Wunong Net Technology Seeks $37 Million U.S. IPO (Pending:WNW)

Quick Take

Wunong Net Technology Company (WNW) has filed to raise $37 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm sells food products via its website connecting food producers with consumers.

WNW has seen a sharp revenue growth slowdown due to the Covid-19 pandemic, so continued uncertainties lead me to stay on the sidelines for the IPO.

Company and Technology

Shenzhen, China-based Wunong was founded to create a food marketplace website that sells agriculture products to a variety of end users such as consumers, restaurants, lodging facilities and others.

More recently, management has opened a restaurant and seeks to create a franchise business model, with agreements signed for 25 restaurants in the Shenzhen area.

The restaurant initiative has been delayed due to the Covid-19 pandemic but management plans to actively deploy its 'restaurant expansion and franchising plans beginning the third quarter of 2020.'

Management is headed by Chief Executive Officer Mr. Xiangang Qin, who was previously an agriculture and related products technology specialist.

Wunong has received at least $1 million from investors including Union International Company Limited, Kindness Global, Four Dimensions Global, Wisdom Global, Soaring International, Morning Choice International, Eternal Horizon International and August International Group.

Customer Acquisition

The firm pursues larger customers through a direct business development and sales team approach, seeking distributors and large corporate buyers through online and offline referrals as well as through food-related expos.

Wunong generates all of its revenue through its website. In some cases, customers are able to track the growth of their agricultural products through the website.

Management has also created 'cooperation relationships with over 100 local service centers nationwide across 15 provinces in China...The role of local service centers is integral in our business as they serve as a bridge between us, our suppliers and our customers.'

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

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 3.5x in the most recent reporting period.

Market and Competition

According to a 2017 market research report by the Government of Canada, the Chinese e-grocery market was worth nearly $24 billion in 2016.

From 2012 to 2016, e-grocery purchases grew at a CAGR of 52.9%, although it accounted for just a 6.5% share of total e-commerce sales in China.

The main drivers for this expected growth are a combination of continued migration to urban areas, reduced time for consumers to travel to stores, greater convenience and increased discretionary incomes for China's middle class.

Also, among the top ten e-grocery markets, China accounted for the most market share by a wide margin, at 32.3% versus 12.0% for the UK and 11.3% for the USA.

Major competitive or other industry participants include:

• Alibaba (BABA)

• Jingdong

• Suning

• Vipshop (NYSE:VIPS)

Financial Performance

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

• Sharply increased topline revenue

• Growing gross profit and gross margin

• Increased operating loss but reduced negative operating margin

• Reduced cash used in operations

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

Source: Company registration statement

As of December 31, 2019, Wunong had $546,294 in cash and $4.9 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was negative ($489,642).

IPO Details

Wunong intends to raise $37 million in gross proceeds from an IPO of six million of its ordinary shares, offered at a midpoint price of $5.00 per share.

Selling shareholders are seeking to sell 999,911 shares in the IPO.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $124.5 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 24%.

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

50% to be used for general working capital;

30% to be used for research and development;

10% to be used for expanding our restaurant business; and

10% to be used for brand development and marketing

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

The sole listed bookrunner of the IPO is Boustead Securities.

Commentary

Wunong is seeking U.S. public market capital for its expansion plans, which include ramping its franchise restaurant business segment.

The firm’s financials are outdated as they only provide information through December 31, 2019, and do not show the effects of the Covid-19 pandemic since then, other than to say that it experienced ‘a year-over-year 35% increase in revenue for the half of the year. This, however, fell short of the Company’s original sales forecast for the year.’

Sales and Marketing expenses as a percentage of total revenue have dropped; its Sales and Marketing efficiency rate is at a reasonably strong 3.5x.

The market opportunity for selling produce via an online website is significant and expected to grow at a moderate rate. Perhaps post-Covid-19, the expected growth rate may be higher as Chinese consumers seek to have more groceries delivered.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm’s Mainland China operating company’s results.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

As to valuation, management is asking IPO investors to pay an Enterprise Value/Revenue multiple of 16.2x.

While the firm’s topline revenue growth rate in 2019 was impressive, it was from a very small base. Furthermore, we have little visibility into Wunong’s results in 2020, other than the reference to 35% growth, which is a sharply lower growth rate than previously.

Given the uncertainties over the firm’s recent performance and its future results due to the Covid-19 pandemic, I'll pass on the IPO.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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