Magic Empire Global Limited Pursues $23 Million U.S. IPO

Summary

• Magic Empire Global Limited has filed to raise $23 million in a U.S. IPO.
• The Hong Kong company provides a range of financial advisory services to companies there.
• MEGL has produced contracting revenue in a highly competitive and uncertain environment.
• While the stock may pop due to ultra-short-term day trading activity, I'm Neutral on MEGL over the longer term.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

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A Quick Take On Magic Empire Global Limited

Magic Empire Global Limited (NASDAQ:MEGL) has filed to raise $22.5 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides a variety of corporate financial services in Hong Kong, China.

MEGL has little to recommend it as its topline revenue is contracting, it operates in a highly competitive and uncertain environment and Chinese companies have generally performed poorly over the past few years.

While high risk-tolerant day traders may have an interest in playing the IPO, as an investment opportunity, I’m on Hold for MEGL over the longer term.

Company

Hong Kong, China-based Magic Empire was founded to provide companies with advisory functions as they seek to list their shares on Hong Kong stock exchanges.

Management is headed by Chief Executive Officer Mr. Sze Hon, Johnson Chen, who has been with the firm since inception of the group in 2016 and was previously in the corporate finance division of Guotai Junan Capital Limited and is a CFA and CPA.

The company’s primary offerings include:

• IPO sponsorship services

• Financial advisory

• Compliance consulting

• Underwriting services

Magic Empire has booked fair market value investment as of December 31, 2021 from investors including Mr. Wai Ho Chan and Mr. Sze Hon, Johnson Chen.

Magic Empire - Client Acquisition

The firm seeks a diversified client base by providing pre-IPO, IPO and post-IPO services.

MEGL has provided its services to at least 73 clients since the firm's establishment in 2016.

Selling, G&A expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
2021	89.7%
2020	81.1%

Click to enlarge

(Source)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, was negative (0.3x) in the most recent reporting period. (Source)

Magic Empire’s Market & Competition

Hong Kong is one of the world's largest securities markets, despite recent social unrest and legal changes.

The industry grew at a CAGR of 31.3% from 2012 to 2017 compared to a 23.1% global average, although recent growth likely has dropped.

The HK securities market is projected to reach $3.1 trillion in 2022, growing at a CAGR of 14.1% between 2018 and 2022.

The main factors driving market growth are a growing number of online brokers (from 126 in 2007 to 274 in 2016), innovative technologies, and increasingly active local and overseas investors.

The company faces intense competition for clients. For example, as of December 31, 2021, 'there were 326 licensed corporations and 31 registered institutions licensed or registered to carry on Type 6 (advising on corporate finance) regulated activity in Hong Kong.'

A further 129 licensees were able to conduct IPO sponsorship activities in Hong Kong.

Magic Empire Global Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• Contracting topline revenue

• Reduced operating profit and margin

• A swing to positive cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2021	$ 2,163,027	-18.5%
2020	$ 2,654,181
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2021	$ 221,779	10.3%
2020	$ 502,257	18.9%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
2021	$ 202,398	9.4%
2020	$ 545,951	25.2%
Cash Flow From Operations
Period	Cash Flow From Operations
2021	$ 87,010
2020	$ (518,338)
(Glossary Of Terms)

Click to enlarge

(Source)

As of December 31, 2021, Magic Empire had $1.5 million in cash and $2.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021, was $87,010.

Magic Empire Global Limited IPO Details

Magic Empire intends to raise $22.5 million in gross proceeds from an IPO of its ordinary shares, offering 5 million shares at a proposed midpoint price of $4.50 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 $70.6 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:

Approximately 50% (approximately $10,230,109) for strengthening of our corporate finance advisory business in Hong Kong and expanding market presence in other international capital markets in particular the US;

Approximately 10% (approximately $2,046,022) for expanding into the asset management business;

Approximately 10% (approximately $2,046,022) for enhancing our brand and expanding our office operation; and

The balance (approximately $6,138,066) to fund working capital and for other general corporate purposes.

(Source)

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

Regarding outstanding legal proceedings, management says the firm is not aware of a threat of legal proceedings that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Valuation Metrics For Magic Empire

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$90,000,000
Enterprise Value	$70,629,499
Price / Sales	41.61
EV / Revenue	32.65
EV / EBITDA	318.47
Earnings Per Share	$0.01
Operating Margin	10.25%
Net Margin	9.36%
Float To Outstanding Shares Ratio	25.00%
Proposed IPO Midpoint Price per Share	$4.50
Net Free Cash Flow	$87,010
Free Cash Flow Yield Per Share	0.10%
Debt / EBITDA Multiple	11.67
Revenue Growth Rate	-18.50%
(Glossary Of Terms)

Click to enlarge

(Source)

Commentary About Magic Empire’s IPO

MEGL is seeking U.S. public capital market financing to invest in its international expansion efforts and for general corporate purposes.

The company’s financials have produced lowered topline revenue, reduced operating profit and margin, a swing to positive cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was $87,010.

Selling, G&A expenses as a percentage of total revenue have risen as revenues have dropped; its Selling, G&A efficiency multiple was negative (0.3x) in 2021.

The firm currently plans to pay no dividends on its shares and anticipates that it will reinvest any future earnings back into its business.

The market opportunity for providing IPO and related corporate advisory services in Hong Kong is large but highly competitive.

Network 1 Financial Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (84.4%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the uncertain legal environment and regulatory environment in Hong Kong.

By selling its shares at a $4.50 midpoint, the company is following a recent common path for small issuers in the U.S.

Typically, first day trading can be highly volatile, with stocks of these microcaps ‘popping’ only to shortly thereafter drop, sometimes well below their offering price.

MEGL has little to recommend it as its topline revenue is contracting, it operates in a highly competitive and uncertain environment and Chinese companies have generally performed poorly over the past few years.

While high risk-tolerant day traders may have an interest in playing the IPO, as an investment opportunity, I’m on Hold for MEGL over the longer term.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.