Quick Take
Loha (LOHA) has filed to raise $25.7 million from the sale of its Class A stock in a U.S. IPO.
The company sells healthy and fresh-oriented grocery and retail products for health-conscious customers in China.
LOHA is growing well in a market segment that is promising but the IPO appears too pricey.
Company & Technology
Shenzhen, China-based Loha was founded to develop a network of distribution partners and retail stores in China to sell premium healthy and fresh products to discerning Chinese consumers.
Management is headed by Chairman and CEO Yanyue Zhang, who has been with the firm since inception and was previously founder of Lohas Agricultural and Lohas Mobile IoT Trading Platform.
Loha currently has over 100 suppliers from 16 countries that provide it with products and the firm is ‘now actively pursuing the smart retail development of fresh products through our smart micro marts, which are intelligent vending machines that provide a unique shopping experience.’ The marts are located in high traffic areas in large cities.
The company’s primary offerings include:
Loha has received at least $9.5 million from investors including Lohas World (controlled by Chairman/CEO Zhang) and JW Investment Management.
Customer Acquisition
The company says that it manages its entire distribution channel, via its ‘Farm to Business to Consumer’ business model, removing the need for middlemen.It seeks to keep minimal inventory and requires pre-payments for orders.
Loha sells through three channels, wholesale, its smart micro marts, and via online group purchasing.
Group purchasing is via social media-organized buying groups that receive discounts via bulk purchases.
Selling expenses as a percentage of revenue have dropped as revenues have increased, as the figures below indicate:
|
Selling |
Expenses vs. Revenue |
|
Period |
Percentage |
|
FYE Sept. 30, 2019 |
2.3% |
|
FYE Sept. 30, 2018 |
3.1% |
Source: Company registration statement
The selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of selling spend, fell to a still impressive 8.4x in the most recent six-month period.
Market
According to a 2019 report by Think China, the market for health food in China is expected to reach RMB300 billion by 2021.
This growth would represent a 26.2% increase from 2017’s result of RMB237.6 billion.
The main drivers for this expected growth are growing demand for healthy products among older consumers in China and new e-commerce selling platforms aimed at younger demographics.
Management says its approach results in lower costs, greater inventory control and more visibility into the supply chain than other approaches.
Financial Performance
Loha’s recent financial results can be summarized as follows:
-
Growing topline revenue
-
Increasing gross profit but decreased gross margin
-
Lowered operating profit and margin
-
A swing to negative cash used in operations
Below are relevant financial metrics derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
FYE Sept. 30, 2019 |
$ 105,429,000 |
23.8% |
|
FYE Sept. 30, 2018 |
$ 85,186,000 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
FYE Sept. 30, 2019 |
$ 16,373,000 |
12.5% |
|
FYE Sept. 30, 2018 |
$ 14,559,000 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
FYE Sept. 30, 2019 |
15.53% |
|
|
FYE Sept. 30, 2018 |
17.09% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
FYE Sept. 30, 2019 |
$ 10,749,000 |
10.2% |
|
FYE Sept. 30, 2018 |
$ 10,239,000 |
12.0% |
|
Net Income (Loss) |
||
|
Period |
Net Income (Loss) |
|
|
FYE Sept. 30, 2019 |
$ 8,691,000 |
|
|
FYE Sept. 30, 2018 |
$ 8,781,000 |
|
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
FYE Sept. 30, 2019 |
$ (7,720,000) |
|
|
FYE Sept. 30, 2018 |
$ 287,000 |
Source: Company registration statement
As of September 30, 2019, Loha had $2.3 million in cash and $10.1 million in total liabilities.
Free cash flow during the twelve months ended September 30, 2019, worsened to a negative ($7.9 million).
IPO Details
LOHA intends to sell 4.3 million shares of Class A stock at a midpoint price of $6.00 per share for gross proceeds of approximately $25.7 million, not including the sale of customary underwriter options.
Class B shareholders will be entitled to five votes per share versus one vote 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 $358 million.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.26%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
approximately 20%, or $4.54 million, for enhancing and expanding our business
approximately 45%, or $10.22 million, for marketing and promotion of our products and branding
approximately 35%, or $7.95 million, for general corporate purposes
Management’s presentation of the company roadshow is not available.
Listed underwriters of the IPO are Maxim Group, Tiger Brokers, Valuable Capital and Prime Number Capital.
Commentary
LOHA is a growing specialty retailer in China that seeks U.S. public investment for its expansion plans.
The company’s financials show a firm growing revenue and gross profit with enviable operating margins and net profits.
Sales and marketing expenses have dropped as revenues have increased, a positive signal as to marketing efficiency.
However, the firm is using increasing cash flow in operations and margins are dropping.
The market opportunity for speciality retail and health food in China is forecast to grow strongly in the coming years, as discerning consumers seeks healthier alternatives to existing food and product options.
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.
As a comparable-based valuation, the firm is asking IPO investors for a roughly 3x valuation compared to a basket of U.S. publicly held speciality retail company valuations as compiled by the NYU Stern School.
While I’m impressed by the market potential in healthy foods and products within China, paying a 3x premium for that growth potential is a bit much for my taste.
Expected IPO Pricing Date: To be announced.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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