Galaxy Payroll Group Starts U.S. IPO Effort (GLXG)

A Quick Take On Galaxy Payroll Group Limited

Galaxy Payroll Group Limited (GLXG) has filed to raise an undisclosed amount in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides outsourced payroll and related services to companies and human resource providers in China.

GLXG is still a tiny company and has plans to expand further in-country.

I’ll provide an update when we learn about management’s pricing and valuation assumptions.

Galaxy Payroll Overview

Hong Kong, China-based Galaxy Payroll Group Limited was founded to assist customers in calculating employment amounts due, monitoring, preparing and filing related tax returns.

Management is headed by co-founder, Chairman and CEO Mr. Wai Hong Lao, who has been with the firm since inception and previously worked as a manager at TAKA Corporate Services and various companies in the U.S. with a focus on software development.

The company’s primary offerings include:

• Outsourced payroll functions

• Employment services

• Consultancy services

• Market research

As of June 30, 2022, Galaxy Payroll has booked fair market value investment of $15,100 from investors, including Executive officers of the company and various other shareholder entities.

Galaxy Payroll – Customer Acquisition

The firm markets its services to human resource providers and end-user companies in various regions in Asia.

For its payroll outsourcing services, a majority of its end user company customers were in the retail and trading, IT, financial, industrial and professional services industries.

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

Selling, G&A	Expenses vs. Revenue
Period	Percentage
FYE June 30, 2022	17.3%
FYE June 30, 2021	32.9%

Click to enlarge

(Source – SEC)

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 1.5x in the most recent reporting period. (Source – SEC)

Galaxy Payroll’s Market & Competition

According to a 2022 market research report by ResearchAndMarkets, the global payroll outsourcing industry was an estimated $23.3 billion in 2020 and is forecast to reach $31.8 billion by 2027.

This represents a forecast CAGR of 4.5% from 2020 to 2027.

The main drivers for this expected growth are an expanding geographical reach of organizations resulting in a need for expertise which enables management to focus on its core areas of interest.

Also, there is a rise in the bundling of payroll services and process automation together to provide a more compelling offering for some customer segments.

Major competitive or other industry participants include:

• Accenture (ACN)

• ADP Group Companies

• Deloitte Touche Tohmatsu

• Hewlett Packard Enterprise Company (HPE)

• Infosys Limited (INFY)

• International Business Machines Corporation (IBM)

• Intuit (INTU)

• Paychex (PAYX)

• Wipro (WIT)

• Workday (WDAY)

• Xerox Corporation (XRX)

• Zalaris

• Others

Galaxy Payroll Group Limited Financial Performance

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

• Growing topline revenue from a small base

• Increasing gross profit and gross margin

• Growing operating profit

• Higher cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
FYE June 30, 2022	$ 5,978,576	34.9%
FYE June 30, 2021	$ 4,431,539
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
FYE June 30, 2022	$ 4,488,068	51.1%
FYE June 30, 2021	$ 2,969,560
Gross Margin
Period	Gross Margin
FYE June 30, 2022	75.07%
FYE June 30, 2021	67.01%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
FYE June 30, 2022	$ 3,450,436	57.7%
FYE June 30, 2021	$ 1,510,641	34.1%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
FYE June 30, 2022	$ 2,874,701	48.1%
FYE June 30, 2021	$ 1,234,683	20.7%
Cash Flow From Operations
Period	Cash Flow From Operations
FYE June 30, 2022	$ 1,529,090
FYE June 30, 2021	$ 916,716
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of June 30, 2022, Galaxy Payroll had $1.7 million in cash and $2.2 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was $1.5 million.

Galaxy Payroll Group Limited IPO Details

Galaxy Payroll intends to raise an undisclosed amount in gross proceeds from an IPO of its ordinary shares.

It appears a selling shareholder will also attempt to sell shares in the offering.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

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

Regarding outstanding legal proceedings, management said it is not involved in any ‘material claim, litigation, arbitration or administrative proceedings.’

The sole listed bookrunner of the IPO is Prime Number Capital.

Commentary About Galaxy Payroll’s IPO

GLXG is seeking U.S. public capital market investment for a variety of corporate working capital needs.

The company’s financials have generated increasing topline revenue from a small base, growing gross profit and gross margin, higher operating profit and greater cash flow from operations.

Free cash flow for the twelve months ended June 30, 2022, was $1.5 million.

Selling, G&A expenses as a percentage of total revenue have fallen as revenue has increased; its Selling, G&A efficiency multiple was 1.5x in the most recent fiscal year.

The firm currently plans to pay no dividends and to retain future earnings to reinvest back into the business.

The market opportunity for providing outsourced payroll processing services and related services is large but expected to grow at a relatively moderate rate of growth in the coming years.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

Prime Number Capital is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (60.2%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

When we learn more details about the IPO from management, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.