ANALYSIS: Jiana Science and Technology Seeks $10 Million U.S. IPO

The Chinese real estate services provider has filed to raise capital from U.S. investors, even though the firm's topline revenue has sharply contracted.

Author: Donovan Jones   

Quick Take

Jiana Science and Technology Co. (JIST) has filed to raise $10 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm is developing an online platform for a variety of real estate services in China.

JIST has produced highly uneven financial results on outdated information, so the firm will likely need to provide updated financial report information prior to a successful IPO transaction.

Company & Technology

Shenzhen, China-based Jiana was founded to originally sell NetEase prepaid cards but has since pivoted to create a real estate website and platform for various residential real estate services in China.

Management is headed by Chief Executive Officer Ms. Fengzheng Zhu, who has been with the firm since 2018 and was previously education director at the Shenzhen Futian District Foreign Language School.

Ms. Zhu currently owns 82.42% of company stock pre-IPO.

The company's primary offerings include:

  • Fun Building - for sale home listings aimed at older buyers

  • Fun Rental - for rent home listings

  • Fangyuanbao - online housing information channel

  • EZ-Link Card - online payment system

The firm has raised a total of $2.7 million in invested capital since inception.

Customer/User Acquisition

The firm says that its marketing efforts are primarily online and aimed at offering consumers discounts for purchasing property through its online system.

Selling and marketing expenses as a percentage of total revenue have risen to only 1.2% as revenues have decreased.

The selling & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was a very high 111.3x in the most recent reporting period.

Market & Competition

According to a 2019 report by Reuters, China's housing market is expected to grow at a 3.1% rate in price terms in 2020.

This forecast is after several years of strong growth after 2015's growth rate of 1.5%.

The residential real estate industry has more recently seen a significant reduction in growth due to a range of government policies designed to lower speculative activity leading to over-building.

Recently, central government regulators have eased certain restrictions while keeping others in place, nevertheless leading to slower activity overall.

Through their various actions, regulators have introduced uncertainty into the financial and real estate development markets, which may induce severe volatility for Jiana's stock.

Major competitive vendors include:

  • World Union Real Estate Consultancy

  • Jones Lang LaSalle

  • Centaline Group

  • SouFun Holdings

Financial Performance & IPO Details

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

  • Sharply reduced topline revenue

  • Higher gross profit and gross margin

  • Increased operating profit and margin

  • Reduced use of cash in operations to nearly breakeven

As of April 30, 2019, Jiana had $52,290 in cash and $4.9 million in total liabilities.

Free cash flow during the twelve months ended April 30, 2019, was a negative ($1.9 million).

Jiana intends to raise $10 million in gross proceeds from an IPO of its ordinary shares, although the final amount may differ.

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

"We intend to use the proceeds from this offering for advertising and marketing, working capital and general corporate purposes, including the expansion of our business."

There is no listed bookrunner for the IPO.

Commentary

Jiana is seeking a small investment from public U.S. capital markets for its expansion plans within the online real estate services market in China.

The company's financials show a puzzling combination of a sharp reduction in topline revenue but an increase in gross profit and net income. Cash flow from operations is now essentially at breakeven.

Also, the firm's financial statements are out of date, so we only have official, audited numbers as of April 30, 2019, nine months ago.

Since then, the Chinese economy has slowed considerably, leading me to question the firm's trajectory.

Selling and marketing expenses as a percentage of total revenue are still very low; the firm's selling & marketing efficiency rate is quite high, given the online nature of its system.

The market opportunity for providing real estate services via an online portal would appear to be significant as many Chinese consumers use their phones for so many other e-commerce-related activities.

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.

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.

In sum, Jiana's financial results and information presents uncertainty for the IPO's prospects 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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