ANALYSIS: 36Kr Holdings Seeks U.S. Public Capital as Its Revenue Growth Accelerates

Business services company 36Kr Holdings has filed to raise capital in a U.S. IPO as the firm's growth accelerates. However, disappointing performance from recent Chinese IPOs may hamper its listing ambitions.

Author: Donovan Jones   

Short Take

36Kr Holdings (KRHO) has filed to raise gross proceeds of up to $100 million from a U.S. IPO, according to an F-1 registration statement.

The firm provides business services to emerging companies in China.

KRHO is growing topline revenue but producing negative operating results amid a volatile U.S. stock market and difficult IPO environment.

Company & Technology

Beijing, China-based 36Kr was founded in 2010 to provide business services to Chinese companies serving the Internet, hardware and software technologies, consumer and retail and finance industries, which the company refers to as the ‘New Economy'.

Management is headed by CEO Dagang Feng, who has been with the firm since 2019 and is also the CEO of Beijing Duoke.

36Kr has developed a suite of business services that includes tailored online advertising and subscription services, as well as other enterprise value-added services.

The firm also provides services that help investors identify promising targets, source investment opportunities and connect with startups directly.

36Kr has developed a database covering over 800,000 enterprises, through which it is able to gain valuable insights into the New Economy by using data analysis on user and customer preferences and provide tailored services.

Below is an overview graphic of the company's business model:

  1. Page Views - during the twelve-month period ended June 30, 2019.

(Source: Company registration statement)

Management says that as of the end of 2018, the company provided business services to 23 of the Global Fortune 100 companies and to 59 of the Top 100 ‘New Economy' companies in China as measured by market capitalization and valuation, according to a 2019 China Insights Consultancy [CIC] report.

Additionally, since the launch of its institutional investors subscription services in Q1 2017, 36Kr has already covered 46 of the Top 200 institutional investors in China as of the end of 2018, as measured by assets under management, according to the CIC report.

Investors in 36Kr included China Merchants Capital, Ant Financial, Matrix Partners, Infinity Ventures and e.ventures, according to Crunchbase.

Customer Acquisition

The firm markets its solutions through an in-house sales teams that consist of 217 employees as of the end of June, 2019, with knowledge and expertise of the New Economy sector. 

They are tasked with understanding 36Kr's customers' needs as well as to maintain a close relationship with them by providing support and customer services during the course of services.

Sales and marketing expenses as a percentage of revenue have been uneven. 

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was stable in the most recent period.

Market

According to a 2018 market research report by IBIS World, the IT services market in China had reached a total revenue of $159 billion in 2018, an increase of 6.2% year-over-year.

This represents a CAGR of 7.7% between 2013 and 2018.

36Kr operates in the business services subset of the IT services market.

The main factors driving forecast market growth is the increase in IT investments and the growth of China's information sector.

The China IT services market accounts for about 20% of China's total IT investment, as compared to an average 40% share in other developed countries.

Financial Performance & IPO Details

KRHO's recent financial results can be summarized as follows:

  • High and accelerating topline revenue growth

  • Uneven gross profit and gross margin

  • A swing to operating loss

  • Increased cash used in operations

As of June 30, 2019, the company had $15.2 million in cash and $15.7 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($22.6 million).

KRHO has filed to raise $100 million in gross proceeds from an IPO of ADSs representing underlying Class A shares.

Class A shareholders will be entitled to one vote, and the co-founders, who will hold Class B shares, will be entitled to 25 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm's latest filing, the firm plans to use the net proceeds from the IPO as follows:

  - approximately 20% to further enhance our content offerings;

  - approximately 40% to expand our business service scope, client base and service depth;

  - approximately 15% to improve our data analytics and technological capabilities; and

  - approximately 25% to supplement our working capital and achieve other general corporate purposes.

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

Listed underwriters of the IPO are Credit Suisse and CICC.

Commentary

KRHO is attempting to raise expansion capital from U.S. investors at a difficult time for Chinese companies on U.S. markets.

Trade tensions between the U.S. and China remain unresolved and U.S. market regulators appear to be increasing their scrutiny of Chinese firms wishing to list their shares.

Furthermore, many Chinese IPOs have performed poorly leading to long investor skepticism about the potential for upside in the near term.

KRHO's financials show a firm that is growing rapidly and at an accelerating rate.

However, the firm is producing operating losses and has swung to negative cash flow, leading me to wonder if the domestic Chinese economy is weighing on the firm's results.

Sales and marketing expenses as a percentage of revenue have been uneven as the firm has scaled operations.

The IT services market opportunity for the firm is large and growing as Chinese companies seek improved IT infrastructure to maintain competitiveness despite increasing labor costs in China.

On the legal side, like many 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.

Given overall U.S. stock market volatility weighing on the IPO market and challenging performance by recent Chinese IPOs, I'm not optimistic about KRHO's IPO prospects in the near term.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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