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Meili Auto Holdings Begins U.S. IPO Process

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About: Meili Auto Holdings (ML)
by: Donovan Jones
Donovan Jones
IPOs, tech, alternative investments, CEO VentureDeal.com
Summary

Meili Auto Holdings has filed to raise capital in U.S. markets.

The firm operates an online marketplace to facilitate financing of used car purchases in China.

ML has grown revenue and gross profit, but that growth is softening.

Net results have improved markedly, so I await management's pricing and valuation assumptions for the IPO.

Quick Take

Meili Auto Holdings (ML) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an F-1 registration statement.

The firm is focused on facilitating loans from financial institutions to prime borrowers in used car transactions.

ML has grown revenue and gross profit, but at a decelerating rate. The firm’s net results are improving.

Company And Technology

Beijing, China-based Meili Auto has developed an online marketplace that facilitates loans from financial institutions to prime borrowers purchasing used cars.

Management is headed by CEO Allen Chonglun Gu, who has been with the firm since 2017 and was previously founder and CEO of Chongzhi Network Technology (Beijing) Co.

Meili has facilitated 233,291 and 128,793 used car financing transactions in 2018 and in H1 2019, respectively, the latter of which represents a total transaction value of RMB7.9 billion and a year-over-year increase of 43.1%.

Management says that based on the number of used car financing transactions in 2018, it is among the top three used car financing companies in China.

Additionally, Meili is one of the first independent used car financing providers with a financial leasing license in China, which enables the company to pre-finance car purchases before proceeds from loans granted by its funding partners are disbursed to the car buyers.

Meili has access to China’s credit reference center and incorporates 43 external sources of personal, behavior, social network and location data into its risk assessment models that rely on data mining, knowledge graph and machine learning.

Customer Acquisition

As of June 30, 2019, the firm markets its products through an offline salesforce of 4,000 personnel that covers about 75,000 dealers across over 300 cities, accounting for 30 of all 31 provinces in mainland China.

Sales personnel are tasked with establishing relationships with car dealers and helping potential buyers with their application processes.

Sales and marketing expenses as a percentage of revenue have been uneven but trending downward, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

To June 30, 2019

29.8%

2018

34.2%

2017

55.6%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, was 0.9x in the most recent six-month period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

To June 30, 2019

0.9

2018

1.4

Source: Company registration statement

The average revenue per transaction has increased but the rate of growth has decelerated, as shown in the table below:

Average Revenue Per

Transaction

Period

ARPT

Variance

To June 30, 2019

$1,113

7.7%

2018

$1,034

42.7%

2017

$725

Market

According to a 2019 market research report by Research and Markets, the auto financing market has grown by 2.6% year-over-year, reaching RMB1.2 trillion in 2018.

Used car financing penetration was 8% in 2016, 10% in 2017 and 13% in 2018, and is projected to grow to 25% by 2023.

Penetration of auto financing in general across China has grown to 40% in 2017, with estimates projecting a further increase to 58% by 2023.

The main factors driving forecast market growth are due to favorable government policies such as the “Guidance for Strengthening Financial Support for New Consumer Fields” and a change in consumer spending habits.

Management says the firm has shortened the time from application submission to credit decision down to 10 minutes and is capable of pre-financing car purchases before loan proceeds are distributed by the buyer.

Financial Performance

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

  • Strong growth in top line revenue, but at a decelerating rate

  • Increasing gross profit and gross margin, but also decelerating

  • Growth in operating profit and operating margin

  • A strong increase 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

To June 30, 2019

$ 143,400,000

37.4%

2018

$ 241,276,000

89.3%

2017

$ 127,452,794

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

To June 30, 2019

$ 109,903,000

42.2%

2018

$ 183,489,000

89.6%

2017

$ 96,783,824

Gross Margin

Period

Gross Margin

To June 30, 2019

76.64%

2018

76.05%

2017

75.94%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To June 30, 2019

$ 35,451,000

24.7%

2018

$ 45,409,000

18.8%

2017

$ (54,775,882)

-43.0%

Net Income (Loss)

Period

Net Income (Loss)

To June 30, 2019

$ 33,790,000

2018

$ 46,390,000

2017

$ (52,721,029)

Cash Flow From Operations

Period

Cash Flow From Operations

To June 30, 2019

$ 79,538,000

2018

$ 61,685,735

2017

$ 5,398,529

Source: Company registration statement

As of June 30, 2019, the company had $184 million in cash and $566 million in total liabilities (unaudited, interim).

Free cash flow during the twelve months ended June 30, 2019, was $118.2 million.

IPO Details

ML has filed to raise $100 million in gross proceeds from an IPO of its ADSs representing underlying Class A shares. The final amount of the IPO may differ.

Class A shareholders will be entitled to one vote per share, and Class B shareholders, a company equity incentive trust, will be entitled to thirty votes per share and conversion rights. The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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

for expansion of loan facilitation services, including satisfying the related working capital needs;

for investment in research and development on information technology and risk management; and

for general corporate purposes.

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

Listed underwriters of the IPO are UBS Investment Bank, Deutsche Bank Securities, Nomura, CICC, Needham & Company, and Tiger Brokers.

Commentary

Meili is a fast-growing marketplace that is attempting to go public in U.S. markets during a challenging time for Chinese companies.

Additionally, the firm is operating in the automobile business in China, which is experiencing a major downturn in consumer demand.

The company’s financials indicate top line revenue and gross profit growth, but at a decelerating rate.

However, operating profit, net income and cash flow from operations are all growing markedly, an impressive result.

Sales and marketing expenses as a percentage of revenue have been uneven but are trending downward, a good sign that the firm’s scaling efforts are generating increasing efficiencies.

But, average revenue per transaction appears to be topping out at just over $1,100 per deal.

The market opportunity for financing automobile purchases appears to have continued growth ahead as so many Chinese are increasingly confident of making significant purchases via online channels.

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.

While ML’s top line revenue and gross profit growth appears to be slowing, the firm’s net results are improving, so the firm’s financial are a bit of a ‘mixed bag.’

When we learn management’s pricing and valuation assumptions for the IPO, I’ll provide some final thoughts.

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.