Edwin Tan/E+ via Getty Images
A Quick Take On Global Engine Group Holding Limited
Global Engine Group Holding Limited (GLE) has filed to raise $16 million in an IPO of its ordinary shares, according to an amended F-1/A registration statement.
The firm provides IT-related consulting services to businesses in Hong Kong, Taiwan and Southeast Asian markets.
GLE is still a tiny firm in fragmented and highly competitive markets.
While the low nominal price of the stock may attract day traders seeking volatility, I’m on Hold for the GLE IPO.
Global Engine Overview
Hong Kong, China-based Global Engine was founded to provide a wide range of business planning to technical design and operations services to companies in the telecom, data center and Internet of Things industries.
Management is headed by founder, Chairman and CEO Andrew Lee, who has been with the firm since its inception in 2018 and was previously Managing Director at 21Vianet Group Limited and Commercial Director at Hutchison Telecom Hong Kong Limited.
The company’s primary offerings include:
-
Business planning
-
System design
-
Project management
-
Development and operation services
-
Feasibility studies
-
Maintenance
-
Support
Global Engine has received investment in the past from investors including China Information Technology Development Limited and individual investors.
Global Engine – Customer Acquisition
The firm pursues clients seeking its consulting and implementation service offerings via a direct business development approach.
For its most recent fiscal year ended June 30, 2022, the company generated 76.2% of its revenue from Hong Kong and 23.8% from Taiwan.
General & Administrative expenses as a percentage of total revenue have risen as revenues have increased, as the figures below indicate:
|
General & Administrative |
Expenses vs. Revenue |
|
Period |
Percentage |
|
FYE June 30, 2022 |
8.2% |
|
FYE June 30, 2021 |
7.2% |
(Source – SEC)
The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, fell to 6.4x in the most recent reporting period, as shown in the table below:
|
General & Administrative |
Efficiency Rate |
|
Period |
Multiple |
|
FYE June 30, 2022 |
6.4 |
(Source – SEC)
Global Engine’s Market & Competition
According to a 2021 market research report by HKTDC Research, the telecommunications industry in Hong Kong in 2019 was approximately $12.3 billion and represented 3.5% of Hong Kong’s gross domestic product.
In December 2020, the Hong Kong government enacted its Smart City Blueprint 2.0, which created ‘over 130 initiatives aimed at making the lives of the general public more convenient.’
As of September 2020, the ICT industry and related fields employed approximately 76,200 people in Hong Kong.
Also, Hong Kong’s household broadband penetration rate was an impressive 95% in September 2020, while ‘its internet connections are among the highest in the world.’
The ICT consulting and services market in Hong Kong is highly fragmented and very competitive.
Global Engine Group Holding Limited Financial Performance
The company’s recent financial results can be summarized as follows:
-
Growing top line revenue
-
Increasing gross profit but dropping gross margin
-
Higher operating profit
-
Decreased 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 |
$ 6,960,386 |
109.1% |
|
FYE June 30, 2021 |
$ 3,328,750 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
FYE June 30, 2022 |
$ 1,775,647 |
35.6% |
|
FYE June 30, 2021 |
$ 1,309,192 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
FYE June 30, 2022 |
25.51% |
|
|
FYE June 30, 2021 |
39.33% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
FYE June 30, 2022 |
$ 1,206,210 |
17.3% |
|
FYE June 30, 2021 |
$ 1,069,115 |
32.1% |
|
Net Income (Loss) |
||
|
Period |
Net Income (Loss) |
Net Margin |
|
FYE June 30, 2022 |
$ 1,040,041 |
14.9% |
|
FYE June 30, 2021 |
$ 906,467 |
13.0% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
FYE June 30, 2022 |
$ 905,742 |
|
|
FYE June 30, 2021 |
$ 1,866,030 |
|
As of June 30, 2022, Global Engine had $766,010 in cash and $1.1 million in total liabilities.
Free cash flow during the twelve months ending June 30, 2022, was $716,746.
Global Engine Group’s IPO Details
GLE intends to sell 3.5 million shares of common stock at a proposed midpoint price of $4.50 per share for gross proceeds of approximately $15.75 million to the company, not including the sale of customary underwriter options.
The firm has also filed a Resale Prospectus to enable selling shareholders to sell up to 1.92 million shares.
No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $74.5 million.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 17.95%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
Proposed Use Of Proceeds (SEC)
(Source – SEC)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management says the firm is ‘not currently a party to any material legal or administrative proceedings.’
The sole listed bookrunner of the IPO is Univest Securities.
Valuation Metrics For Global Engine Group
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
|
Measure [TTM] |
Amount |
|
Market Capitalization at IPO |
$87,750,000 |
|
Enterprise Value |
$74,483,990 |
|
Price / Sales |
12.61 |
|
EV / Revenue |
10.70 |
|
EV / EBITDA |
61.75 |
|
Earnings Per Share |
$0.05 |
|
Operating Margin |
17.33% |
|
Net Margin |
14.94% |
|
Float To Outstanding Shares Ratio |
17.95% |
|
Proposed IPO Midpoint Price per Share |
$4.50 |
|
Net Free Cash Flow |
$716,746 |
|
Free Cash Flow Yield Per Share |
0.82% |
|
CapEx Ratio |
4.79 |
|
Revenue Growth Rate |
109.10% |
(Source – SEC)
Commentary About Global Engine Group
GLE is seeking U.S. capital market funding to continue its general corporate expansion efforts.
The company’s financials have generated increasing top line revenue, growing gross profit but reduced gross margin, and increased operating profit but reduced cash flow from operations.
Free cash flow for the twelve months ending June 30, 2022, was $716,746.
General & Administrative expenses as a percentage of total revenue have risen as revenue has increased; its General & Administrative efficiency multiple was 6.4x in the most recent reporting period.
The firm currently plans to pay no dividends (although it has paid dividends in the recent past) and plans to retain future funds for its growth plans.
GLE’s trailing twelve-month CapEx Ratio is 4.8, which indicates it is spending significantly on capital expenditures as a percentage of its operating cash flow.
The market opportunity for providing ICT consulting services in Hong Kong and Taiwan is large but fragmented and highly competitive.
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.
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.
Univest Securities is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (48.3%) since their IPO. This is a bottom-tier performance for all significant underwriters during the period.
The primary risk to the company’s outlook is the regions in which it operates are subject to arbitrary and capricious regulatory actions which may occur on little or no notice.
While the firm has performed admirably as a tiny consulting services company, there is a question as to its ability to profitably expand its operations within or outside its existing geographic focus.
As for valuation expectations, management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 10.7x.
The company is still very small and is subject to a variety of ongoing and unpredictable regulatory risks in China.
Furthermore, the sub-$5.00 share price has been an indicator of poor post-IPO performance.
While the low nominal price of the stock may attract day traders seeking volatility, I’m on Hold for the GLE IPO.
Expected IPO Pricing Date: To be announced
Be the first to comment