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MingZhu Logistics Begins U.S. IPO Effort

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About: MingZhu Logistics Holdings (YGMZ)
by: Donovan Jones
Summary

MingZhu Logistics has filed to raise $11.5 million in a U.S. IPO.

The firm is a small trucking cargo and logistics firm in China.

YGMZ has rather stale financials and likely slim chances of going public in the U.S., given increased regulatory scrutiny of small Chinese IPOs.

Quick Take

MingZhu Logistics (YGMZ) has filed to raise gross proceeds of $11.5 million from a U.S. IPO, according to an F-1 registration statement.

The firm provides trucking-based cargo transportation services in China.

YGMZ is attempting to go public at a difficult time for small Chinese firms; I’ll provide a final opinion if we learn additional details from management.

Company & Technology

Shenzhen, China-based MingZhu was founded in 2002 to provide freight trucking services to companies in China.

Management is headed by Chairman and CEO Jinlong Yang, who has been with the firm since 2009 and was previously an officer at the Exit and Entry Frontier Inspection Stations in Shenzhen.

MingZhu provides primarily Dedicated Truckload Services to logistics companies, freight forwarders, and warehouse operators in mainland China through two terminals located in the Guangdong and Xinjiang regions and a fleet of 132 tractors and 90 trailers, wholly-owned.

Below is an overview graphic of the company’s corporate structure:

Source: Company registration statement

During the fiscal years 2017 and 2018, MingZhu had 36 and 40 customers, respectively, and the top five of its customers accounted for approximately 63.9% and 71.4% of the company’s total revenue, respectively.

Management claims that MingZhu Logistics has become the second-largest transportation service provider in the Guangdong region in China and is recognized and accredited by the China Federation of Logistics and Purchasing as a ‘3A-grade trucking service provider’.

Customer Acquisition

The firm markets its products primarily through a dedicated marketing team that is tasked with contacting customers to maintain good business relationships and expand the company’s network by soliciting new customers through referrals from existing ones.

Sales and marketing expenses as a percentage of revenue have been remarkably tiny and stable, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2018

0.2%

2017

0.2%

Source: Company registration statement

Average revenue per customer has risen by almost 21% in 2018 versus 2017, as the table shows below:

Average Revenue Per

Customer

Period

ARPC/U

Variance

2018

$691,170

20.7%

2017

$572,667

Market & Competition

According to a 2019 market research report by IBIS World, the China freight trucking industry is projected to reach $122 billion in 2019, a 5.2% increase year over year. This represents an annual growth rate of 7.3% between 2014 and 2019.

Road transportation services accounted for about 36.0% of total transportation volumes in terms of freight turnover volumes in ton-kilometers in 2016.

Major competitors that provide freight trucking services in China include:

  • SF Express Co. (SHE:002352)

  • Deppon Logistics Co. (SHA:603056)

  • HOAU Logistics Group

  • Shanghai CNEX Express Co.

  • Shanghai ANE Juchuang Supply Chain Management Co.

Source: Sentieo

Financial Performance

MingZhu’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increasing gross profit and gross margin

  • Increased operating profit and operating margin

  • Growth in cash flow from operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$ 27,646,789

34.1%

2017

$ 20,616,011

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2018

$ 5,247,723

37.7%

2017

$ 3,809,753

Gross Margin

Period

Gross Margin

2018

18.98%

2017

18.48%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2018

$ 4,034,766

14.6%

2017

$ 2,317,476

11.2%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

2018

$ 2,435,203

2017

$ 1,529,334

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$ 3,798,997

2017

$ 1,933,926

Source: Company registration statement

As of December 31, 2018, the company had $648,103 million in cash and $7.4 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended December 31, 2018, was $3.8 million.

IPO Details

MingZhu has filed to raise $11.5 million in gross proceeds from an IPO of its ordinary shares, not including customary underwriter options.

Typically, foreign firms offer U.S. investors shares in the form of ADS, American Depositary Shares, to reduce the administrative burden, so the absence of this feature is a signal that the firm doesn’t wish to provide this convenience to investors, and is generally a negative signal.

Per the firm’s latest filing, the firm plans to use the net proceeds from the IPO as follows:

Management’s presentation of the company roadshow is not available.

The sole listed underwriter of the IPO is ViewTrade.

Commentary

MingZhu is attempting to raise U.S. investment capital at a difficult time in the IPO market due to increased overall stock market volatility and growing market scrutiny of Chinese IPOs, especially those of smaller firms such as MingZhu.

The firm’s financials are only through the end of 2018 and do not show the effects in 2019 of China’s slowing domestic economy.

While the older financials reveal a company that has grown revenue, gross profit, and net results, I’m skeptical that this picture has been as positive since the end of 2018.

Sales and marketing expenses as a percentage of revenue are tiny, and the firm’s average revenue per customer grew markedly in 2018 versus 2017.

The market opportunity for over-the-road freight operations in China is uncertain, given the domestic economy’s challenging growth environment and continued trade frictions with the U.S. weighing on manufacturers.

MingZhu’s chances of successfully floating its shares on U.S. markets in the current environment are low, but if the firm produces more details about IPO pricing and valuation, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

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.