ANALYSIS: Muliang Agritech Continues U.S. IPO Effort

Muliang Agritech has filed to raise $56 million in a U.S. IPO, but most of the proceeds will be going to existing shareholders.

Author: Donovan Jones   

Quick Take

Muliang Agritech (MULG) has filed to raise $12 million in an IPO of its common stock, according to an S-1 registration statement.

The firm produces agricultural fertilizer products that have a high organic component.

MULG has grown revenue but that growth has stopped and the proposed IPO will mostly benefit existing shareholders who are selling shares into it.

Company

Shanghai, China-based Muliang was founded to produce fertilizers through processing crop straw into organic fertilizers for sale in the PRC.

Management is headed by Chairman, CEO, CFO and Director Lirong Wang who has experience in the chemical products industry prior to Muliang and is a majority shareholder of the company.

The firm currently has no subcommittees of the board of directors and Wang is the only listed executive of the firm.

The firm has two production facilities and also sells other agriculture food products such as apples as a sales agent for other agriculture companies.

Management expects its apple sales business to grow as the apple orchards mature in the coming years.

The company also has plans to begin processing black goat meat products in 2020.

Muliang has received at least approximately $19.4 million from investors including the company founder Wang and other small shareholders

Customer Acquisition

Muliang acquires customers primarily through its direct sales efforts.

In 2018, the firm had two large customers which accounted for 31% of its revenue and two suppliers which accounted for 53% of its purchases, so Muliang is still fairly concentrated in terms of its business relationships.

Selling expenses as a percentage of revenue have dropped as revenues have increased.

The selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was a negative (0.3) in the most recent nine-month period.

Market & Competition

According to a 2019 report by Grand View Research, the market for nitrogenous fertilizers will reach $85.4 billion by 2025.

This represents a forecast CAGR of 4.5% from 2019 to 2025.

The main drivers for this expected growth are increased demand from Asian buyers as a result of high crop rotation activities and further efforts to increase crop yields.

Major competitive vendors include:

  • Sinofert

  • Sinochem

  • Hubei Xinyangfeng Fertilizer

  • Wengfu Group

  • Lenan Xinlianxin (China XLX)

  • Luxi Chemical Group

  • China BlueChemical Ltd.

  • Anhui Liuguo Chemical Co. Ltd.

Management says its products are superior due to a higher "organic" materials content in its fertilizers, resulting in a broader group of nutrients delivered to crops.

Financial Performance & IPO Details

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

  • Increased topline revenue, but contraction in the most recent period

  • Increased gross profit, also contracting

  • Fluctuating gross margin 

  • Variable operating profit and margin

  • Positive but uneven cash flow from operations

As of September 30, 2019, Muliang had $6.3 million in cash and $15.8 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was $1.5 million.

Muliang intends to raise $12 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

The firm's selling shareholders intend to sell up to 8.46 million shares of stock for expected gross proceeds of $42 million, more than three times the amount the firm is seeking to raise.

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

  - Construction of an organic fertilizer plant

  - Construction of a black goat meat processing plant

  - Technology research and development

  - General working capital

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

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

Commentary

Muliang is seeking U.S. public investment capital mostly to pay off selling shareholders, with only a smaller amount left for the firm's growth plans, so the structure of this IPO is unusual.

The firm's financials show a company that is struggling to grow revenue after a burst of growth in the prior year.

Also, management appears to be diversifying into unrelated businesses, a signal that it isn't so confident that its primary business is worth investing in.

Sales and marketing expenses as a percentage of revenue have dropped; however, its sales & marketing efficiency rate has turned negative as revenue has contracted in the current year's partial period.

The market opportunity for fertilizers is expected to produce consistent growth but also has many large players.

With contracting topline revenue, diversifying into unrelated businesses, and most of the IPO proceeds going to existing shareholders, this IPO may have difficulty in its current form.

(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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