Lixiang Education Proposes U.S. IPO Terms (Pending:LXEH)


Quick Take

Lixiang Education Holding (LXEH) has filed 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.

The firm provides private primary and secondary education to students in Lishui City, Zhejiang Province, China.

Since LXEH is primarily an offline-focused firm, it faces ongoing uncertainties related to the effects of the Covid-19 virus on its future trajectory, so I’m staying away from the IPO.

Company

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.

Student Acquisition

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, as the figures below indicate:

General & Administrative

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

8.5%

2019

6.1%

2018

19.4%

Source: Company registration statement

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, as shown in the table below:

General & Administrative

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

-0.1

2019

0.7

Source: Company registration statement

Market

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.

Financial Performance

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:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 12,277,000

-0.8%

2019

$ 21,851,000

4.3%

2018

$ 20,959,412

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 4,664,000

-20.3%

2019

$ 7,755,000

-0.3%

2018

$ 7,781,471

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

37.99%

2019

35.49%

2018

37.13%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ 3,622,000

29.5%

2019

$ 6,422,000

29.4%

2018

$ 3,719,559

17.7%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ 3,847,000

2019

$ 6,785,000

2018

$ 4,031,176

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ 4,288,000

2019

$ 8,443,000

2018

$ 7,694,706

(Glossary Of Terms)

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.

IPO Details

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.

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 I’ll pass on the IPO.

Expected IPO Pricing Date: Week of September 28, 2020

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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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