Eshallgo seeks $15 million IPO

Johnny Greig

A quick look at Eshallgo Inc

Eshallgo Inc (EHGO) has applied to raise $15 million in an initial public offering of its Class A common stock, according to an F-1 registration statement.

The company provides sales and maintenance for the office Supplies and equipment in China.

I will refrain from going public given the company’s declining revenues, reversal to large-scale losses, thin capitalization, industry and execution risks, and regulatory uncertainty in the PRC.

Eshallgo overview

Eshallgo Inc., based in Shanghai, PRC, was established to operate as a sales and maintenance company for office equipment and supplies in 20 provinces of PRC.

Management is led by Chief Executive Officer Qiwei Miao, who has been with the company since its inception in 2015 and was previously Head of Sales at Shanghai Aidaiersi Development Co.

The company’s main offerings include the the following:

• Sale and rental of office supplies

• After-sales maintenance and repairs

As of September 30, 2022, Eshallgo has booked a fair market value investment of US$3.3 million from investors including Junzhang Digital Limited and Magic Ideal Limited.

Eshallgo – customer acquisition

The company is an authorized distributor of major office equipment brands such as Sharp, Toshiba, HP, Epson, Konica, Kyocera and others.

Management is also pursuing the development of a comprehensive “e-commerce platform for all types of offices”.

The share of selling expenses in total sales has risen while sales are declining, as the following figures show:

sale	Expenses vs. Income
Period	percentage
Six months ending September 30, 2022	5.4%
FYE March 31, 2022	5.0%
FYE March 31, 2021	4.3%

click to enlarge

(Source – SEC)

The sales efficiency multiple, defined as how many dollars in additional new revenue generated by each dollar in selling expenses, fell negative (2.1x) in the most recent reporting period as topline revenue declined, as shown in the table below:

sale	efficiency rate
Period	Several
Six months ending September 30, 2022	-2.1
FYE March 31, 2022	4.9

click to enlarge

(Source – SEC)

Eshallgos Market & Competition

According to a 2021 market research report by Million Insights, the global market for printers and copiers was estimated at US$10.9 billion in 2020 and is projected to shrink to US$9.7 billion by 2028.

This corresponds to a projected CAGR of negative (1.4%) from 2021 to 2028.

The main drivers for this expected decline are lower demand from the commercial sector, which could be offset by growth in the home office segment.

Also, the potential for innovation in the industry through improved inks and partnerships with e-commerce platforms may somewhat mitigate the declining trend over time.

Key contestants or other industry participants include:

• Medium-sized companies from the region

• Small and local operators

Financial performance of Eshallgo Inc

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

• Declining topline earnings

• Reduced gross profit and gross margin

• Decreased operating profit

• Uneven cash flow from operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
Period	total revenue	% variance vs. before
Six months ending September 30, 2022	$9,243,491	-10.2%
FYE March 31, 2022	$23,875,331	32.3%
FYE March 31, 2021	$18,050,317
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Six months ending September 30, 2022	$2,277,923	-23.0%
FYE March 31, 2022	$7,621,740	51.6%
FYE March 31, 2021	$5,029,031
gross margin
Period	gross margin	% variance vs. before
Six months ending September 30, 2022	24.64%	-4.1%
FYE March 31, 2022	31.92%	14.6%
FYE March 31, 2021	27.86%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Six months ending September 30, 2022	$395,576	4.3%
FYE March 31, 2022	$2,954,977	12.4%
FYE March 31, 2021	$3,136,216	17.4%
Overall result (loss)
Period	Overall result (loss)	net margin
Six months ending September 30, 2022	$(1,012,566)	-11.0%
FYE March 31, 2022	$2,045,222	22.1%
FYE March 31, 2021	$2,465,542	26.7%
Cash flow from operations
Period	Cash flow from operations
Six months ending September 30, 2022	$906,837
FYE March 31, 2022	$ (159,416)
FYE March 31, 2021	$2,449,042
(Glossary of terms)

click to enlarge

(Source – SEC)

As of September 30, 2022, Eshallgo had $3.9 million in cash and $3.3 million in total debt.

Free cash flow for the twelve months ended September 30, 2022 was $685,300.

Eshallgo Inc IPO Details

Eshallgo intends to raise $15 million in gross proceeds from an initial public offering of its Class A common stock and is offering three million shares at a proposed mid-price of $5.00 per share.

Class A common shareholders are entitled to one vote per share, while class B shareholders are entitled to ten votes per share and retain voting control of the company immediately after the IPO.

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

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

Assuming a successful IPO, the Company’s enterprise value at IPO would be approximately $100 million, excluding the impact of underwriters’ over-allotment options.

The free float to outstanding share ratio (excluding over-allotments by underwriters) will be approximately 12.88%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

As a foreign private issuer, the Company may benefit from reduced, delayed or exempt disclosure requirements for financial information and officers compared to those to which domestic US companies are subject.

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

Proposed use of IPO proceeds (SEC)

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

With respect to pending legal proceedings, management says that the Company is not currently a party to any material legal or administrative proceedings.

The only listed bookrunner for the IPO is Tiger Brokers.

Valuation metrics for Eshallgo

Below is a table of relevant cap and valuation numbers for the company:

Measure [TTM]	Crowd
Market capitalization at IPO	$116,425,000
Enterprise value	$99,642,788
price / sale	5.10
EV / Revenue	4.36
EV / EBITDA	40.91
earnings per share	$0.03
operating margin	10.67%
net margin	2.62%
Ratio of float to shares outstanding	12.88%
Proposed IPO midpoint price per share	$5.00
Net Free Cash Flow	$685,300
Free cash flow yield per share	0.59%
investment rate	5.84
sales growth rate	-10.18%
(Glossary of terms)

click to enlarge

(Source – SEC)

Eshallgo IPO Commentary

EHGO is seeking investments in the US public capital market to fund its general growth initiatives, potential acquisitions and working capital needs.

The company’s financial metrics have resulted in declining sales, lower gross profit and gross margin, lower operating income, a swing to overall loss, and faltering cash flow from operations.

Free cash flow for the twelve months ended September 30, 2022 was $685,300.

Selling expenses as a percentage of total sales have increased as sales have fallen; its sales efficiency multiple fell to negative (2.1x) in the last reporting period.

The company currently plans not to pay dividends and to retain future profits to reinvest back into the company’s growth and working capital needs.

Eshallgo’s recent investment history shows that it has had modest capital spending relative to its operating cash flow.

The market opportunities for the supply of office equipment in the PRC are likely to continue to grow, although global figures indicate that the industry is likely to shrink in the coming years, so the company’s future prospects are unimpressive.

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, coupled with additional reporting requirements from the US side, has put a serious damper on Chinese IPOs and their post-IPO performance.

A significant risk to the company’s prospects is the uncertain future status of Chinese company stocks in the context of the US HFCA law, which requires a delisting if the company’s auditors fail to make their working papers available for PCAOB review for three years .

Additionally, the post-IPO announcements from management of smaller Chinese companies that have become public in the US have been mostly spotty and superficial, indicating a lack of interest in communicating with shareholders, providing only the bare minimum required by the SEC and something quite a different approach to keeping shareholders informed of management’s priorities.

Tiger Brokers is the leading underwriter and IPOs managed by the firm over the last 12 months have generated an average negative return (23.7%) since going public. This is a lowest performance for any major underwriter over the period.

Risks to the company’s prospects as a public company include the highly competitive and fragmented nature of the company’s core business, the impact of inflation on its operations, whether it will be able to acquire the types of companies that it seeks, and relies on, inter alia, third party supply chains and producers.

As for valuation expectations, management is asking investors to pay an enterprise value/revenue multiple of around 4.4x on falling topline earnings and a swing to overall loss.

I will refrain from going public given the company’s declining revenues, reversal to wholesale losses, thin capitalization, industry and execution risks, and regulatory uncertainty in the PRC.

Estimated IPO Price Date: To be announced.