ANALYSIS: Ucommune Seeks U.S. Public Investment for Growth Plan

Ucommune aims to raise U.S. growth capital for its ambitious plans to lead the co-working market in China.

Author: Donovan Jones   

Short Take

Ucommune Group Holdings (UK) has filed to raise $100 million in an IPO of its ADSs representing underlying Class A shares, according to an F-1 registration statement.

The firm operates as a co-working space and related services provider to individuals and businesses in China.

UK is growing revenue at an accelerating rate but at a cost of operating losses and cash burn.

Company & Technology

Beijing, China-based Ucommune was founded to provide real estate as a service to businesses and individuals in 171 cities throughout the PRC.

Management is headed by Founder, Chairman and CEO Daqing Mao, who has been with the firm since inception and was previously EVP China for China Vanke Co. (HKEX: 2202) and was a senior architect at Nikken Sekkei (Singapore).

The company's primary offerings include:

  • Real estate space for rent

  • U Plus Services

  • U Studio asset light services

  • U Design custom services

  • Design build services

  • Advertising & branding

  • Partner services for a wide range of categories

Ucommune has received at least $506.2 million from investors including Ambitious World and Starry Shore Company.

Customer Acquisition

The firm obtains larger customers from a dedicated sales and marketing team.

UK also connects with real estate agents to provide promotions for targeted locations.

The company also uses online platforms to search for prospective customers based on their location and interests.

Sales and marketing expenses as a percentage of revenue have been dropping as revenues have increased.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, rose to 12.0x in the most recent reporting period.

Average annual revenue per workstation has surged to $2,244.

Market & Competition

According to a 2019 report by China Real Estate Chamber of Commerce, the amount of co-working space in China grew by nearly 60% in the first ten months of 2018.

But, many co-working locations were less than 50% leased indicating a real plateau in adoption of the industry.

In response, many co-working space operators have turned to expanding their service offerings, and it appears Ucommune is no different in this regard.

Major competitive vendors include:

  • MyDreamPlus

  • Kr Space

Management says its offerings are comprehensive and provide greater value than just leasing office space by virtue of its partnerships, location, technology capabilities and ability to attract quality personnel.

Financial Performance & IPO Details

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

  • Increasing topline revenue at an accelerating rate

  • Negative gross profit and gross margin 

  • Negative operating profit and margin

  • Sharply increased cash use in operations

As of September 30, 2019, Ucommune had $23.4 million in cash and $436.8 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was a negative ($49.6 million).

Ucommune intends to raise $100 million in gross proceeds from an IPO of its ADSs representing underlying Class A shares, although the final amount may differ.

Class A shareholders will be entitled to one vote per share and the Class B shareholder, the company founder, will be entitled to 15 votes per share.

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

  - for expanding our spaces and services offerings;

  - for strengthening our technologies; and

  - for working capital and other general corporate purposes.

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

Listed bookrunners of the IPO are Haitong International, China Renaissance, The Core Securities, Prime Number Capital and CRIC Securities.

Commentary

Ucommune is seeking U.S. public investment capital to fuel its expansion plans in China and even overseas.

The company is generating high and accelerating revenue growth, but has produced increasing operating losses and high operational cash burn.

Sales and marketing expenses are dropping as revenues increase; its sales & marketing efficiency rate has increased. Both are positive signals as to the efficiency of its marketing efforts.

The market opportunity for co-working space services in China has the potential to plateau in the near-term, possibly turning into a battle for market share, with the resulting downward pressure on pricing a very real concern.

However, with the recent signing of a phase one trade deal between the U.S. and China, consumer sentiment may improve, resulting in a better business outlook.

Haitong International is the lead left underwriter and there is no data available on IPOs the firm has been involved with in the U.S. Haitong has been a busy underwriter of IPOs in Hong Kong and China. 

Ucommune has a revenue growth story to sell to U.S. investors, as the firm has pursued topline revenue growth and market share at high cost with no discernible path to operating profitability and sharply increased use of cash in operations.

Management's assumptions on IPO pricing and valuation will be important to the IPO's potential for success.

(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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