ANALYSIS: Phoenix Tree Holdings Seeks U.S. IPO in Perilous Market
Phoenix Tree Holdings (DNK) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an F-1 registration statement, although the final amount may be as high as $300 million.
The firm operates an online-enabled co-living space rental and management platform for both landowners and renters.
DNK is growing quickly but producing losses and high cash burn, similar to the recently failed WeWork IPO.
Company & Technology
Beijing, China-based Phoenix Tree was founded in 2015 as Danke Apartments and operates a co-living space platform that provides homes to people looking for lodging accommodations at affordable prices in the cities.
Management is headed by Co-Founder, CEO and Director Jing Gao, who was previously chief executive officer of Sun0101.com.
Phoenix Tree has developed a "New Rental" model under which it sources apartments from landowners, standardizes their design by renovating and furnishing apartments, and centrally operates the acquired co-living spaces.
The firm uses AI algorithms, which it refers to as "Danke Brain" to analyze, predict and undertakes business decisions, such as real-time price analysis and adjustments as well as rating future operational expansions, that it believes will benefit the company, based on previous experience.
Below is a brief overview graphic of the company's growth and landmark since its inception:
Portfolio growth from 2,434 apartments as of December 31, 2015, to 406,746 as of September 30, 2019.
CAGR during the three ended September 31, 2018.
(Source: Company registration statement)
The firm introduced "Dream Apartment" in 2018, in which it focuses on leasing entire buildings or floors in such to transform them into dormitory-style apartments, and rents them to business clients for employee accommodation.
Management says the firm seeks to provide a "one-stop" service, including cleaning, repair and maintenance, WiFi as well as non-stop resident support.
Investors in Danke included Primavera Capital Group, CMC Capital Group, Joy Capital, Tiger Global Management, Ant Financial, Gaorong Capital and Regent Capital, among others, according to Crunchbase.
Phoenix Tree markets its products through general brand advertising as well as targeted marketing campaigns.
Sales and marketing expenses as a percentage of revenue have been variable in recent reporting periods.
The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, was a strong 4.1x in the most recent nine-month period.
Average Revenue per Apartment Unit appears to have plateaued in its two most recent reporting periods.
According to a recent market research report by JLL, the Asia-Pacific's co-living market is experiencing growth due to rising property prices in "gateway" cities and as more people are migrating to cities for jobs or education opportunities.
In the face of soaring city apartment rent, co-living spaces can offer up to 25% in savings as compared to a traditional renting model, while providing good value to investors by eliminating the need for a building manager to handle maintenance, property manager to collect rent and a field agent to source potential tenants.
Additionally, "since co-living spaces are fully furnished with cleaning and maintenance services, tenants only need to deal with one operator instead of paying for deposits, utilities, furniture, and agent fees."
Moreover, due to the ability of operators to scale their co-living, operators have the potential to provide higher incomes to landowners and deliver efficiently on cleaning, furniture and utilities.
Despite being in its infancy, the research firm strongly believes the co-living renting model will outgrow the standard rental model in the long run.
Financial Performance & IPO Details
DNK's recent financial results can be summarized as follows:
Strong topline revenue growth, but at a decelerating rate
Increasing gross profit (decelerating) and decreased gross margin
Increasing operating losses and worsening negative operating margin
Growing cash used in operations
As of September 30, 2019, the company had $290.3 million in cash and $1.1 billion in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended September 30, 2019, was a negative ($596.3 million).
DNK 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 per share, and the Class B shareholder who is the company CEO, will be entitled to twenty votes per share and conversion rights. 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:
- expanding our scale, including sourcing and renovating additional apartment units;
- enhancing our technological capabilities; and
- general corporate purposes, including branding and marketing, and potential acquisitions and investments (although we are not currently negotiating any such acquisitions or investments).
Management's presentation of the company roadshow is not available.
Listed underwriters of the IPO are Citigroup, Credit Suisse and J.P. Morgan.
Phoenix is attempting to obtain capital from U.S. investors in the wake of the failed WeWork IPO.
WeWork was essentially the same model but applied to working space rather than living space.
DNK's financials show many of the same aspects of WeWork's problems. Large losses and cash burn.
Sales and marketing expenses as a percentage of revenue have fluctuated leading me to question whether the firm isn't gaining efficiencies of scale as it ramps up its operations.
The market opportunity for co-living spaces in China is significant but may be centered on top tier cities and not necessarily applicable to lower tier cities, placing a cap on growth prospects.
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.
This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.
Citigroup is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of a negative (19.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.
Phoenix Tree may have a difficult time selling U.S. investors on its approach, given the firm's large losses and no immediate path to profitability, which is an increasingly important consideration for operating companies in the current U.S. IPO environment.
(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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