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A Quick Take On WANG & LEE GROUP
WANG & LEE GROUP (WLGS) has filed to raise $16 million in an IPO of its ordinary shares, according to an F-1 registration statement.
The firm provides electrical and mechanical design and construction services in Hong Kong.
Given its high valuation expectations, future uncertainties and flat revenue trajectory, I’m on Hold for the IPO, although day traders interested in the low nominal price of the stock may seek its likely volatility in early trading.
WANG & LEE GROUP Overview
Hong Kong, China-based WANG & LEE was founded to provide electrical contracting work and expanded to include mechanical construction services to businesses and individuals in Hong Kong, China.
Management is headed by Chairman and CEO Pui Lung Ho, who has been with the firm since 2000 and previously obtained a master’s degree of science in Engineering Management.
The company’s primary offerings include:
-
Electrical
-
Mechanical
-
Prime and subcontractor services
WANG & LEE has booked fair market value investment of $2.7 million in equity and debt as of December 31, 2021 from investors including WANG & LEE BROTHERS (Chairman and CEO Pui Lung HO).
WANG & LEE – Client Acquisition
The company seeks customers from small startup companies to large firms located in Hong Kong.
All of the firm’s projects were in the private sector, and management says its average bid/win rate was 28 – 43%.
General & Administrative expenses as a percentage of total revenue have risen as revenues have increased slightly, as the figures below indicate:
|
General & Administrative |
Expenses vs. Revenue |
|
Period |
Percentage |
|
2021 |
29.5% |
|
2020 |
14.5% |
(Source – SEC)
The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, was 0x in the most recent reporting period. (Source)
WANG & LEE’s Market & Competition
According to a 2022 market research report by GlobalData, the market for construction in Hong Kong was an estimated $31.5 billion in 2021 and is forecast to reach $34.8 billion by 2026.
This represents a forecast CAGR of over 2% from 2023 to 2026.
The main drivers for this expected growth are a return to slight growth despite the negative effect of the COVID-19 pandemic.
Also, the government has announced a number of infrastructure-related initiatives designed to improve Hong Kong’s linkages to mainland China.
The firm faces significant competition as the market for M&E construction services is fragmented among large, medium and smaller sized entities.
WANG & LEE GROUP Financial Performance
The company’s recent financial results can be summarized as follows:
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Slightly growing top line revenue
-
Increasing gross profit and gross margin
-
A swing to operating loss
-
Increased cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
2021 |
$4,135,059 |
1.5% |
|
2020 |
$4,074,258 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
2021 |
$859,760 |
16.9% |
|
2020 |
$735,165 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
2021 |
20.79% |
|
|
2020 |
18.04% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
2021 |
$(360,859) |
-8.7% |
|
2020 |
$142,626 |
3.5% |
|
Net Income (Loss) |
||
|
Period |
Net Income (Loss) |
Net Margin |
|
2021 |
$354,743 |
8.6% |
|
2020 |
$278,018 |
6.7% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
2021 |
$(482,801) |
|
|
2020 |
$(74,380) |
|
(Source – SEC)
As of December 31, 2021, WANG & LEE had $537,738 in cash and $3.5 million in total liabilities.
Free cash flow during the twelve months ended December 31, 2021, was negative ($482,801).
WANG & LEE GROUP IPO Details
WANG & LEE intends to raise $16 million in gross proceeds from an IPO of its ordinary shares, offering 4 million shares at a proposed price of $4.00 per share.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $50.5 million, excluding the effects of underwriter over-allotment options.
The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 25%. A figure under 10% is generally considered a ‘low float’ stock, which can be subject to significant price volatility.
Management says it will use the net proceeds from the IPO as follows:
38% to be used for general working capital;
7% to be used for development of maintenance services and setting up a new workshop, which is a work area for testing and integrating a MVAC system with a building management system (“BMS”) control panel. This testing and integration require special brand new machinery such as a drilling machine, welding machine and measurement instruments to be purchased from suppliers and not any affiliates of the Company. Additionally the Company plans to use part of the proceeds to furnish the workshop and hire a specialist in MVAC BMS. The Company intends to purchase an entire 3,000 sq. ft. level in a factory building at its current location and furnished it for this workshop;
11% to be used for development of Extra Low Voltage (“ELV”) business;
25% to be used for development of Cloud Building Management System for energy saving
24% to be used for purchases of properties
(Source – SEC)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management says neither the firm nor its subsidiaries are a party to any pending legal proceedings.
The sole listed bookrunner of the IPO is Boustead Securities.
Valuation Metrics For WANG & LEE
Below is a table of relevant capitalization and valuation figures for the company:
|
Measure [TTM] |
Amount |
|
Market Capitalization at IPO |
$64,000,000 |
|
Enterprise Value |
$50,542,823 |
|
Price / Sales |
15.48 |
|
EV / Revenue |
12.22 |
|
EV / EBITDA |
-140.06 |
|
Earnings Per Share |
$0.02 |
|
Operating Margin |
-8.73% |
|
Net Margin |
8.58% |
|
Float To Outstanding Shares Ratio |
25.00% |
|
Proposed IPO Midpoint Price per Share |
$4.00 |
|
Net Free Cash Flow |
-$482,801 |
|
Free Cash Flow Yield Per Share |
-0.75% |
|
Debt / EBITDA Multiple |
-2.09 |
|
Revenue Growth Rate |
1.49% |
(Source – SEC)
Commentary About WANG & LEE’s IPO
WLGS is seeking U.S. public investment capital for its general corporate cash needs and for development of ancillary projects.
The company’s financials have produced slowly growing topline revenue, higher gross profit and gross margin, a swing to operating loss and growing cash used in operations.
Free cash flow for the twelve months ended December 31, 2021, was negative ($482,801).
General & Administrative expenses as a percentage of total revenue have risen as revenue has essentially flat lines; its General & Administrative efficiency multiple was 0.0x in the most recent year.
The firm currently plans to pay no dividends, and any future dividends will be dependent upon receipt of funds from its BVI subsidiary and its Hong Kong subsidiary.
The market opportunity for providing M&E construction services to companies and projects in Hong Kong is large and expected to grow at a moderate rate over the coming years, largely as a result of the uncertainties from the COVID pandemic.
However, should the pandemic’s effects wane, construction projects may increase in velocity, potentially giving the firm a boost in the coming years.
Boustead Securities is the sole underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of 10.7% since their IPO. This is an upper-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is a continuation of lockdown policies in the greater Hong Kong region.
Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. 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 U.S. 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 U.S. stock listings.
As to valuation, management is asking IPO investors to pay an EV/Revenue multiple of around 12.2x, which is quite high for a construction services company that isn’t growing.
Given its high valuation expectations, future uncertainties and flat revenue trajectory, I’m on Hold for the IPO, although day traders interested in the low nominal price of the stock may seek its likely volatility in early trading.
Expected IPO Pricing Date: To be announced.
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