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A quick look at Graphex Group Limited
Graphex Group Limited (GRFX) has applied to raise $14 million in an initial public offering of its American Depositary Shares, which represent common stock, according to an F-1 registration statement.
The Company manufactures graphite products used in lithium-ion batteries.
GRFX grows revenue but operating losses soar.
I will provide a final opinion when we hear more details on the IPO from management.
Company & Technology
Based in Hong Kong, PRC, Graphex was established to develop graphene products for use in lithium-ion batteries, specifically for electric vehicles and clean energy storage applications.
Management is led by Chief Executive Officer, Andross Yick Yan Chan, who has been with the company since January 1991 and was previously a Director of Earthasia Limited.
Below is a short overview video on the use of graphene in lithium-ion batteries:
(Source)
The company’s main offerings include:
-
Spherical Graphite
-
High purity graphite
-
Micronized Graphite
Graphex has booked $53 million in investments at fair market value as of June 30, 2021 from investors including various individuals.
Graphex – Customer Acquisition
The Company derives most of its revenue from the sale of spherical graphite in the PRC and Hong Kong.
GRFX’s current facilities have a production capacity of approximately 10,000 tonnes of graphene products per year.
Selling and marketing expenses as a percentage of total sales have changed as sales have increased, as shown in the following figures:
|
sales and marketing |
Expenses vs. Income |
|
period |
percentage |
|
Six months ending June 30, 2021 |
3.4% |
|
2020 |
3.6% |
|
2019 |
-8.7% |
(Source)
The Sales and Marketing Efficiency Multiplier, defined as how many dollars of additional new revenue generated by each dollar of sales and marketing spend, fell 4.1 times over the most recent reporting period, as shown in the table below:
|
sales and marketing |
efficiency rate |
|
period |
Several |
|
Six months ending June 30, 2021 |
4.1 |
|
2020 |
5.1 |
(Source)
Graphex market and competition
According to a 2021 market research report by Grand View Research, the global graphene market was valued at US$94.4 million in 2020 and is projected to reach US$1.67 billion by 2028.
This equates to a projected CAGR of 43.2% from 2021 to 2028.
The main drivers for this expected growth are increasing demand for such products in a variety of industries, including biomedical, composites and coatings, electronics, water and wastewater treatment, and energy storage.
Below is also a chart showing historical and forecast future growth path of US Graphene Market:
US Graphene Market (Grand View Research)
(Source)
Key contestants or other industry participants include:
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Angertron Materials, Inc.
-
ACS Material, LLC
-
BGT Materials Ltd.
-
CVD Equipment Corp.
-
Grafoid Inc.
-
graphene
-
Graphene NanoChem
-
NanoXplore, Inc.
-
G6 Materials Corp.
-
XG Sciences
-
Thomas Schwan & Co.Ltd.
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2D Carbon Graphene Material Co.,Ltd.
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Haydale Graphene Industries plc
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Applied Graphene Materials (AGM)
Financial performance of Graphex Group Limited
The company’s recent financial results can be summarized as follows:
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Uneven sales
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Variable gross profit and declining gross margin
-
Increasing operating losses
-
A change to cash used in 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 June 30, 2021 |
$23,413,000 |
16.1% |
|
2020 |
$49,853,000 |
22.2% |
|
2019 |
$40,812,330 |
|
|
gross profit (loss) |
||
|
period |
gross profit (loss) |
% variance vs. before |
|
Six months ending June 30, 2021 |
$9,084,000 |
7.7% |
|
2020 |
$20,131,000 |
5.8% |
|
2019 |
$19,026,670 |
|
|
gross margin |
||
|
period |
gross margin |
|
|
Six months ending June 30, 2021 |
38.80% |
|
|
2020 |
40.38% |
|
|
2019 |
46.62% |
|
|
Operating Profit (Loss) |
||
|
period |
Operating Profit (Loss) |
operating margin |
|
Six months ending June 30, 2021 |
$(6,821,000) |
-29.1% |
|
2020 |
$(8,688,000) |
-17.4% |
|
2019 |
$(6,038,630) |
-14.8% |
|
net income (loss) |
||
|
period |
net income (loss) |
net margin |
|
Six months ending June 30, 2021 |
$(9,284,000) |
-39.7% |
|
2020 |
$(12,348,000) |
-52.7% |
|
2019 |
$(8,062,600) |
-34.4% |
|
Cash flow from operations |
||
|
period |
Cash flow from operations |
|
|
Six months ending June 30, 2021 |
$(2,428,000) |
|
|
2020 |
$787,000 |
|
|
2019 |
$(3,958,240) |
|
|
(Glossary of terms) |
(Source)
As of June 30, 2021, Graphex had $3.6 million in cash and $119 million in total debt.
Free cash flow for the twelve months ended June 30, 2021 was negative ($3.9 million).
Details of the Graphex Group Limited IPO
Graphex intends to raise $14 million in gross proceeds from an initial public offering of its American Depositary Shares, which represent common stock, although the final number may vary.
No existing shareholder has expressed an interest in buying shares at the IPO price.
The Company’s shares are currently listed on the OTCQX under the symbol “GRFXY”.
Management says it will use the net proceeds from the IPO as follows:
We plan to use approximately $13 million of the proceeds to upgrade and expand our Graphene Products business’ manufacturing facility(s).
We plan to use approximately $7.5 million of the proceeds to repay short-term debt to reduce our financing costs, which debt will be determined by GGL prior to pricing of this offering and will be disclosed in a supplement to this prospectus.
The remaining proceeds from this offering will be used for working capital and general corporate purposes.
(Source)
Management’s presentation of the company’s roadshow is not available.
Regarding pending legal proceedings, management says the company is not the subject of material legal claims, although it is pursuing claims related to the acquisition of an equity interest in Suzhou Industrial Park Wenlvge Hotel Management Company Limited.
The sole public bookrunner of the IPO is EF Hutton.
Commentary on the Graphex IPO
GRFX is seeking public investment in the US to fund expansion of its manufacturing facilities and reduce its short-term debt burden.
The company’s financials have generated variable top-line growth, uneven gross profit and declining gross margin, growing operating losses, and a shift to operating cash.
Free cash flow for the twelve months ended June 30, 2021 was negative ($3.9 million).
Selling and marketing expenses as a percentage of total sales varied as sales growth varied; its sales and marketing efficiency multiple fell to 4.1 times in the most recent period.
The company currently does not plan to pay dividends on its shares and is subject to a number of restrictions on paying dividends in the future should it choose to do so.
The market opportunity for the supply of graphene products is moderate but is expected to grow very rapidly until 2028 thus the Company is benefiting from strong market growth momentum.
Like other Chinese firms 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 contractual rights to the company’s operating results but would not own the underlying assets.
This is a legal gray area that carries the risk of management changing the terms of the contractual agreement or the Chinese government changing 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 candidates, coupled with additional reporting and disclosure requirements from the US, has put a serious damper on China’s IPOs and their post-IPO performance.
EF Hutton is the sole underwriter and the IPOs the firm has led over the past 12 months have generated an average negative return (48.0%) since going public. This is a lowest performance for any major underwriter over the period.
Key risks to the Company’s prospects include volatility in commodity prices and the associated supply chain disruptions, as well as the PRC’s rapidly changing and unpredictable legal and regulatory policies.
When we learn management’s assumptions about IPO pricing and valuation, I will provide a final opinion.
Estimated IPO Price Date: To be announced.
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