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A Quick Take On Kepuni Holdings
Kepuni Holdings (KPNT) (KPN) has filed to raise $24.7 million in gross proceeds from the sale of its common stock in an IPO, according to an amended registration statement.
The company provides marine communication systems for a variety of maritime applications.
While the low nominal price of the IPO shares may attract day traders seeking volatility, given the generally poor performance of Chinese companies on U.S. stock exchanges, for a variety of reasons including ongoing regulatory concerns, I’m on Hold for the Kepuni IPO.
Kepuni Holdings Overview
Taizhou City, China-based Kepuni was founded to develop an integration business for various nautical communications systems for use on the open ocean.
Management is headed by Chairman and CEO Xiaofei Cui, who has been with the firm since inception and was previously general manager of Taizhou Feiming Electronics Co, a seller of nautical equipment.
The company’s primary offerings include:
-
Nautical engineering
-
Ship communication
-
Navigation
-
Driving control
-
Power distribution
As of December 31, 2021, Kepuni has received at least $3 million in equity investment from investors including Optimal Coefficient Holdings (Chairman Cui), Bandai International and Huaqin Cai.
Customer Acquisition
The firm pursues customer relationships through its dedicated sales group.
Kepuni is focused on providing its customized products to clients primarily in the PRC.
Selling expenses as a percentage of total revenue have dropped slightly as revenues have increased, as the figures below indicate:
|
Selling |
Expenses vs. Revenue |
|
Period |
Percentage |
|
2021 |
3.5% |
|
2020 |
3.6% |
(Source – SEC)
The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was 3.3x in the most recent reporting period.
Market & Competition
According to a market research report by Future Market Insights, the global market for marine communications is forecast to exceed $8.6 billion by 2031.
This represents a forecast CAGR of 7.8% from 2021 to 2031.
The main drivers for this expected growth are an increasing demand for global freight movement as well as advances in technology offerings by vendors and a reduction in data transmission cost as new satellite systems come online.
Also, further development of 5G technologies is expected to open up greater options for services over time.
Major competitive or other industry participants include:
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Inmarsat
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Furuno Electric
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Icom
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Garmin
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Cobham Satcom
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Intellian Technologies
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Samyung ENC
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Standard Horizon
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Jotron
Financial Performance
Kepuni’s recent financial results can be summarized as follows:
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Growing topline revenue
-
Increased gross profit and gross margin
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Higher operating profit and net income
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A swing to 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 |
$ 10,615,693 |
13.3% |
|
2020 |
$ 9,366,670 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
2021 |
$ 4,326,610 |
20.9% |
|
2020 |
$ 3,578,960 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
2021 |
40.76% |
|
|
2020 |
38.21% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
2021 |
$ 2,386,373 |
22.5% |
|
2020 |
$ 1,662,338 |
17.7% |
|
Net Income (Loss) |
||
|
Period |
Net Income (Loss) |
|
|
2021 |
$ 1,990,731 |
|
|
2020 |
$ 1,351,217 |
|
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
2021 |
$ 2,223,042 |
|
|
2020 |
$ (1,975,271) |
|
As of December 31, 2021, Kepuni had $20,528 in cash and $6.5 million in total liabilities.
Free cash flow during the twelve months ended December 31, 2021, was $272,566.
Kepuni Holdings’ IPO Details
KPN intends to sell 4.2 million shares of common stock at a proposed midpoint price of $5.88 per share for gross proceeds of approximately $24.7 million, not including the sale of customary underwriter options.
No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Post-IPO, the entity will be considered a ‘controlled company’ by Nasdaq, with the directors and officers of the company controlling approximately 37.3% of voting stock.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $60.5 million.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 29.6%. 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:
Product research and development
Marketing and Business Development
New production equipment purchase
New business assessment and acquisition
Talent acquisition and training
Working capital
(Source – SEC)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management said it is not involved in any legal or administrative proceedings that may have a material adverse impact on its operations or financial condition.
The sole listed underwriter of the IPO is Boustead Securities.
Valuation Metrics For Kepuni
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 |
$83,496,000 |
|
Enterprise Value |
$60,475,472 |
|
Price / Sales |
7.87 |
|
EV / Revenue |
5.70 |
|
EV / EBITDA |
25.34 |
|
Earnings Per Share |
$0.13 |
|
Float To Outstanding Shares Ratio |
29.58% |
|
Proposed IPO Midpoint Price per Share |
$5.88 |
|
Net Free Cash Flow |
$272,566 |
|
Free Cash Flow Yield Per Share |
0.33% |
|
Revenue Growth Rate |
13.33% |
(Source – SEC)
Commentary About Kepuni Holdings
Kepuni is seeking U.S. capital market investment to fund its various corporate expansion initiatives.
The company’s financials have shown growing topline revenue, increased gross profit and gross margin, increased operating profit and net income and a swing to cash flow from operations.
Free cash flow for the twelve months ended December 31, 2021, was $272,566.
Selling expenses as a percentage of total revenue have dropped slightly as revenue has increased and its Selling efficiency multiple was 3.3x in 2021.
The firm currently plans to pay no dividends on its capital stock and anticipates that it will retain any future earnings to reinvest back into its growth plans.
The market opportunity for marine communications equipment is large and expected to grow at a reasonably strong rate 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.
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.
Boustead Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (18.1%) 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 its focus on the Chinese maritime industry which may, like other industries in recent years, be subject to a rapidly changing regulatory environment directed by the Chinese government.
As for valuation, management is asking investors to pay and EV/Revenue multiple of approximately 5.7x trailing twelve month revenue.
Compared to a basket of publicly held telecommunications equipment companies (compiled by valuation expert Dr. Aswath Damodaran) which produced an average EV/Sales multiple of 4.74x in January 2022, the IPO appears valued at a premium.
The low nominal price of the IPO shares may attract day traders seeking volatility, but given the largely negative performance of Chinese companies on U.S. stock exchanges, for a variety of reasons including ongoing regulatory concerns, I’m on Hold for the Kepuni IPO.
Expected IPO Pricing Date: To be announced
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