Global Engine Group Holding (GLE) begins US IPO

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A quick look at Global Engine Group Holding

Global Engine Group Holding Limited (GLE) has applied to raise $17 million in an initial public offering of its common stock, according to an F-1 registration statement.

The company offers IT-related Advisory services for companies in Hong Kong, Taiwan and Southeast Asian markets.

GLE is still a tiny company in fragmented and highly competitive markets.

I will provide an update when we get more details on the IPO.

Global engine overview

Based in Hong Kong, China, Global Engine was established to provide a wide range of business planning to technical design and operations services to companies in the telecommunications, data center and Internet of Things industries.

Management is led by Founder, Chairman and CEO Andrew Lee, who has been with the company since inception in 2018 and was previously Managing Director at 21Vianet Group Limited and Commercial Director at Hutchison Telecom Hong Kong Limited.

The company’s main offerings include:

• business planning

• system design

• project management

• Development and Operational Services

• feasibility studies

• maintenance

• Support

As of December 31, 2021, Global Engine has booked a fair value investment of $459,000 attributable to a related party from investors including China Information Technology Development Limited and individual investors.

Global Engine – Customer Acquisition

The company pursues clients seeking its consulting and implementation service offerings through a direct business development approach.

In its most recent fiscal year ended June 30, 2021, the company generated 81.3% of its revenue from Hong Kong and 18.7% from Taiwan.

G&A expenses as a percentage of total revenue tend to be higher as revenue has increased, as shown in the following figures:

General administration	Expenses vs. Income
Period	percentage
Six months ending December 31, 2021	6.2%
FYE June 30, 2021	7.2%
FYE June 30, 2020	1.7%

click to enlarge

(Source – SEC)

The general and administrative efficiency multiple, defined as how many dollars in additional new revenue generated by each dollar of general and administrative expenditure, increased 9.0 times over the most recent reporting period, as shown in the following table:

General administration	efficiency rate
Period	Several
Six months ending December 31, 2021	9.0
FYE June 30, 2021	8.5

click to enlarge

(Source – SEC)

Global Engine market and competition

According to a 2021 market research report by HKTDC Research, Hong Kong’s telecom industry was worth about US$12.3 billion in 2019, accounting for 3.5% of Hong Kong’s gross domestic product.

In December 2020, the Hong Kong government adopted its Smart City Blueprint 2.0, which has “created over 130 initiatives aimed at making life easier for the general public”.

As of September 2020, the ICT industry and related fields employed about 76,200 people in Hong Kong.

Also, as of September 2020, Hong Kong’s household broadband penetration rate was an impressive 95%, while “its internet connections are among the highest in the world”.

The market for ICT consulting and services in Hong Kong is highly fragmented and very competitive.

Financial performance of the Global Engine Group

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

• Increasing topline earnings

• Increased gross profit but decreased gross margin

• Higher operating profit

• Decreased 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 December 31, 2021	$4,718,726	125.7%
FYE June 30, 2021	$3,297,248	157.3%
FYE June 30, 2020	$1,281,720
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Six months ending December 31, 2021	$1,308,448	33.3%
FYE June 30, 2021	$1,296,803	101.6%
FYE June 30, 2020	$643,233
gross margin
Period	gross margin
Six months ending December 31, 2021	27.73%
FYE June 30, 2021	39.33%
FYE June 30, 2020	50.19%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Six months ending December 31, 2021	$1,015,023	21.5%
FYE June 30, 2021	$1,058,998	32.1%
FYE June 30, 2020	$431,347	33.7%
net income (loss)
Period	net income (loss)	net margin
Six months ending December 31, 2021	$858,108	18.2%
FYE June 30, 2021	$897,889	19.0%
FYE June 30, 2020	$395,756	8.4%
Cash flow from operations
Period	Cash flow from operations
Six months ending December 31, 2021	$254,665
FYE June 30, 2021	$1,848,370
FYE June 30, 2020	$ (55,046)
(Glossary of terms)

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As of December 31, 2021, Global Engine had $1 million in cash and $3.3 million in total debt.

Free cash flow for the twelve months ended December 31, 2021 was $483,960.

Details on the IPO of Global Engine Group Holding Limited

Global Engine intends to raise $17 million in gross proceeds from an initial public offering of its common stock, although the final number may vary.

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

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

Proposed Use of Proceeds (SEC EDGAR)

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

Regarding pending legal proceedings, management says the company “is not currently a party to any material legal or administrative proceedings.”

The sole public bookrunner for the IPO is Univest Securities.

Commentary on Global Engine’s IPO

GLE is seeking US capital markets funding to continue its general corporate expansion efforts.

The Company’s financial metrics have resulted in increased revenue, increased gross profit but decreased gross margin, increased operating profit but decreased cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was $483,960.

G&A expenses as a percentage of total revenue have increased as revenue has increased; its multiplier for general and administrative efficiency was 9.0x in the last reporting period.

The company currently plans not to pay dividends (although it has paid dividends in the recent past) and plans to retain future funds for its growth plans.

GLE’s trailing 12-month CapEx ratio is 3.6, suggesting it’s spending heavily on capital expenditures as a percentage of its operating cash flow.

The market opportunities for the provision of ICT consulting services in Hong Kong and Taiwan are large but fragmented and highly competitive.

Like other companies with Chinese operations looking to enter US markets, the company operates within a WFOE structure, or a wholly foreign-owned entity. US investors would only have an interest in an offshore company with interests in operating subsidiaries, some of which may be located in the PRC. In addition, there may be restrictions on the transfer of funds between subsidiaries within China.

The Chinese government’s recent crackdown on IPO candidates, coupled with additional reporting and disclosure requirements from the US, has put a serious damper on Chinese or related IPOs, resulting in generally poor post-IPO performance.

Prospective investors are well advised to consider the potential impact of certain laws relating to profit repatriation and changing or unpredictable Chinese regulatory decisions that may affect such companies and US stock listings.

Univest Securities is the lead underwriter and the IPOs the firm has led over the past 12 months have generated an average return of 24.0% since its IPO. This is a peak performance for all major underwriters over the period.

The main risk to the company’s prospects is that the regions in which it operates are subject to arbitrary and unpredictable regulatory measures that may be announced at short notice or not at all.

While the company has performed admirably as a tiny consulting services company, the question is whether it’s able to profitably expand its operations inside or outside of its existing geographic focus.

I will provide a final opinion when we hear more details on the IPO from management.

Estimated IPO Price Date: To be announced.