Webus International Commences U.S. IPO Effort (Pending:WETO)

A Quick Take On Webus International Limited

Webus International Limited (WETO) has filed to raise $20 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides ground transportation options for groups and individuals in China.

When we learn more IPO details from Webus International Limited management, I’ll provide an update.

Webus Overview

Hangzhou, China-based Webus International Limited was founded to develop an alternative to public transportation by providing privately-owned vans and buses for groups and individuals to use for various transportation needs in China.

Management is headed by founder and Chairman Zheng Jiahua, who has been with the firm since its inception and was previously Chairman of Huzhou Xinhanrui Real Estate Co.

The company’s primary offerings include the following:

• Commute

• Inter-city

• Business visits

• Cross-province travel

• Guided tours

• Tailored vacation packages

• Budget, high-end and customized offerings.

As of December 31, 2022, Webus has booked fair market value investment of $7.8 million from investors, including senior management and others.

Webus – Customer Acquisition

Webus International Limited operates primarily in Hangzhou City in China, but management said it began offering a customized tour service in North America under the brand name “Wetour” starting in March 2022.

The firm markets its services online, at airport terminals and through major online travel agencies and online services, among others.

Sales and Marketing expenses as a percentage of total revenue have fallen as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended December 31, 2022	3.3%
FYE June 30, 2022	3.2%
FYE June 30, 2021	18.7%

Click to enlarge

(Source – SEC.)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing expense, fell to 15.4x in the most recent reporting period, as shown in the table below:

Sales and Marketing	Efficiency Rate
Period	Multiple
Six Mos. Ended December 31, 2022	15.4
FYE June 30, 2022	29.0

Click to enlarge

(Source – SEC.)

Webus’ Market

According to a 2022 market research report by GlobalData, the Chinese market for domestic tourism (as a proxy for domestic ground transportation demand) was an estimated $2.1 billion in 2021 and was forecast to reach $2.8 billion by 2025.

This represents a forecast CAGR of 3.0% from 2022 to 2025.

The main drivers for this expected growth are the improvement of China’s road infrastructure, “especially in the vast rural areas.”

Also, now that the “Zero-COVID” restrictions have largely been eliminated, the demand for travel will likely pick up materially.

The collective mobility industry in China and the U.S. is highly fragmented, so the company faces significant competition from a large number of market participants.

Webus International Limited’s Financial Performance

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

• Growing top line revenue

• Slowing gross profit growth and reduced gross margin

• Increased operating loss

• Reduced cash used in operations.

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended December 31, 2022	$ 13,588,280	105.9%
FYE June 30, 2022	$ 18,840,360	1155.8%
FYE June 30, 2021	$ 1,500,301
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended December 31, 2022	$ 667,121	68.9%
FYE June 30, 2022	$ 1,282,153	531.7%
FYE June 30, 2021	$ 202,955
Gross Margin
Period	Gross Margin
Six Mos. Ended December 31, 2022	4.91%
FYE June 30, 2022	6.81%
FYE June 30, 2021	13.53%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended December 31, 2022	$ (697,521)	-5.1%
FYE June 30, 2022	$ (1,059,443)	-5.6%
FYE June 30, 2021	$ (1,108,644)	-73.9%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)	Net Margin
Six Mos. Ended December 31, 2022	$ (444,052)	-3.3%
FYE June 30, 2022	$ (954,330)	-7.0%
FYE June 30, 2021	$ (1,101,925)	-8.1%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended December 31, 2022	$ (68,151)
FYE June 30, 2022	$ (526,587)
FYE June 30, 2021	$ (934,393)
(Glossary Of Terms.)

Click to enlarge

(Source – SEC.)

As of December 31, 2022, Webus had $1.4 million in cash and $2.1 million in total liabilities.

Free cash flow during the twelve months ending December 31, 2022, was $85,432.

Webus International Limited IPO Details

Webus intends to raise $20 million in gross proceeds from an IPO of its ordinary shares, although the final figure may differ.

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

Following the IPO, the company will be a “controlled company” under Nasdaq rules, controlled by the founder and Chairman.

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

to set up our new subsidiary or representative office in the United States to enhance sales and service support for our customers, initiate future expansion in marketing and internet sales of self-branded products and acquire more talents.

for working capital of our China operations, including but not limited to sale and marketing expenses, and research and development expenses for our [–] products and services.

(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 proceedings.

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

Commentary About The Webus IPO

Webus International Limited is seeking U.S. public capital market investment to fund its growth initiatives in China and the United States.

The company’s financials have produced increasing top line revenue, reduced gross profit growth and lower gross margin, growing operating loss and lower cash used in operations.

Free cash flow for the twelve months ending December 31, 2022, was $85,432.

Sales and Marketing expenses as a percentage of total revenue have fallen as revenue has increased; its Sales and Marketing efficiency multiple was 15.4x in the most recent reporting period.

The firm currently plans to pay no dividends and retain any future earnings for reinvestment back into the company’s growth and working capital requirements.

WETO’s CapEx Ratio indicates it has spent materially on capital expenditures as a percentage of its operating cash flow.

The market opportunity for the firm’s services is substantial but expected to grow only moderately, on average, 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’s crackdown on IPO company candidates combined with added reporting requirements from the U.S. side has put a serious damper on Chinese IPOs and their post-IPO performance.

A 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 for three years by the PCAOB.

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

Network 1 Securities is the sole underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (47.8%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

When we learn more information about the Webus International Limited IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.