Shengfeng Development Launches $36 Million U.S. IPO

Sep. 21, 2022 4:03 PM ETShengfeng Development Limited (SHNG)

Summary

  • Shengfeng Development Limited has filed proposed terms to raise $36 million in a U.S. IPO.
  • The company provides contract logistics services to firms in China.
  • SHNG has produced growth but faces economic and regulatory risks.
  • I'm on Hold for the SHNG IPO, although it may attract day traders seeking volatility.
  • Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Red truck leaving the harbor

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What Is Shengfeng Development Limited?

Fuzhou City, China-based Shengfeng Development Limited (SHNG) was founded to provide a full range of contract logistics services, which combine traditional logistics with supply chain management, to companies with operations primarily in China.

Management is headed by founder, Chairman, president and CEO Yongxu Liu, who has been with the firm since inception in 2001 and was previously manager of Department of Vehicle Management of Shenghui Logistics Group Co.

The company’s primary offerings include:

  • LTL and FTL transportation services

  • Plan & design supply chains

  • Design facilities

  • Order processing

  • Payment collection

  • Inventory management

  • Other client services

The firm pursues relationships with manufacturers and trading companies through its in-house sales & marketing efforts as well as through partner referrals.

The company serves over 4,000 manufacturers and trading firms of medium to large scale size throughout China.

According to a 2022 market research report by 360 Market Updates, the global contract logistics market was an estimated $180.1 billion in 2021 and is forecast to reach $242.5 billion by 2028.

This represents a forecast CAGR of 3.9% from 2022 to 2028.

The main drivers for this expected growth are increasing demand from companies to redesign and improve their supply chains in the wake of the global pandemic.

Also, the continued growth of the e-commerce sector is placing increasing demands on supply chain efficiencies and risk reduction.

Major competitive or other industry participants include:

  • Sinotrans Logistics Ltd.

  • Beijing Changjiu Logistics

  • Kerry Logistics [EAS] Limited

  • Others

Shengfeng Development's IPO Date & Details

The initial public offering, or IPO, for Shengfeng has not yet been determined.

(Warning: Compared to stocks with more history, IPOs typically have less information for investors to review and analyze. For this reason, investors should use caution when thinking about investing in an IPO, or immediately post-IPO. Also, investors should keep in mind that many IPOs are heavily marketed, past company performance is not a guarantee of future results and potential risks may be understated.)

Shengfeng intends to raise $36 million in gross proceeds from an IPO of its Class A ordinary shares, offering 8 million shares at a proposed midpoint price of $4.50 per share.

Class A ordinary shareholders will be entitled to one vote per share and Class B shareholders will have 10 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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 $201.9 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 17.35%. 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 20% for expanding and increasing the number of our regional sorting centers;

approximately 20% for expanding and increasing the number of our OFCs and service outlets;

approximately 15% for purchasing trucks and other vehicles to add to our self-owned fleet;

approximately 15% for upgrading the equipment of our existing regional sorting centers, OFCs and service outlets;

approximately 10% for improving our IT infrastructure; and

The balance to fund working capital and for other general corporate purposes.

(Source - SEC)

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

Regarding outstanding legal proceedings, management believes that any legal proceedings would not have a material adverse effect on its financial position or operations.

The sole listed bookrunner of the IPO is Univest Securities.

How To Invest In The Company’s Stock: 7 Steps

Investors can buy shares of the stock in the same way they may buy stocks of other publicly traded companies, or as part of the pre-IPO allocation.

Note: This report is not a recommendation to purchase stock or any other security. For investors who are interested in pursuing a potential investment after the IPO is complete, the following steps for buying stocks will be helpful.

Step 1: Understand The Company's Financial History

Although there is not much public financial information available about the company, investors can look at the company's financial history on their form S-1 or F-1 SEC filing (Source).

Step 2: Assess The Company's Financial Reports

The primary financial statements available for publicly-traded companies include the income statement, balance sheet, and statement of cash flows. These financial statements can help investors learn about a company's cash capitalization structure, cash flow trends and financial position.

The firm’s financials have produced growing topline revenue, increasing gross profit but dropping gross margin, higher operating profit and rising cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was negative ($7.5 million).

Selling & Marketing expenses as a percentage of total revenue have remained stable as revenue has increased; its Selling & Marketing efficiency multiple was 7.7x in 2021.

The firm currently plans to pay no dividends and to reinvest any future earnings back into its growth plans. There may be significant regulatory restrictions on the paying of dividends as well as conversion of RMB into foreign currencies.

SHNG’s trailing twelve-month CapEx Ratio was 0.69x, which indicates it has spent heavily on capital expenditures as a percentage of its operating cash flow.

Step 3: Evaluate The Company's Potential Compared To Your Investment Horizon

When investors evaluate potential stocks to buy, it's important to consider their time horizon and risk tolerance before buying shares. For example, a swing-trader may be interested in short-term growth potential, whereas a long-term investor may prioritize strong financials ahead of short-term price movements.

Step 4: Select A Brokerage

Investors who do not already have a trading account will begin with the selection of a brokerage firm. The account types commonly used for trading stocks include a standard brokerage account or a retirement account like an IRA.

Investors who prefer advice for a fee can open a trading account with a full-service broker or an independent investment advisor and those who want to manage their portfolio for a reduced cost may choose a discount brokerage company.

Step 5: Choose An Investment Size And Strategy

Investors who have decided to buy shares of company stock should consider how many shares to purchase and what investment strategy to adopt for their new position. The investment strategy will guide an investor's holding period and exit strategy.

Many investors choose to buy and hold stocks for lengthy periods. Examples of basic investing strategies include swing trading, short-term trading or investing over a long-term holding period.

For investors wishing to gain a pre-IPO allocation of shares at the IPO price, they would ‘indicate interest’ with their broker in advance of the IPO. Indicating an interest is not a guarantee that the investor will receive an allocation of pre-IPO shares.

Step 6: Choose An Order Type

Investors have many choices for placing orders to purchase stocks, including market orders, limit orders and stop orders.

  • Market order: This is the most common type of order made by retail traders. A market order executes a trade immediately at the best available transaction price.

  • Limit order: When an investor places a buy limit order, they specify a maximum price to be paid for the shares.

  • Stop order: A buy-stop order is an order to buy at a specified price, known as the stop price, which will be higher than the current market price. In the case of buy-stop, the stop price will be lower than the current market price.

Step 7: Submit The Trade

After investors have funded their account with cash, they may decide an investment size and order type, then submit the trade to place an order. If the trade is a market order, it will be filled immediately at the best available market price.

However, if investors submit a limit order or stop order, the investor may have to wait until the stock reaches their target price or stop-loss price for the trade to be completed.

The Bottom Line

SHNG is seeking U.S. capital investment to fund its general corporate growth and operations initiatives.

The market opportunity for providing contract logistics services is large and expected to grow at a CAGR of around 4% in the coming years.

Like other 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.

Additionally, the Chinese government crackdown on IPO company candidates combined with added reporting requirements from the U.S. side as well as the potential for delisting by the SEC has put a serious damper on Chinese IPOs and their post-IPO performance.

Univest Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (9.2%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the unpredictable nature of the Chinese regulatory environment, both as to companies in protected industries as well as from the country’s zero-tolerance COVID-19 lockdown policies.

As for valuation, management is asking investors to pay an EV/Revenue multiple of 0.58x. Compared to a basket of U.S. publicly held Trucking companies as compiled by noted valuation expert Dr. Aswath Damodaran with an average EV/Sales of 2.59x, the IPO is priced at a discount.

While the IPO appears reasonably priced from a metrics standpoint, the firm faces a variety of risks and uncertainties.

Day traders may be attracted to the stock as they seek volatility opportunities, but I’m on Hold for SHNG’s IPO.

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This article was written by

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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.

Additional disclosure: This report is for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions. IPO investing can involve significant volatility and risk of loss.

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