IPO Launch: UTime Seeks $17 Million U.S. IPO

IPOStreet

UTime (UTME) intends to raise $17 million in an IPO of its common stock, per an amended registration statement.

The company is a manufacturer of lower cost mobile phones and related accessories for brands and for its own in-house sales efforts.

UTME has produced contracting revenue in an intensely competitive industry. The firm’s financials are stale and my opinion on the IPO is to AVOID it.

AVOID

Shenzhen, China-based UTime was founded to provide a range of design, development, production and sales of lower cost mobile phones, accessories and related electronic products for sale to emerging markets and the entry level within developed markets.

The company is also developing its own branded product offerings through its UTime and Do brands.

Management is led by Chairman and CEO Mr. Minfei Bao, who has been with the firm since 2008 and was previously general manager of United Creation Technology, Ltd., a mobile phone manufacturer.

The company’s primary offerings include:

  • Original Electronics Manufacturing
  • Original Design Manufacturing
  • Printed Circuit Board Assembly

The company is majority owned and controlled by Chairman Bao, who owns 96.95% of company stock pre-IPO.

The firm sells primarily as an OEM/ODM contract manufacturer to brands that are active in emerging markets

UTME has relationships with companies such as TCL Communication Technology, Haier Electronics and Quality One Wireless.

Selling expenses as a percentage of total revenue have been uneven as revenues have decreased.

The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was negative (9.0) in the most recent reporting period.

According to a 2019 market research report by IBISWorld, the market for mobile phone manufacturing in China was expected to reach $232 billion in 2019.

This represented an annual average growth rate of 5.0% from 2014 to 2019 and a 3.2% growth in 2019.

Although the industry has grown rapidly from 2013 forward as a result of the popularity of the 4G mobile phone standard, growth has slowed more recently as the market has attained saturation.Although phone manufacturers are optimistic about the prospects for 5G rollouts, a transition to that standard will likely occur over several years.

Major competitive vendors include:

  • Wentai
  • XiaoMi
  • Samsung Electronics
  • Shenzhen Transsion Holding

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

  • Contracting topline revenue
  • Dropping but positive gross profit
  • Uneven gross margin
  • Variable negative operating
  • Uneven cash flow or use in operations

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

utimepl
Source: UTime F-1/A Filing

UTME intends to sell 3.75 million shares of common stock at a midpoint price of $4.50 per share for gross proceeds of approximately $16.875 million, not including the sale of customary underwriter options.

Foreign firms typically sell ADSs rather than common stock to U.S. investors to minimize the administrative burden, so the lack of this feature is a negative signal.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $37.8 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 45.36%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

utmeproceeds
Source: UTime F-1/A Filing

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

The sole listed underwriter of the IPO is ViewTrade Securities.

Commentary

UTime is seeking U.S. public capital investment for its expansion initiatives to the U.S. and elsewhere.

The firm’s financials show a recent sharp drop in revenue and a swing to cash used in operations.

Its selling efficiency rate has also swung to negative territory.

Notably, the firm has not provided updated financials, so we have no visibility into more recent activity, especially important since the Covid19 pandemic began well after the end of the firm’s financial information.

The market opportunity for low end phones is growing only moderately as the industry is experiencing market saturation and therefore intense competition on price.

ViewTrade Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (67.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

On the legal side, 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.

Management is asking IPO investors to invest in a firm with contracting revenue, increasing net losses and stale financial information.

My opinion on the IPO is to AVOID it.

AVOID

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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