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A brief overview of Jinxin Technology Holding Company
Jinxin Technology holding company (JTHC) has filed a request to raise $5 million in an initial public offering of its American Depositary Shares, representing underlying common stock SEC F-1 Registration Statement.
The Company provides digital content products and services to K-9 students in China.
Jinxin has had declining sales but increasing gross profit and operating profit recently.
I will provide an update once we get more details on the IPO.
Jinxin overview
Shanghai-based Jinxin Technology Holding Company was established to provide educational content for K-9 students by converting textbooks into digital versions for Chinese and English subjects in China.
Management is led by Founder, Chairman and CEO Mr. Jin Xu, who has been with the company since its inception in 2014 and previously worked as a software developer and Architect at Huawei Technologies.
The company’s main offerings include:
-
Digital Textbooks
-
Digital self-learning materials
-
leisure reading products.
As of December 31, 2022, Jinxin has booked US$36.9 million in fair market value investments from investors including Namibox Technology, Wu Capital, Rockbridge Angel Investments, QM Angel I, Talented Ventures II and China Broadband Capital Partners.
Jinxin – Customer Acquisition
The company distributes its digital content through its learning app Namibox, as well as through telecom and broadcast operators and third-party devices.
The company’s Namibox app had more than 77 million downloads and 35 million registered users as of December 31, 2022.
Management plans to expand its market focus beyond the K-9 student market.
Sales and marketing expenses as a percentage of total sales have decreased due to fluctuating revenues, as shown in the following figures:
|
Sales & Marketing |
Expenses vs. Income |
|
Period |
percentage |
|
Fiscal year ends December 31, 2022 |
4.9% |
|
Fiscal year ended December 31, 2021 |
30.4% |
click to enlarge
(Source – SEC.)
The Sales and Marketing Efficiency Multiplier, which defines how many dollars of incremental new revenue generated by each dollar of sales and marketing spend, was negative (3.2x) for the most recent reporting period. (Source – SEC.)
The Rule of 40 is a software industry rule of thumb stating that as long as the combined revenue growth rate and EBITDA percentage is at least 40%, the company is on an acceptable growth/EBITDA trajectory.
JTHC’s most recent calculation was only 5% as of December 31, 2022, so the company has performed poorly in this regard, as shown in the table below:
|
Rule of 40 |
calculation |
|
Recent Revenue Growth % |
-14% |
|
EBITDA % |
19% |
|
In total |
5% |
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(Source – SEC.)
Jinxin’s Market and Competition
According to a 2023 GlobalData market research report, the Chinese EdTech market (which includes Jinxin’s content segment) generated an estimated total revenue of $90.4 billion in 2022.
This equates to a projected CAGR (Compound Annual Growth Rate) of 19.4% between 2017 and 2022.
The main drivers for this expected growth were a general trend towards consumer digital content as well as the global pandemic and the need to learn from home in a digital environment.
Additionally, the higher education segment generated an estimated $43.7 billion in revenue in 2022, the highest segment at 48.3% of total revenue.
The industry is highly fragmented and has dozens of direct or indirect competitors. The Chinese government has recently taken steps to exercise more control over online education companies in various segments of the industry.
Financial Performance of Jinxin Technology Holding Company
The company’s recent financial results can be summarized as follows:
-
declining sales
-
Increase in gross profit and gross margin
-
A turnaround to operating profit and positive cash flow from operations.
Below are relevant financial results derived from the Company’s registration statement:
|
total sales |
||
|
Period |
total sales |
% Variance vs. Previous |
|
Fiscal year ends December 31, 2022 |
$34,281,000 |
-13.6% |
|
Fiscal year ended December 31, 2021 |
$39,694,560 |
|
|
gross profit (loss) |
||
|
Period |
gross profit (loss) |
% Variance vs. Previous |
|
Fiscal year ends December 31, 2022 |
$14,101,000 |
12.3% |
|
Fiscal year ended December 31, 2021 |
$12,557,440 |
|
|
gross margin |
||
|
Period |
gross margin |
% Variance vs. Previous |
|
Fiscal year ends December 31, 2022 |
41.13% |
30.0% |
|
Fiscal year ended December 31, 2021 |
31.64% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
operating margin |
|
Fiscal year ends December 31, 2022 |
$6,346,000 |
18.5% |
|
Fiscal year ended December 31, 2021 |
$(11,252,480) |
-28.3% |
|
Total Income (Loss) |
||
|
Period |
Total Income (Loss) |
net margin |
|
Fiscal year ends December 31, 2022 |
$7,077,000 |
20.6% |
|
Fiscal year ended December 31, 2021 |
$(11,956,160) |
-30.1% |
|
Cash flow from operations |
||
|
Period |
Cash flow from operations |
|
|
Fiscal year ends December 31, 2022 |
$4,815,000 |
|
|
Fiscal year ended December 31, 2021 |
$(6,896,000) |
|
|
(Glossary of terms.) |
click to enlarge
(Source – SEC.)
As of December 31, 2022, Jinxin had $8.0 million in cash and $12.3 million in total debt.
Free cash flow for the twelve months ended December 31, 2022 was $4.8 million.
Jinxin Technology Holding Company IPO details
Jinxin intends to raise $5 million in gross proceeds from an IPO of its American Depositary Shares, representing underlying common stock, although the final number may vary.
No existing shareholder has expressed an interest in purchasing shares at the IPO price.
As a foreign private issuer, the company may elect to benefit from reduced, delayed or exempt financial and executive disclosure requirements compared to those required by domestic US companies.
Management says the company qualifies as an “emerging growth company” under the JOBS Act 2012 and may choose to benefit from reduced reporting requirements for public companies; Potential shareholders would receive less information for the IPO and going forward as a publicly traded company under the requirements of the law.
Management states that it will use the net proceeds from the IPO as follows:
About 50% is expected to be used for product and content development;
About 20% is expected to be used for sales, marketing and brand promotion.
around 20% is expected to be used for recruiting experienced staff; And
Approximately 10% is expected to be used for general corporate purposes and potential strategic investments and acquisitions to strengthen our technology capabilities and overall ecosystem, although we have not identified any specific investments or acquisition opportunities at this time.
(Source – SEC.)
The company’s stock incentive plan currently provides for up to 3.7% of the total authorized shares out of 3.5 billion shares.
A presentation of the company roadshow by the management is not available.
With respect to pending legal proceedings, management states that the Company is not currently involved in any legal proceedings that would have a material adverse effect on its financial condition or operations.
However, the company could “be subject to liability claims for inappropriate content in our product and content offerings, which could subject us to legal costs and damage our reputation.”
The sole public bookrunner of the IPO is EF Hutton.
Commentary on Jinxin IPO
JTHC is seeking public capital market investment in the US to support its product development and growth initiatives.
The company’s financials have resulted in declining revenues but higher gross profits and gross margins, and more recently higher operating income and positive cash flow from operations.
Free cash flow for the twelve months ended December 31, 2022 was $4.8 million.
The share of sales and marketing costs in total sales has fallen; The sales and marketing efficiency multiplier was negative (3.2x), indicating a deterioration in efficiency as revenue declined year-on-year.
The company currently plans not to pay dividends and to retain future profits, if any, to reinvest in the company’s growth and working capital needs.
In addition, the company is subject to various laws in the Cayman Islands and China regarding money transfers or dividend payments.
Jinxin’s recent investment history shows that the company has had little investment relative to its operating cash flow.
The company’s Rule of 40 results were poor as the decline in sales largely offset recent operating profit.
The educational technology and content market opportunity is large and growing, with significant demand upside due to the global pandemic, allowing the Company to enjoy positive industry growth momentum in its favor.
EF Hutton is the sole underwriter and the 12 IPOs the company has completed in the past 12 months have generated an average negative return (50.5%) since their IPO. This is a bottom performance for any major underwriter over the period.
Like other Chinese firms looking to enter US markets, the company operates under 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 carries the risk that management will change the terms of the contract agreement or the Chinese government will change the legality of such agreements. Potential investors in the IPO would have to consider this important structural uncertainty.
In addition, the Chinese government’s crackdown on companies’ IPO candidates, coupled with additional US reporting requirements, has significantly impacted 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, post-IPO communications from management at smaller Chinese companies that have gone public in the US have been largely patchy and superficial, indicating a lack of interest in shareholder communications that provide only the bare minimum required by the SEC and represents a very different approach to keeping shareholders informed of management’s priorities.
As soon as we hear more details about the IPO from management, I will provide a final opinion.
Estimated IPO Price Date: To be announced.
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