ANALYSIS: Goxus Seeks U.S. IPO Investment
Goxus has filed to raise $13.5 million in an IPO, but decelerating financial metrics are a concern.
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Donovan Jones
Feb 14,2020,20:57

Quick Take

Goxus (GOXS) has filed to raise $13.5 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides a range of urban-rural design and development consulting services to construction firms and municipalities in China.

GOXS has provided incomplete recent financial information and the firm’s revenue growth, profit and cash flow from operations is decelerating.

Company & Technology

Beijing, China-based Goxus was founded to offer two primary consulting service lines:

1. Urban-rural design services

2. Construction project management consulting services

Management is headed by Chairman and Chief Executive Officer Mr. Xingpeng Zhao, who previously had more than ten years experience in the culture and design industry.

Mr. Zhao owns 32.43% of company shares pre-IPO.

The company began operations in 2010 and has provided services on more than one hundred projects in the PRC, including the following project types:

  • Villages

  • Towns

  • Theme parks

  • Neighborhoods

  • Shopping malls

  • Schools

For the majority of the projects, Goxus also served as the sub-contractor for the construction companies won government contracts for the respective project.

Customer Acquisition

Goxus has developed and maintains a network of construction company partners that bid on government-sponsored projects.

In addition, the firm contracts with design companies, project consulting companies and construction material suppliers that serve as sub-contractors for project management services.

Selling expenses as a percentage of total revenue have dropped to 0.6% as revenues have increased.

The selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of selling spend, dropped to a still very high 30.6x in the most recent reporting period.

Market & Competition

According to a 2019 report by Frost & Sullivan and commissioned by the company, the population and urbanization rate within the PRC has grown at a CAGR of 0.5% from 2014 to 2018.

The rate is expected to continue to grow at a CAGR of 0.2% from 2019 to 2023, as shown in the graphic below:

The historical and forecast size and rate of growth for the urban-rural design and development market is expected to reach $22.5 billion in 2023, representing a CAGR of 15.9% from 2019 to 2023, as the chart shows here:

Major competitive vendors include:

  • AECOM Limited (ACM)

  • Tus-Design Group Co.

  • CCDI Group

  • Numerous other small competitors

Financial Performance & IPO Details

Goxus’s recent financial results can be summarized as follows:

  • Increased topline revenue, but at a decelerating rate of growth

  • Growing gross profit and uneven gross margin 

  • Decreasing operating profit

  • Sharply reduced cash flow from operations

As of September 30, 2019, Goxus had $8.8 million in cash and $10.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2019, was a negative ($4.9 million).

Goxus intends to raise $13.5 million in gross proceeds from the sale of 1.5 million of its ordinary shares at a proposed midpoint price of $9.00 per share.

Normally, foreighn firms sell ADSs (American Depositary Shares) to U.S. investors to reduce administrative burden for investors, so the lack of this feature is a negative signal to IPO investors.

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

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

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

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

Commentary

Goxus is a Chinese company seeking a small IPO from U.S. public market investors.

For the most recent reporting period, the firm’s financials are incomplete but show topline revenue growth at a decelerating rate of growth, dropping net income and sharply reduced cash flow from operations.

Free cash flow for the year ended March 31, 2019 was highly negative.

Selling expenses as a percentage of total revenue have been extremely low; its selling efficiency rate was still a very high 30.6x in the most recent reported period, although significantly lower than the previous period.

The market opportunity for urban-rural design and development services and consulting in China is significant and expected to continue an impressive growth trajectory as the country undergoes further urbanization in the years ahead.

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.

Given the firm’s sharply slowing topline revenue growth, dropping operating profit and net income, and sharply lowered cash flow from operations, it will be challenging for the IPO to be successful in the current 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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