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IPO Update: GigaCloud Technology Prepares $ 40 Million US IPO (Pending: GCT)

Medium wide shot of a male warehouse worker checking an order on a computer workstation in the warehouse

Thomas Berwick

GigaCloud Technology Overview

According to the revised registration statement, GigaCloud Technology (GCT) has applied to raise a total of $ 39.4 million from the sale of Class A common stock at the IPO.

The The company provides logistics services associated with the e-commerce logistics marketplace for companies that need to deliver large parcels.

GCT is cautious because of growth risks, low-margin businesses, uncertain China’s regulatory environment, and the potential for COVID-19 blockades in China to continue.

I’m pending for an IPO.

Overview of GigaCloud

Based in Hong Kong and China, GigaCloud was founded to develop the GigaCloud Marketplace to connect manufacturers and resellers through discovery, payment and logistics tools on online platforms.

As of March 31, 2022, the company had 21 large warehouses in the United States, Japan, the United Kingdom and Germany.

The management team is headed by Larry Raywoo, founder, chairman and CEO, who has worked for the company since its inception and was formerly the general manager of the New Oriental Education and Technology Group.

GigaCloud has booked $ 65 million in fair market value investments as of March 31, 2022 from investors such as DCM and JD.com.

GigaCloud-Customer Acquisition

The company provides the platform and related inventory through its own system and major e-commerce websites.

During the 12 months ending March 31, 2022, the company had 410 active 3P sellers and 3,782 active buyers, with a total product volume of over $ 438 million. [GMV]..

As the figure below shows, the ratio of sales and marketing costs to total revenue tends to decrease as revenue increases.

Sales and marketing

Expenses and revenue

Limit

percentage

Three moss. Ends March 31, 2022

4.9%

2021

6.2%

2020

8.1%

(Source-SEC)

As shown in the following table, the multiple of sales and marketing efficiency is defined as how many dollars of additional new revenue is generated for every $ 1 of sales and marketing spending, which is 3.2 times over the latest reporting period. It has dropped.

Sales and marketing

Efficiency rate

Limit

Many

Three moss. Ends March 31, 2022

3.2

2021

5.4

(Source-SEC)

The Rule of 40 is a rule of thumb in the software industry that companies are on an acceptable growth / EBITDA trajectory as long as the combined revenue growth rate and EBITDA percentage are at least 40%.

The latest GCT calculation was 26% as of March 31, 2022, so the company has several ways to do this, as shown in the table below.

40 rules

Calculation

Recent Rev. Growth%

19%

EBITDA%

7%

total

26%

(Source-SEC)

Compete with the GigaCloud market

According to the Frost & Sullivan market research report referenced by the company, the US B2B e-commerce sales market is estimated at $ 1.3 trillion in 2020 and is expected to reach $ 2.2 trillion by 2025.

This represents a projected CAGR of 10.7% from 2020 to 2025.

The main drivers of this expected growth are the increasing use of smartphones for shopping purposes, the emergence of more e-commerce platforms, and the availability of alternative payment solutions.

The graph below also shows the vertical projected growth trajectory of various large plots in the United States up to 2025.

Large parcel online market in the United States

Large parcel online market in the United States (SEC EDGAR)

The company competes with other e-commerce platforms and 1P providers of large parcel products around the world.

GigaCloud Technology Financial Performance

The company’s recent financial results can be summarized as follows:

  • Growth slows, but top-line revenue grows

  • Decrease in gross profit and decrease in gross profit margin

  • Operating profit and decline in operating profit

  • Swing to cash used for operations

Below are the relevant financial results obtained from the company’s registration statement.

Total income

Limit

Total income

% Variance vs. before

Three moss. Ends March 31, 2022

$ 112,442,000

19.0%

2021

$ 414,197,000

50.4%

2020

$ 275,478,000

Gross profit (loss)

Limit

Gross profit (loss)

% Variance vs. before

Three moss. Ends March 31, 2022

$ 16,870,000

-19.2%

2021

$ 89,597,000

19.3%

2020

$ 75,116,000

gross profit

Limit

gross profit

Three moss. Ends March 31, 2022

15.00%

2021

21.63%

2020

27.27%

Operating profit (loss)

Limit

Operating profit (loss)

Operating income

Three moss. Ends March 31, 2022

$ 7,481,000

6.7%

2021

$ 39,353,000

9.5%

2020

$ 44,184,000

16.0%

Comprehensive income (loss)

Limit

Comprehensive income (loss)

Comprehensive margin

Three moss. Ends March 31, 2022

$ 4,670,000

4.2%

2021

$ 29,380,000

26.1%

2020

$ 37,091,000

33.0%

Cash flow from operating activities

Limit

Cash flow from operating activities

Three moss. Ends March 31, 2022

$ (14,512,000)

2021

$ 8,556,000

2020

$ 33,284,000

(Glossary)

(Source-SEC)

As of March 31, 2022, GigaCloud had $ 49.5 million in cash and $ 216.5 million in debt.

Free cash flow for the 12 months ending March 31, 2022 was negative ($ 808,000).

Details of GigaCloud IPO

GCT plans to sell 3.5 million Class A common stock at an intermediate price of $ 11.25 per share for a total revenue of approximately $ 39.4 million, excluding the sale of regular underwriting options.

Existing or potentially new shareholders are not interested in buying shares at the IPO price.

Class A shareholders can get 1 vote per share and Class B shareholders can get 10 votes per share.

The S & P 500 Index no longer allows companies with multiple classes of stock in the index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s corporate value (excluding underwriting options) at the IPO would be approximately $ 377 million.

The float-to-issued share ratio (excluding underwriter options) is approximately 8.6%. Values ​​below 10% are generally considered “low float” stocks and prices can fluctuate significantly.

According to the company’s latest regulatory submission, the net revenue will be used as follows:

The net revenue of this offering will be used for working capital, operating expenses, capital expenditures, and other general corporate purposes, including financing potential strategic acquisitions, investments and alliances, but is currently specific. There is no specific plan, and we are still not discussing it. Or negotiations regarding such transactions.

(Source-SEC)

Management presentations on company road shows are not available.

Regarding unresolved proceedings, management has stated that there are currently no pending proceedings that could have a significant adverse effect on the company’s financial position or business.

IPO’s only listed bookrunner is Aegis Capital Corp.

GigaCloud metrics

Below is a table of the company’s relevant capitalization and metrics in the IPO, excluding the impact of underwriter options.

measurement [TTM]

amount

Market capitalization at IPO

$ 459,039,893

Corporate value

$ 376,883,893

Price / sales

1.06

EV / Revenue

0.87

EV / EBITDA

10.40

Profit per share

$ 0.63

Operating income

8.39%

Net profit margin

6.04%

Float to Issued Shares Ratio

8.58%

Proposed IPO midpoint price per share

$ 11.25

Net free cash flow

-808,000 dollars

Free cash flow yield per share

-0.18%

Debt / EBITDA Multiple

0.01

Capital investment ratio

0.38

Revenue growth rate

18.95%

(Glossary)

(Source-SEC)

Commentary on GigaCloud

The GCT is seeking investment in the US public market to fund common unspecified corporate growth initiatives.

The company’s finances are top-line revenues despite a decline in growth over the last year, a decline in gross and gross profits, a decline in operating and operating profits, and fluctuations in cash used in operations. Shows an increase.

Free cash flow for the 12 months ending March 31, 2022 was negative ($ 808,000).

Sales and marketing costs as a percentage of total revenue decreased as revenue increased. Its sales and marketing efficiency has dropped 3.2 times over the most recent reporting period.

The company currently does not pay dividends and plans to maintain future earnings and reinvest in corporate growth initiatives.

The market opportunities for optimizing the e-commerce logistics process are enormous and are expected to grow at a considerable rate as the entire e-commerce market grows over the next few years.

Like other Chinese companies seeking to open up the US market, the company operates within a VIE structure or variable equity entity. US investors are only interested in offshore companies that have contractual rights to the performance of the offshore companies and do not own the underlying assets.

This is a legal gray area that poses a risk for management to change the terms of the contractual agreement and for the Chinese government to change the legality of such arrangements. Future investors in the IPO need to take into account this important structural uncertainty.

In addition, the Chinese government’s crackdown on potential IPO companies combined with additional reporting requirements from the US side has severely impacted China’s IPO and its post-IPO performance.

Aegis Capital is the only underwriter, and the IPOs it has led in the last 12 months have generated an average negative (77.7%) return since the IPO. This is the lowest performance for all major underwriters during the period.

The main risks to the company’s outlook are slowing revenue growth and fluctuations in the cash used in the business.

It is difficult to know how much of the slowdown in top-line earnings trajectory in the first quarter of 2022 was due to the COVID-related blockade in a particular Chinese state.

In terms of valuation, the company has a low net profit margin, so although it has high profits, it has a low single-digit net profit margin.

GCT is cautious because of growth risks, low-margin businesses, uncertain China’s regulatory environment, and the potential for COVID-19 blockades in China to continue.

I’m pending for an IPO.

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