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Chinese manufacturer applies to raise $25 million through a risky Nasdaq listing as China-U.S. tensions remain high.
The latest U.S. IPO plan from a Chinese company is decidedly low-tech, seeking to raise modest funds as it also tries to avoid U.S.-China tensions that have wiped out billions of dollars in market value from other New York-listed Chinese stocks over the last year.
The plan will see commercial kitchen appliance manufacturer Li Bang International (LBGJ) step back from the stoves to raise $25 million via an offering of 5 million shares at $5 apiece. The company is relatively small, with a target market value of around $100 million, suggesting the modest IPO could have a potentially transformative impact on the business – if it makes it to market.
Like many Chinese companies that list overseas, Li Bang is a Cayman Islands company that ultimately owns several China-based companies that are the engines of its commercial enterprise, according to its prospectus filed last week with the U.S. Securities and Exchange Commission (SEC).
Notably, Li Bang doesn’t appear to be a variable interest entity (VIE) – a controversial corporate structure used by most U.S.-listed Chinese companies that has drawn concerns from securities regulators in both the U.S. and China.
The company also notes that its auditor is a U.S.-based firm that has an information-sharing agreement with the SEC-affiliated Public Company Accounting Oversight Board. That’s also a key point, as most U.S.-listed Chinese companies use China-based auditors that are barred by Chinese law from such information sharing – a fact that has led the U.S. securities regulator to threaten to delist all New York-listed Chinese companies unless Beijing changes its stance.
Li Bang’s business also looks decidedly low-tech and doesn’t involve big volumes of user data – two other factors that have raised recent concerns by Chinese regulators over some larger Chinese companies that are already listed in the U.S.
Li Bang designs and sells stainless steel kitchen equipment in China under the high-end Libang brand to big commercial clients like international hotels, companies, public institutions, schools, and hospitals. The company’s website reveals it counts Radisson and Ramada hotels, high schools and universities, corporates across a diverse range of sectors, as well as governments at all levels as clients, all of those in China.
Third-party data in the prospectus shows that China’s commercial kitchen appliance industry was worth over $12 billion in 2020 and is tipped to hit $14 billion this year. That’s not exactly huge growth, but still a substantial market opportunity.
While making big stainless-steel cookers for commercial customers lacks the flashier appeal of shiny and strokable home kitchen appliances, Li Bang makes up for that with the color of its big money. The company produced net income of $2.7 million in its fiscal year through June last year, and about $748,000 in the six months to December 31, 2021.
The latest annual figure represented a more than doubling of Li Bang’s net income of $1.2 million in the 12 months to June 2020. The company’s revenue also posted strong growth over the same period, rising to $15.9 million for the 12 months to June 2021 from about $10 million in its previous fiscal year.
Sure, these aren’t rockstar amounts in absolute terms, and Li Bang is still a relatively small fry in its addressable market. But its net return to shareholders of 12.5% and 16.7% on 2020 and 2021 financial year revenues, respectively, would be tastier to many investors than a pile of steamed Shanghai dumplings.
Expanding capacity
Around 30% of the funds raised from the planned listing are designated for construction of two factories to expand Li Bang’s production capacity. Some 15% will go to new production equipment, while over $11.1 million are flagged for day-to-day expenses.
What Li Bang doesn’t plan to do is turbocharge its business. The company knows its niche – servicing the commercial kitchen market in Yangtze River Delta cities centered on the affluent Shanghai area. It’s a modest but profitable strategy that is reflected in the modest size of its IPO.
Many companies wouldn’t bother with an IPO to raise a piddly $25 million. But after the disastrous U.S. mega-listing last year by the Uber-like DiDi Global (OTCPK:DIDIY), and subsequent delisting of the company this year, Chinese companies are only just starting to return to the U.S. IPO arena. The smart ones are keeping their fundraising targets unassuming and ambitions small scale.
China-based companies recently taking the same low-profile IPO path as Li Bang include tax advisory business Lichen China Ltd. (LICN), education materials provider Jianzhi Education Technology Group Co. Ltd. (JZ), and solar panel company SolarMax Technology Inc. (SMXT).
No doubt executives in the Li Bang boardroom were encouraged by the recent highly successful IPO by language training company Golden Sun Education (GSUN), whose shares quadrupled in their first trading day on the Nasdaq.
Of its shares now issued, 75% are controlled by Li Bang CEO and Chairman Huang Feng – a common occurrence among Chinese companies that means minority shareholders will have little say in how the company is run. If the company succeeds in selling shares for $5, Li Bang will start life with a market capitalization of almost $114 million – not too shabby for a modest commercial kitchen manufacturer.
From a valuation perspective, a $5 share price would give Li Bang a price-to-earnings (P/E) ratio of 11.7 based on its profit in the 2020/21 fiscal year. This relatively modest P/E ratio aligns with Li Bang’s modest growth projections. The company doesn’t want to revolutionize the industry; it simply wants to keep on making reasonable profits – or perhaps slightly stepped-up profits from those extra IPO-funded factories and upgraded production facilities.
Despite its modest aspirations, Li Bang argues it does have several competitive advantages that help it stand out from the pack. Those include advanced R&D and design capabilities, high brand recognition, and a commitment to maintaining what the company calls “its leading market position.”
But it may take more than that kind of self-assessment to get investors on board. The road to U.S. IPO riches is fraught with peril for Chinese companies these days, as governments in both jurisdictions take increasing interest in what such companies are up to.
While the company is clearly trying to take steps to avoid running afoul of regulators on both sides of the Pacific and a deteriorating U.S.-China relationship, such points will remain major risk factors for any Chinese company listing in New York right now.
But Li Bang figures the risks and pressures are worth the potential rewards. A successful IPO could take the company to the next level, vaulting it from just another Yangtze River Delta commercial kitchen appliance maker to among the ranks of China’s top players. Who knows: maybe the listing could mark the start of a shinier future where Libang-branded stainless steel ovens and other appliances become fixtures in big commercial kitchens around China.
Disclosure: None.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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