IPO Update: AgiiPlus Seeks $39 Million In US IPO (Pending:AGII)

JimmyFam

A Quick Take On AgiiPlus

AgiiPlus (AGII) has filed to raise $39 million in gross proceeds from the sale of its Class A common stock in an IPO, according to an amended registration statement.

The company provides co-working, leasing and design options for businesses and individuals in China.

Given the various external risks the firm faces, its lack of gross profit breakeven and continued high operating losses, I’m on Hold for the AGII IPO.

AgiiPlus Overview

Shanghai, China-based AgiiPlus was founded to utilize an asset-light model to lease flexible office/co-working facilities while providing enterprise software solutions as a bundled option.

Management is headed by founder, Chairman and CEO Dr. Jing Hu, who has been with the firm since inception in 2016 as Shanghai Distrii and was previously at Greenland Holdings, including as Executive Vice President and Chief Architect where he led 20 real estate development projects.

The company’s primary offerings include:

  • Workspace leasing – Distrii brand

  • Space design & construction – Spacii brand

  • Brokerage & enterprise services – Tangtang

As of June 30, 2022, AgiiPlus has booked fair market value investment of $58 million from investors including City Connected Communities Pte, J.distrii Global, China Lodging Holdings, King Inspiration, Junzi Holding and Ningbo Nayun.

AgiiPlus – Customer Acquisition

The firm markets its service offerings through its internal business development efforts and partner referrals.

The company had 60 locations in six cities within China and one location in Singapore, as of December 31, 2021.

Selling expenses as a percentage of total revenue have fallen to 9.5% as revenues have increased, as the figures below indicate:

selling

Expenses vs. Revenue

Period

Percentage

Six Moss. Ended June 30, 2022

9.5%

2021

10.3%

2020

10.3%

(Source – SEC)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, rose to 2.8x in the most recent reporting period.

selling

Efficiency Rate

Period

multiple

Six Moss. Ended June 30, 2022

2.8

2021

2.6

(Source – SEC)

AgiiPlus’ Market & Competition

According to a 2020 market research report by Ken Research, the market for flexible workspace in China was estimated to grow at a CAGR of 38.3% from 2018 to 2025.

However, the report was completed before the onset of the COVID-19 pandemic, which has negatively impacted the industry since its onset.

While the industry is making a comeback in regions not affected by recent lockdowns, future demand growth may come from not only expansion but also from consolidation through M&A along with a rise in revenue from additional services.

Major competitive or other industry participants include:

  • Regus

  • ucommune

  • Mydream+

  • Kr Space

  • Soho

  • Compass Offices

  • People2

  • Atlas

  • service office

  • The Executive Centre

  • Others

AgiiPlus Financial Performance

The company’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Reduced gross loss

  • Lowered Negative Gross Margin

  • High operating losses

  • Growing cash flow from operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Moss. Ended June 30, 2022

$38,356,000

36.7%

2021

$68,555,000

37.3%

2020

$49,935,340

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Moss. Ended June 30, 2022

$ (3,350,000)

-46.6%

2021

$(10,091,000)

-13.4%

2020

$ (11,652,480)

gross margin

Period

gross margin

Six Moss. Ended June 30, 2022

-8.73%

2021

-14.72%

2020

-23.34%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Moss. Ended June 30, 2022

$(19,390,000)

-50.6%

2021

$(43,779,000)

-63.9%

2020

$(32,928,000)

-65.9%

Net Income (Loss)

Period

Net Income (Loss)

Just Margin

Six Moss. Ended June 30, 2022

$(19,264,000)

-50.2%

2021

$(43,496,000)

-113.4%

2020

$(31,884,300)

-83.1%

Cash Flow From Operations

Period

Cash Flow From Operations

Six Moss. Ended June 30, 2022

$5,216,000

2021

$9,845,000

2020

$6,814,360

(glossary of terms)

As of June 30, 2022, AgiiPlus had $17.7 million in cash and $522.6 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was negative ($3.6 million).

AgiiPlus IPO Details

AGII intends to sell 8.7 million shares of Class A ordinary shares at a proposed midpoint price of $4.50 per share for gross proceeds of approximately $39.15 million, not including the sale of customary underwriter options.

Class A ordinary shareholders will be entitled to one vote per share and Class B shareholders will have 15 votes per share.

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

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

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $354 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 9.64%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

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

approximately 25% to 30%, or US$8.8 million to $10.6 million for enhancing our technology capability;

approximately 55% to 60%, or US$19.3 million to $21.2 million for business expansion, including organic growth of our geographic coverage, and mergers and acquisitions opportunities, although we have not identified any specific investments or acquisition opportunities at this time; and

approximately 10% to 20%, or US$3.5 million to $7.1 million for other operating purposes.

(Source – SEC)

Management’s presentation of the company roadshow is available here until the IPO is completed.

Regarding outstanding legal proceedings, management said the firm is currently ‘involved in an ongoing litigation with Zhonglian Runshi over a lease agreement.[…for] rental payment, liquidated damages and other types of expenses totaling approximately RMB24.30 million (US$3.81 million).’

The sole listed bookrunner of the IPO is US Tiger Securities.

Valuation Metrics For AgiiPlus

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]

Amount

Market Capitalization at IPO

$406,259,694

Enterprise Value

$353,577,694

Price / Sales

5.15

EV / Revenue

4.48

EV / EBITDA

-4.44

Earnings Per Share

-$0.87

Operating Margin

-101.07%

Just Margin

-100.73%

Float To Outstanding Shares Ratio

9.64%

Proposed IPO Midpoint Price per Share

$4.50

Net Free Cash Flow

-$3,566,720

Free Cash Flow Yield Per Share

-0.88%

CapEx Ratio

0.76

Revenue Growth Rate

36.67%

(Source – SEC)

Commentary About AgiiPlus

AGII is seeking US public capital market investment to fund its corporate growth initiatives and general working capital needs.

The company’s financials have produced increasing topline revenue, lowered gross loss, reduced negative gross margin, increasing operating losses and higher cash flow from operations.

Free cash flow for the twelve months ended June 30, 2022, was negative ($3.6 million).

Selling expenses as a percentage of total revenue fell to 9.5% as revenue has increased; its Selling efficiency multiple was 2.8x in the most recent reporting period.

The firm currently plans to pay no dividends and intends to retain any future earnings for reinvestment back into the firm’s growth and operating initiatives.

AGII’s trailing twelve-month CapEx Ratio indicates it has spent heavily on capital expenditures as a percentage of its operating cash flow.

The market opportunity for providing flexible office space and related services in China is large but undergoing significant turbulence due to ongoing lockdowns in regions affected by the COVID-19 virus and government policies.

Like other firms with Chinese operations seeking to tap US markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. US investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the US has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and US stock listings.

US Tiger Securities is the sole underwriter and there is no data on the firm’s IPO involvement over the last 12-month period.

The primary risk to the company’s outlook is the unpredictable Chinese regulatory environment as well as the potential for COVID-19 lockdowns from China’s zero-COVID policy.

As for valuation, management is asking investors to pay an EV/Revenue of approximately 4.5x while the company continues to produce negative gross profit and topline revenue growth is beginning to decelerate.

Given the various external risks the firm faces, its lack of gross profit breakeven and continued high operating losses, I’m on Hold for the AGII IPO.

Expected IPO Pricing Date: To be announced

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