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Intelligent Living Application Group (NASDAQ:ILAG) is a $65 million market cap company that sells locks under the Kambo and Bamberg brands. The Company is a Cayman Islands holding company that owns subsidiaries based in Hong Kong and China. They are subject to numerous risks, including demand and supply side risks, but also regulatory risks in China and risks related to delisting. This IPO was for the purpose of funding the development of software for their smart lock products that will be launched soon. Ultimately, they are a small player among many competitors with more advanced products and better financial position. As cash becomes a more valuable resource and issues remain that are more difficult for a smaller player to deal with, its competitors are more attractive than they are to people interested in the lock market. Still, it’s good to know what’s out there, so here’s a breakdown of ILAG.
When did ILAG go public?
ILAG went public through the IPO on July 13, 2022 on the Nasdaq Capital Market with an initial valuation of $4 per share, representing a market capitalization of $72 million. The purpose of the IPO was to advance the research and development of smart locking systems, which had to be paused in recent years, leaving work on the software unfinished.
Most of our R&D on smart locks was done in-house by our technicians and engineers, except that in 2017, Hing Fat hired outside services for about $25,000. Due to the customs war and the outbreak of COVID-19, we have not made any further progress on the software for our smart locks to save more working capital for our core operations.
Brochure ILAG – ‘Our business area’
The company isn’t listed on any other market, which is one of the first potential problems. Many companies that are essentially Chinese have listings in Hong Kong or Shenzhen, and this mitigates the impact of the HFCAA regulation, which came into effect under President Trump as part of a series of measures aimed at targeting Chinese companies on the US – to act on the market. At present, ILAG has no problem with this regulation, since the auditors they hire are based in the USA. However, if for any reason they are found by the regulator PCAOB to be unable to fully comply with their obligations, they could run afoul of the HFCAA, which would lead to delisting concerns that put great pressure on other companies like Alibaba exercise (Baba). As far as we understand, ILAG is well aware that they are working with a NYC-based auditor (named Wei, Wei & Co., LLP), but various rulings by China or the US could change whether that’s enough or not . If they were identified as a potential problem (aka emitters identified by the Commission), they could be de-listed in a few years if they failed to comply, which is not only by them but also by agreements between Beijing and China Washington would depend on auditors’ access and accountability. A resolution there is not guaranteed. Since they are not listed anywhere else, this would severely impact their liquidity, leading to severe price volatility and forced selling. This is something investors in Chinese companies need to be aware of and is detailed in the 10-K or prospectus risk sections.
ILAG markets
What are ILAG’s markets? Geographically, almost all sales are in the US market and the model is wholesale sales. They will likely continue to do so and do so in the APAC market where they hope to expand their markets. However, they have recognized significant price competition in APAC markets that limits marginality in that market, while in the US it is quality-based competition and allows more latitude for pricing and building significant contribution.
End markets are real estate developers, leisure and hospitality markets (especially with the Smart Lockset foray), but also housing markets. There is a reopening element that is relaxing some of the markets that have been paralyzed by COVID-19, such as leisure and hospitality. But new business development in APAC for these markets will be somewhat limited as China is still in lockdown, perhaps a signal of what is to come for the rest of us as they have been ground zero for the pandemic. While the reopening restores markets in the US, other markets could face greater trouble. ILAG customers can recall purchases if real estate markets and development rates suffer. Developers are already struggling with supply chain bottlenecks in terms of volume, but it could also become a demand problem as interest rates rise. Office real estate may be in a secular decline, so these markets are also a bit shaky.
Below are some of ILAG’s competitors in their markets, excluding companies like Dormakaba, AB ABLOY and others.
Competitor (ILAG brochure)
Most of these companies are also involved in other businesses but some like Allegion plc (ALL) are closer to ILAG which is a lockset only. Allegion operates in the enterprise security and building security market, dealing with many door functions, including locks and ID systems. The mechanical products segment accounts for about 80% of the business and overlaps significantly with ILAG’s markets. Allegion leads in terms of software and technology, where ILAG has only spent about $20,000 on contracting R&D on top of internal work and has had to put those efforts on hold in recent years to conserve working capital and manage business issues , encompassing more than just end-market pressures related to COVID-19 and the current lockdowns in China. Allegion is not heavily indebted and has a high debt capacity with a cash-generative business model, while ILAG has had to turn to the stock markets to fund its research and development. In addition, they are less subject to the power control problems affecting some of the Chinese manufacturers such as ILAG, where government regulations limit on-floor power consumption to conserve electricity as energy has become scarce. With the ongoing COVID-19 problem in China related to the continuation of strict controls, the manufacturing will continue to be disrupted from time to time. All of this limits ILAG’s scalability and poses a threat to well-capitalized incumbents like Allegion.
finance
The financials reflect the struggles of a company dealing with tougher end markets and selling a product that is already well established in the market. They’re generating growth, but the new forays like digital locks and the APAC market in general are unlikely to fuel growth further, especially since the end-market demand environment is ambiguous.
Income statement (ILAG prospectus)
The lack of scale limits their profitability, and losses only grow as they take their first steps to scale operations. Basically, while there will be a tipping point, we don’t see strong catalysts to get them to that point quickly and avoid further capital market action. With the IPO, the company raised around $20 million, which is great. This dwarfs their last disclosed cash position of $131,000 and will keep the business going for quite a while. While R&D will begin to increase operating outflows, current cash burn is approximately $1 million per year. Assuming that doubles, you’re covered for several years since the debt position is only about $2 million. Leverage won’t be an issue and risks of dilution are minimal, but the company needs to grow quite a bit before it emerges from unprofitability, especially as the company has kept its belt tight before going public, which eases the pressure.
valuation
Against this background, the rating of 6x P/S seems quite high. Taking Allegion as a comp, it makes sense that investors might be interested in the business given its fairly high margins and good cash flow generation. End markets are generally solid, although they will experience some stress in the current macro environment. But starting small with a 6x P/S multiple that implies quite a bit of scaling and growth expectations at a time when there isn’t much hustle in their end markets and their growth is primarily attributed to marginal benefits , we don’t know I don’t think this is the right time and price to invest.
bottom line
From a valuation perspective, when you invest in a company that is poised for growth, you hope that the company is firing on all cylinders so that it can quickly transition from a more uncertain phase in its life to a more solid one, which also has a positive effect on its premium , as more and more investors begin to ‘qualify’ to invest in it. Catching a theoretically profitable company early is a good strategy. We believe in the theoretical profitability of a lockset business but do not understand the advantage ILAG is intended to offer in terms of product and as their end markets pie is not necessarily growing at the moment, investors risk slow growth of this company into its current valuation. Leverage and dilution are not a big issue, just growth expectations implied by the market price. Furthermore, it is actually a Chinese company and the delisting specter is one to be aware of. Finally, since the company essentially operates in China, there are regulatory uncertainties at all times that have already impacted the business. At the end of the day, it’s an emerging-market company. As we are generally wary of markets and realistic about valuation and operational risks, we are concerned about a company that is still growing from profitability and has operations in China. The market share is still tiny after all, not even a blip on these larger radars for now and yet without a smart lock product. We would stay on the sidelines.
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