Shengfeng Development Launches $36M IPO (Private:SHNG) – Seeking Alpha | Jewelry Dukan

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What is Shengfeng Development Limited?

Located in Fuzhou City, China, Shengfeng Development Limited (SHNG) was established to mainly provide businesses with a full range of contract logistics services that combine traditional logistics with supply chain management in China.

Management is led by founder, chairman, president and CEO Yongxu Liu, who has been with the company since its inception in 2001 and was previously the head of vehicle management department at Shenghui Logistics Group Co.

The company’s main offerings include:

  • LTL and FTL transport services

  • Planning & designing supply chains

  • design options

  • order processing

  • payment collection

  • inventory management

  • Other Customer Services

The Company maintains relationships with manufacturers and retailers through its internal sales and marketing efforts, as well as through partner referrals.

The company supplies over 4,000 medium to large sized manufacturers and trading companies across China.

According to a 2022 market research report by 360 Market Updates, the global contract logistics market was estimated at US$180.1 billion in 2021 and is projected to reach US$242.5 billion by 2028.

This equates to a projected CAGR of 3.9% from 2022 to 2028.

The main drivers for this expected growth are the increasing demand from companies to redesign and improve their supply chains in the wake of the global pandemic.

Also, the continued growth of the e-commerce sector places increasing demands on supply chain efficiency and risk mitigation.

Key contestants or other industry participants include:

  • Sinotrans Logistic Ltd.

  • Beijing Changjiu logistics

  • Kerry logistics [EAS] Limited

  • Other

Shengfeng Development IPO date and details

The IPO or IPO of Shengfeng is not yet fixed.

(Warning: Compared to stocks with more history, IPOs typically have less information for investors to review and analyze. For this reason, investors should exercise caution when considering investing in an IPO or immediately after an IPO. Also Investors should stick with it, however, remember that many IPOs are heavily marketed, past company performance is no guarantee of future results, and potential risks may be underestimated.)

Shengfeng intends to raise gross proceeds of US$36 million from an initial public offering of its Class A common shares and is offering 8 million shares at a proposed mid-price of US$4.50 per share.

Class A common shareholders are entitled to one vote per share and Class B shareholders are entitled to 10 votes per share.

The S&P 500 Index no longer includes companies with multiple share classes in its index.

No existing shareholder has expressed an interest in buying shares at the IPO price.

Assuming a successful IPO, the Company’s enterprise value at IPO would be approximately $201.9 million excluding the impact of underwriters’ over-allotment options.

The free float to outstanding share ratio (excluding over-allotments by underwriters) will be approximately 17.35%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

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

approximately 20% to expand and increase the number of our regional sorting centers;

approx. 20% for expanding and increasing the number of our OFCs and service points;

approximately 15% for the purchase of trucks and other vehicles to complement our own fleet;

approximately 15% to upgrade equipment at our existing regional sorting centers, OFCs and service points;

approx. 10% for improving our IT infrastructure; and

The balance to fund working capital and other general business purposes.

(Source – SEC)

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

With respect to pending litigation, management believes that any litigation would not have a material adverse effect on its financial condition or operations.

The sole public bookrunner for the IPO is Univest Securities.

How to invest in the company’s stock: 7 steps

Investors can purchase shares of the stock in the same manner as shares of other publicly traded companies or as part of the pre-IPO allotment.

Note: This report is not a recommendation to buy stocks or other securities. For investors interested in making a potential investment after the IPO closes, the following steps to buying shares will be helpful.

Step 1: Understand the financial history of the company

Although not much public financial information is available about the company, investors can view the company’s financial history on its Form S-1 or F-1 with the SEC (source).

Step 2: Evaluate the company’s financial reports

The primary financial statements available for publicly traded companies include the income statement, balance sheet, and cash flow statement. These financial statements can help investors understand a company’s cash capitalization structure, cash flow trends, and financial condition.

The company’s financial metrics have resulted in increasing revenue, increasing gross profit but declining gross margin, higher operating profit and increasing cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was negative ($7.5 million).

Selling and marketing expenses as a percentage of total sales have remained stable as sales have increased; its sales and marketing efficiency multiple was 7.7x in 2021.

The company currently plans not to pay dividends and to reinvest future profits into its growth plans. There may be significant regulatory restrictions on paying dividends and converting RMB into foreign currencies.

SHNG’s trailing 12-month CapEx ratio was 0.69x, indicating that it has spent heavily on investments as a percentage of its operating cash flow.

Step 3: Evaluate the company’s potential against your investment horizon

When investors evaluate potential stocks to buy, it’s important to consider their time horizon and risk tolerance before buying stocks. For example, a swing trader might be interested in short-term growth potential, while a long-term investor might prioritize strong financials over short-term price movements.

Step 4: Choose a brokerage

Investors who do not already have a trading account start by choosing a brokerage firm. Account types commonly used for trading stocks include a standard brokerage account or a retirement account like an IRA.

Investors who prefer fee-based advice can open a trading account with a full-service broker or independent investment advisor, and those looking to manage their portfolio at a reduced cost can opt for a discount brokerage firm.

Step 5: Choose an investment size and strategy

Investors who have decided to buy shares in the company should consider how many shares they want to buy and what investment strategy they want to adopt for their new position. The investment strategy determines an investor’s holding period and exit strategy.

Many investors choose to buy stocks and hold them for an extended period of time. Examples of basic investment strategies are swing trading, short-term trading, or investing over a long-term holding period.

Investors wishing to receive an allocation of shares at the IPO price prior to the IPO would “express interest” to their broker prior to the IPO. Declaring an interest is not a guarantee that the investor will receive an allotment of shares prior to the IPO.

Step 6: Choose an order type

Investors have many ways of placing orders to buy stocks, including market orders, limit orders, and stop orders.

  • Market Order: This is the most common type of order filled by retail traders. A market order executes a trade immediately at the best available transaction price.

  • Limit Order: When an investor places a buy limit order, they set a maximum price to be paid for the shares.

  • Stop Order: A buy stop order is an order to buy at a specific price, known as the stop price, which will be higher than the current market price. In the case of buy stop, the stop price is lower than the current market price.

Step 7: Submit the trade

After investors fund their account with cash, they can set an investment size and order type, and then submit the trade to place an order. If the trade is a market order, it will be executed immediately at the best available market price.

However, when investors place a limit order or stop order, the investor may have to wait for the stock to reach its target price or stop-loss price for the trade to complete.

The final result

SHNG is seeking equity investment in the US to fund its overall business growth and operational initiatives.

The market opportunity for the provision of contract logistics services is large and is expected to grow at a CAGR of around 4% in the coming years.

Like other Chinese companies looking to enter US markets, the company operates within a VIE structure, or Variable Interest Entity. US investors would only have an interest in an offshore company with contractual rights to the company’s operating results but would not own the underlying assets.

This is a legal gray area that poses a risk that management will change the terms of the contractual agreement or the Chinese government will change the legality of such agreements. Potential investors for the IPO would have to take this important structural uncertainty into account.

In addition, the Chinese government’s crackdown on IPO company candidates, combined with additional US reporting requirements and the possibility of SEC delisting, has put a serious damper on Chinese IPOs and their post-IPO performance.

Univest Securities is the sole underwriter and the IPOs the firm has led over the past 12 months have generated an average negative yield (9.2%) since its IPO. This is a lower performance for all major underwriters over the period.

The main risk to the company’s prospects is the unpredictability of China’s regulatory environment, both in relation to companies in protected industries and in relation to the country’s zero-tolerance lockdown policy related to COVID-19.

As for valuation, management is asking investors to pay an EV/sales multiple of 0.58x. Compared to a basket of publicly traded US trucking companies as suggested by well-known valuation expert Dr. Aswath Damodaran with an average EV/sales of 2.59x, the IPO is priced at a discount.

While the IPO appears cheap on a metric basis, the company faces a variety of risks and uncertainties.

Day traders might be drawn to the stock as they seek volatility opportunities, but I’m waiting for SHNG’s IPO.

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