Based in Hong Kong, China, Loyalty Alliance Enterprise (LAEC) scheduled a $75 million IPO with a market capitalization of $195 at a price range mid-point of $15 for Thursday, August 11, 2011. The full IPO calendar for the week of August 8 includes 12 scheduled IPOs trying to raise almost $2 billion.
OBSERVATIONS -- "China’s Stocks Decline to 6-Week Low on Manufacturing Slowdown, Inflation." (link)
SUMMARY -- LAEC is a leading provider of data-driven multi-channel direct marketing and customer loyalty solutions in the mobile telecommunications sector. LAEC relies on two customers China Unicom and China Telecom.
Revenue increased 62% to $6 million, gross profit increased to $4.2 million, or from to 70% from 47% and profits climbed to $1.5 million from a loss of $900,000. LAEC’s auditors have identified a material weakness in its accounting systems.
VALUATION -- The jump in gross profit is not fully explained in the S-1 filing. In addition, US-based companies wanting to IPO are reporting results for the June 2011 quarter. LAEC has not yet reported results for the June quarter, which raises questions about its financial and control systems.
CONCLUSION -- In the economic climate and with stock market uncertainty, it seems prudent not to chase Chinese IPOs, especially ones that have question marks.
MATERIAL ACCOUNTING WEAKNESS -- In connection with the audit of the consolidated financial statements for the period from January 1, 2008 to December 31, 2010, LAEC and its independent registered public accounting firm identified material weaknesses and other deficiencies in LAEC's internal control over financial reporting.
LAEC plans plan to take measures to improve its internal control over financial reporting to remediate the material weaknesses identified including: hiring two additional accounting personnel with extensive experience in U.S. GAAP and SEC reporting requirements prior to the fourth quarter of 2011.
RISK -- As LAEC acquires new clients, it will continue to face risks related to ownership and use of a portion of the customer data in its database that that is acquires through LAEC’s relationships with China Unicom and China Telecom.
LAEC relies on China Unicom to provide call lists for direct marketing activities as well as lists of merchants for the customer loyalty programs LAEC develops, implements and manages on behalf of both China Unicom and China Telecom.
Certain agreements with these clients restrict LAEC’s ability to disclose or use this customer data in providing services to other clients. In particular, certain other agreements specify that China Unicom owns all information, content and data related to customer loyalty programs we develop on its behalf.
If China Unicom or China Telecom challenges LAEC’s use of such information, LAEC could be precluded from further using portions of its customer database to provide services to other clients.
EXECUTIVE OVERLAP -- Three of LAEC’s executive officers, Abraham Jou, Frederick Sum and Deborah Wang, serve in similar capacities with PayEase.
During 2010, as between PayEase and LAEC, LAEC estimates that its chairman of the board and president and chief executive officer spent between 30% and 40% of their time, and LAEC’s chief financial officer and general counsel, and executive vice president, technology and development spent between 50% and 60% of their time, respectively, on matters related to LAEC’s business.
HEADCOUNT DECLNES -- LAEC had 920, 871 and 701 employees as of December 31, 2008, 2009 and 2010, respectively. In addition, LAEC had 975, 677 and 604 independent contractors as of December 31, 2008, 2009 and 2010, respectively, all of whom were providing direct marketing services.
The decrease in direct marketing services cost of revenues is due to a reduction in sales commissions and labor costs. These reductions are a result of reduced headcount stemming from lower 2G sales and reduced commissions as 2G commission fees are higher than for 3G sales.
USE OF PROCEEDS -- LAEC expects to net $67 million, allocated as follows:
- $35 million for geographic expansion, including through acquisitions;
- $10 million to develop new technologies and products; and
- The balance for general corporate purposes, including working capital needs.