the three underwriters being prominent in Chinese IPO share placements.

The firm’s financials show that it is growing revenue quickly and approaching operating breakeven.

However, we don’t have financial figures from after December 31, 2019, so we don’t know how the firm has performed since the outbreak of the Covid19 pandemic.

General & Administrative expenses as a percentage of total revenue have dropped as revenues have increased.

The market opportunity for on-demand services has increased sharply in China and the market is expected to grow in the coming years as China’s economy transitions to a more ‘gig economy’ structure in some respects.

Roth Capital Partners is the lead left underwriter and there is no data on IPOs led by the firm over the last 12-month period.

As a comparable-based valuation, the NYU Stern School lists a basket of publicly held Business & Consumer Services companies with an EV/Sales multiple of 2.39x in January 2020 compared to Quhuo’s proposed EV/Revenue of 1.73x.

So, from a multiple standpoint and given QH’s revenue growth trajectory and other metrics, the IPO appears reasonably valued.

However, the firm’s results during the Covid19 pandemic have been negatively affected. For example, for Q1 2020, management said:

the average monthly number of delivery orders fulfilled through our on-demand food delivery solutions was approximately 16.9 million in the first quarter of 2020, representing a decrease by approximately 42% compared to approximately 29.2 million in the previous quarter, albeit an increase by approximately 22% compared to approximately 13.9 million in the first quarter of the previous year.

Also, as to the financial impacts:

Our revenues increased by 12.6% from RMB348.7 million in the three months ended March 31, 2019 to RMB392.6 million (US$56.4 million) in the three months ended March 31, 2020, primarily due to the increase in revenues generated from our on-demand food delivery solutions as a result of our continued market penetration and expansion, partially offset by the impacts of the recent COVID-19 pandemic on our revenues.

So, revenues grew by a much lower 12.6% in Q1 2020 than the previous full year’s 36.2% as Quhuo was forced to alter its business operations materially.

Given the uncertainties associated with the Covid19 pandemic on its operations in the short term, my opinion on the IPO is NEUTRAL.

Expected IPO Pricing Date: July, 2020.

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 incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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