October 25, 2020

cedric-lachat

education gives you strength

Lixiang Education Proposes $33 Million U.S. IPO

4 min read
Lixiang Education Holding (LXEH) intends to raise $33.3 million in an IPO of its American...

Lixiang Education Holding (LXEH) intends to raise $33.3 million in an IPO of its American Depositary Shares [ADSs] representing underlying ordinary shares., according to an F-1 registration statement.

Lishui City, China-based Lixiang was founded to develop offline campuses for primary, middle school and high school students featuring government approved curriculum programs.

Management is headed by wife and husband team Ms. Fen Ye, who is founder and Chairlady and her husband, CEO Mr. Biao Wei.

Mr. Wei previously ‘attended a professional program in fashion design at the Zhejiang Institute of Silk Textiles.’

As of September 1, 2019, the company had a total of 4,558 enrolled students and 322 teachers.

Lixiang has received at least $8.7 million from investors including The founder and her husband own 90% of company stock, with two other family members owning the remaining 10% of stock, pre-IPO.

The company has two campuses that it operates for primary and middle school students.

Pursuant to a contractual agreement, it offers high school education through a campus operated by another firm.

Management says it can charge premium pricing due to the organization’s reputation for high quality and continuous investment in teacher education and training.

General and Administrative expenses as a percentage of total revenue have been uneven as revenues have fluctuated.

The General and Administrative efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of General and Administrative spend, swung to negative (0.1x) in the most recent reporting period.

According to a 2019 market research report by ResearchAndMarkets, the market for Chinese education at all levels is forecast to reach $573 billion by 2023.

This represents a forecast of an impressive CAGR of 11.3% from 2018 to 2023.

The main drivers for this expected growth are an increasing urban population, growing discretionary income, increased government spending on education and growing broadband adoption.

Also, increased demand for online education along with the emergence of a two teacher model in lower-tier cities will also provide for increased educational success.

The market for private education in China remains fragmented and the company faces competition from both public and private education providers.

Lixiang’s recent financial results can be summarized as follows:

  • Slightly contracting topline revenue
  • Decreased gross profit and uneven gross margin
  • Growing operating profit and net income
  • Slightly increased cash flow from operations

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

lixiangpl

Source: Company registration statement

As of June 30, 2020, Lixiang had $4.1 million in cash and $12.9 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $5.2 million.

Lixiang intends to raise $33.3 million in gross proceeds from an IPO of 3.33 million American Depositary Shares [ADSs] representing underlying ordinary shares, offered at a midpoint price of $10.00 per ADS.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $135.2 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 25.0%.

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

business expansion including student and teacher recruitments, campus construction and maintenance and upgrade of facilities;

strategic acquisition (there are currently no specific acquisition targets identified and we have not initiated any strategic acquisition project as of the date of this prospectus) or investment. We intend to consider acquisition of companies and/or institutions which are reputable, established and sizable private education service providers engaging in grades 1 through 9 compulsory education with national presence, recognized high schools, vocational higher education schools and online learning institutions which will complement our current operations; and

for general corporate purposes.

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

Listed bookrunners of the IPO are AMTD and Loop Capital Markets.

Commentary

Lixiang is seeking U.S capital to expand its footprint, perhaps through acquisition.

The firm’s financials show a softening effect in the current year as the Covid-19 pandemic has affected its operations. However, LXEH reports growing profit and cash flow from operations.

In response, management sought to institute online learning capabilities through third parties.

General and Administrative expenses have trended lower as revenues have fluctuated; its General and Administrative efficiency rate has swung negative in the most recent reporting period.

The market opportunity for providing private education services in China is large and forecast to grow in the coming years as parents seek to provide their children with an edge over public education, which doesn’t have the best reputation in China.

AMTD is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (11.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As to valuation, compared to already public K-12 education provider Puxin, the Lixiang IPO is much more highly priced, at least on a revenue basis.

On a net profits basis and EV/EBITDA, the IPO is more fairly priced.

However, both firms face significant uncertainty in a Covid-19 environment due to their primarily offline focus, putting them at a disadvantage compared to online education offerings.

Despite LXEH’s attempts at online education, success in that endeavor will likely take some time, so my opinion on the IPO is NEUTRAL.

Expected IPO Pricing Date: Week of September 28, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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