ANALYSIS: Zhongchao Readies Plan for $15 Million U.S. IPO

Zhongchao has proposed terms for its small U.S. IPO. The firm is growing topline revenue at an accelerating rate and the IPO presents a potentially interesting opportunity for a 'risk-on' investor.

Author: Donovan Jones   

Short Take

Zhongchao (ZCMD) has filed to raise $15 million from an IPO of its Class A shares, per an amended F-1 registration statement.

The company provides offline and online professional medical education to healthcare practitioners in China.

ZCMD is a growing and profitable company and the IPO appears fairly priced. The firm is definitely one to watch on the open market.

Company & Technology

Shanghai, China-based Zhongchao was founded in 2012 as Zhongchao Medical Consulting (Shanghai) to provide online and on-site medical education services in China, under the brand MDMOOC.

Management is headed by founder, president and chief executive, Weiguang Yang, who was previously general manager at Medwork.

The firm's MDMOOC platform currently has about 1,429 education and training programs, about 95% of which are self-developed by the Zhongchao's research and development team.

The firm provides interactive programs through Practice Improvement (PI), Community of Practice Share (COPS), Continuing Professional Development (CPD), Continuing Medical Education (CME), and Continuing Professional Development (CPD) courses.

The firm's operating subsidiaries include Zhongchao Medical Technology (Shanghai), Shanghai Maidemu Cultural Communication, Shanghai Maidemu, Horgos Zhongchao Medical Technology, Shanghai Zhongxun Medical Technology, and Horgos Zhongchao Zhongxing Medical Technology.

Customer Acquisition

The firm employs 11 sales and marketing personnel and plans to generate awareness through online and offline advertising, promotions, media coverage and word-of-mouth support.

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

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, was stable at 1.3x in the most recent six-month period.

Average Revenue per Customer has been uneven but at its lowest point in the last three reporting periods.

Market

According to a 2019 market research report by Transparency Market Research, the global medical education market was valued at nearly $31 billion in 2018, and is projected to grow at a CAGR of over 4% between 2019 and 2027.

The main factors driving forecast market growth include the growing number of medical schools and increase in cost of medical education.

Data from the World Directory of Medical Schools shows that around one-third of medical schools are located in one of the five countries, namely India, the U.S., China, Brazil and Pakistan.

The Asia-Pacific region is projected to grow due to a rapidly growing number of medical schools being built to satisfy more medical students in India and China.

Financial Performance & IPO Details

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

  • Growing topline revenue at an accelerating rate

  • Increased gross profit and gross margin

  • Uneven operating profit and operating margin

  • Variable cash flow from operations, negative in the most recent period

As of June 30, 2019, the company had $6.6 million in cash and $2.5 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($3.3 million).

ZCMD intends to sell 3.5 million shares of Class A stock at a midpoint price of $4.25 per share for gross proceeds of approximately $15 million, not including the sale of customary underwriter options.

The company is also offering for sale an "HF Warrant" to HF Capital concurrent with the IPO.

Class A shareholders will be entitled to one vote per share and Class B holders will be entitled to 15 votes per share.

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

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO would approximate $77.5 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 17.85%.

Per the firm's most recent regulatory filing, the firm plans to use the net proceeds as follows:

  - 30% for development of the online course content;

  - 20% for platform technology upgrade and system integration;

  - 50% for business expansion, i.e., to expand our existing locations to develop new customers by hiring more qualified personnel, and marketing effort.

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

The sole listed underwriter of the IPO is Network 1 Financial Securities.

Commentary

 ZCMD is seeking U.S. public investment capital for its business expansion efforts.

The firm's financials show a company that is still small, profitable and growing at an impressive rate.

Sales and marketing expenses have been uneven and the sales & marketing efficiency rate has been stable as revenues have increased.

The market opportunity for providing medical education in China is large and growing, especially as China continues to grapple with an aging population growth in the coming decades, so the firm has very positive industry growth trends in its favor.

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.

The ZCMD IPO is a potentially interesting opportunity for a ‘risk-on' investor. Although Chinese firms have almost uniformly disappointed U.S. investors over the past two years, ZCMDis a growing, profitable company in a large and growing industry within China.

(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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