Based in the Cayman Islands with executive offices in Hong Kong, Loyalty Alliance Enterprise (LAEC) scheduled a $66 million IPO. LAEC's IPO at the price range mid-point of $13 per ADR (1 ADR represents 12 ordinary shares) would have a market capitalization of $195 million. It's scheduled for Friday, May 11, 2012. [S-1]
LAEC is one of 12 IPOs scheduled for the week of May 7 (Full IPO calendar here).
Manager, Joint Managers: Macquarie Capital; Needham.
SUMMARY
LAEC is a multi-channel direct marketing and customer loyalty solutions company in the mobile telecommunications sector.
LAEC tried to IPO about in July, 2011 at a 33 times P/E, it's now trying again at a 23 P/E of trailing earnings.
NEGATIVE
At the top of the S-1 the investment bankers say the CEO is based in Hong Kong, which is true. But the entity that is going public is based in the Cayman Island.
Note: "Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands." S-1, page 6 Also see organization chart here.
The above appears to be purposeful obfuscation, and is reason enough to pass on the LAEC IPO.
It appears the China Telecom had an in-house unit that is competing with LAEC, so it seems reasonable that the major customer China Unicom might also be preparing to compete directly with LAEC.
RECOMMENDATION
In view of actual and potential competition from China Telecom and China Unicom, IPOdesktop's recommendation is to pass on the LAEC IPO.
BUSINESS
LAEC is a leading provider of data-driven multi-channel direct marketing and customer loyalty solutions in the mobile telecommunications sector in the high-growth China market in terms of the breadth and depth of the services offered, according to a market research report by CCID Consulting that LAEC sponsored.
CUSTOMER CONCENTRATION & REVENUE SEGMENTS
LAEC currently provides services mainly to China Unicom and China Telecom, although LAEC's customer is broadening.
Net revenues from China Unicom represented of 81% of total net revenues in 2009, 73% of total net revenues in 2010 and 40% of total net revenues in 2011. Net revenues from China Telecom represented an aggregate of 2.5% of total net revenues in 2009, 3.9% of total net revenues in 2010 and 0.8% of total net revenues in 2011 (see 'competition' below).
LAEC's direct marketing services constituted 81%, 83% and 80% of total net revenues in 2009, 2010 and 2011, respectively. Direct marketing services consist of customer acquisition, customer retention and marketing and promotion consulting services.
LAEC's predictive data analytics services represented 7% of total net revenues in 2010 and 15% of total net revenue in 2011.
MARKET
Despite the significant growth in the number of mobile phone subscribers, China still has a relatively low mobile phone penetration rate of 73% by the end of November 2011, according to the release by Ministry of Industry and Information Technology of the PRC, or "MIIT" in December 2011, when compared to other developed economies such as the United States, where the mobile phone penetration rate is 102.4% according to the release by CTIA-The Wireless Association in 2011,
According to MIIT, as of the end of November 2011, 3G mobile subscribers accounted for just 12.2% of the total mobile subscriber base in China, with 118.7 million subscribers.
INTELLECTUAL PROPERTY
As of December 31, 2011, LAEC had nine registered trademarks and seven pending trademark applications in the PRC, and 13 registered trademarks and 10 pending trademark applications in other countries in Asia.
COMPETITION
Direct Marketing and Predictive Data Analytics Services
LAEC generally competes with Chinese World Information Industry and a variety of niche providers in directing marketing and predictive data analytics services.
In addition, LAEC competes against internally developed offerings created by existing clients such as China Telecom Best Tone's internal team.
Customer Loyalty Services
LAEC competes with other promotional and loyalty programs offered by Beijing COIAS Technology Co., Ltd. and a number of smaller competitors, both traditional and on-line.
LAEC also competes against clients' internal customer loyalty operations, such as China Telecom's Best Tone internal team.
EMPLOYEES
LAEC had 871, 701 and 504 employees as of December 31, 2009, 2010 and 2011, respectively. So for some reason LAEC is consistently reducing its headcount, not exactly a sign of growth.
USE OF PROCEEDS
LAEC expects to net $60.4 million from its IPO. IPO proceeds are allocated as follows:
. $30 million for geographic expansion, including through acquisitions;
. $5 million to develop new technologies and products;
. $11.5 million to repay debt
. the balance for general corporate purposes, including working capital needs.
Disclaimer: This LAEC IPO report is based on a reading and analysis of LAEC's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
