IPO Launch: Yalla Group Targets $149 Million U.S. IPO
Yalla Group Limited (YALA) intends to raise $149 million in an IPO of its American Depositary Shares [ADSs] representing underlying Class A shares, according to an F-1 registration statement.
Dubai, United Arab Emirates-based Yalla was founded to develop an online community service focused on the Middle East and North Africa [MENA] region that is built on voice communication rather than just written texting.
Management is headed by founder, Chairman and CEO Mr. Tao Yang, who was previously manager of ZICT Technology Co and vice president of Beijing Feinno Communication Technology.
The company’s primary offerings include:
- Voice Chat
- Social Network
- Online Games
- Gift Exchange
Yalla has received at least $26.9 million from investors including YooYoo Limited, Orchid Asia, WindBell Limited, and SIG Global China Fund.
The firm provides its app through major mobile platform operators such as Apple and Google.
Management believes there is a 'significant imbalance between the supply of, and demand for, online social networking and entertainment options in MENA.'
The desire for persons in the Arab world to interact online is further exacerbated by the 'relatively limited offline social networking and entertainment options in MENA as a result of local cultures and customs. Leisurely social gatherings among family members and friends are the main traditional social networking and entertainment activities in this region. By bringing such offline social interactions online, social networking and entertainment applications have made it easier for users to continue their social networking and entertainment activities anywhere and anytime.'
Selling and Marketing expenses as a percentage of total revenue have been dropping 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, rose substantially to 4.7x in the most recent reporting period.
According to a 2019 market research report by Wamda, Crowd Analyzer, along with Hootsuite and APCO Worldwide, issued a report that analyzed over 172 million social media interactions and concluded that MENA social media users are 'becoming more active and engaged online where conversations are taking place about brands, business and services alongside fashion, politics and religion.'
User bases have shown growth on nearly every social media platform and that growth has been driven primarily by Generation X persons.
Notably, Saudi Arabia registered a social media penetration rate of 75%; in Egypt, users were interested in a 'much broader variety of topics, including politics, religion, sports and social development.'
Major competitive or other industry participants include:
- Facebook (FB)
- Tik Tok
- Twitter (TWTR)
- Snapchat (SNAP)
- Other social media enabled services
Yalla’s recent financial results can be summarized as follows:
- Sharp growth in topline revenue, at an accelerating rate
- Strong increase in gross profit, uneven gross margin within a tight range
- Substantial increase in operating profit and net income
- Strong growth in cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Source: Company registration statement
As of June 30, 2020, Yalla had $58.6 million in cash and $14.1 million in total liabilities.
Free cash flow during the twelve months ended June 30, 2020, was $37 million.
Yalla intends to raise $149 million in gross proceeds from an IPO of 18.6 million American Depositary Shares [ADSs] representing underlying Class A shares, at a proposed midpoint price of $8.00.
Class A ADS holders will be entitled to one vote per share and the Class B shareholder, the company founder, will receive 20 votes per share.
The S&P 500 Index no longer admits firms with multiple classes of shares into its index.
An existing shareholder has indicated an interest to purchase ADSs of up to $30 million in the aggregate at the IPO price. This is a bullish signal as to the IPO and its pricing.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $1.1 billion, 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 12.65%.
Management says it will use the net proceeds from the IPO as follows:
approximately 30% to 40% for new product development;
approximately 25% to 30% for marketing activities to promote our brand and increase our user base;
approximately 20% to 25% for technology infrastructure to enhance user experience and operational efficiency; and
the balance for general corporate purposes, including working capital needs and potential acquisitions (although we are not currently negotiating any such acquisitions).
Management’s presentation of the company roadshow is not available.
Listed bookrunners of the IPO are Morgan Stanley, Haitong International and Tiger Brokers.
Yalla is seeking U.S. public capital for its growth and expansion plans within the MENA region and beyond.
With the company’s voice-based networking features available in more than 100 countries, management has ambitious plans to both deepen its penetration within the MENA region as well as taking advantage of prudent opportunities in other countries.
The firm’s financials show strong growth, net profits and cash flow - very impressive metric performance across all major metrics.
Selling and Marketing expenses as a percentage of total revenue have been dropping; its Selling and Marketing efficiency rate has increased markedly in the most recent reporting period.
The market opportunity for operating a dominant social network in the uniquely defined MENA region is significant and has the potential for substantial growth in the years ahead.
Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 41.6% since their IPO. This is a top-tier performance for all major underwriters during the period.
As to valuation, compared to Twitter (admittedly, a different type of social network), the YALA IPO is valued at higher multiples.
Given the firm’s revenue growth rate, net profits and strong cash flow, including free cash flow, a higher multiple than Twitter appears justified.
YALA has performed well and is operating in a region where social networking is growing quickly.
My opinion on the IPO is a BUY at up to $8.00 per share.
Expected IPO Pricing Date: September 29, 2020.
(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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