PSI Group Holdings Prepares US IPO Terms (Pending: PSIG)

TRANSFER

A quick look at PSI Group Holdings Ltd

PSI Group Holdings Ltd (PSIG) has applied to raise $16.25 million in an initial public offering of its common stock, according to an F-1 registration statement.

The company provides forwarding services to companies operating in Asia.

Given the company’s ongoing regulatory risks in China, its patchy revenue growth history, and fragmented industry with low barriers to entry, I will refrain from going public.

Overview of the PSI Group

Based in Hong Kong, PRC, PSI Group Holdings Ltd was formed to provide a range of logistics services from its Hong Kong operating base.

Management is led by Chief Executive Officer Hok Wai Alex, KO, who has been with the company since February 2022 and previously held various positions at United Airlines and was the founder of Trans Orient Logistics HK.

The company’s main offerings include the following:

• Air and sea freight forwarding

• Logistical ancillary services

• Storage ancillary services

As of June 30, 2022, PSI Group has booked a fair value investment of US$7.9 million from investors including Grand Pro Development, Profit Sail SAS and Active Move Group Holdings.

PSI Group – customer acquisition

The Company seeks customer relationships with companies that require freight forwarding and related services.

Most of the company’s revenue comes from its air freight forwarding service offerings.

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

General administration	Expenses vs. Income
Period	percentage
Six months ending June 30, 2022	2.7%
2021	2.8%
2020	4.6%

click to enlarge

(Source – SEC)

The multiple of general and administrative efficiency, defined as how many dollars in additional new revenue generated by each dollar of general and administrative expenditure, fell to negative (6.7x) over the last reporting period, as shown in the following table:

General administration	efficiency rate
Period	Several
Six months ending June 30, 2022	-6.7
2021	16.5

click to enlarge

(Source – SEC)

Market & competition of the PSI Group

According to a 2022 market research report by Valuates Reports, the global trucking market was estimated at US$186 billion in 2021 and is projected to reach US$233 billion by 2028.

This equates to a projected CAGR of 3.3% from 2022 to 2028.

The main drivers for this expected growth are the increasing number of activities that large providers carry out for customers.

Also, an expected increase in e-commerce penetration along with increasing technological developments such as the use of machine learning/AI and robotic process automation are expected to drive additional growth.

The freight forwarding industry in Hong Kong is highly fragmented, with an estimated number of market participants in excess of 1,000 companies.

Financial Performance of PSI Group Holdings Ltd

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

• Declining sales

• Greatly reduced gross profit and gross margin

• Decreased operating profit and operating margin

• Significantly reduced 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 June 30, 2022	$49,486,841	-15.3%
2021	$130,907,212	84.3%
2020	$71,026,332
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Six months ending June 30, 2022	$3,687,759	-60.0%
2021	$18,572,517	148.7%
2020	$7,468,757
gross margin
Period	gross margin
Six months ending June 30, 2022	7.45%
2021	14.19%
2020	10.52%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Six months ending June 30, 2022	$2,350,061	4.7%
2021	$14,934,202	11.4%
2020	$4,232,082	6.0%
Overall result (loss)
Period	Overall result (loss)	net margin
Six months ending June 30, 2022	$2,195,780	4.4%
2021	$12,435,130	25.1%
2020	$3,727,415	7.5%
Cash flow from operations
Period	Cash flow from operations
Six months ending June 30, 2022	$122,377
2021	$15,572,264
2020	$3,544,787
(Glossary of terms)

click to enlarge

(Source – SEC)

As of June 30, 2022, PSI Group had $6.8 million in cash and $12.1 million in total debt.

Free cash flow for the twelve months ended June 30, 2022 was $6.5 million.

Details on the IPO of PSI Group Holdings Ltd

PSI Group intends to raise gross proceeds of $16.25 million from an initial public offering of its common stock and is offering 3.25 million shares at a proposed mid-price of $5.00 per share.

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 $105.5 million, excluding the impact of underwriters’ over-allotment options.

The ratio of free float to shares outstanding (excluding over-allotments by underwriters) will be approximately 13%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

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

Approximately US$[4.7 million] (U.S$[5.5 million] if the over-allotment option is exercised in full) or 35% towards further expansion of our integrated logistics and supply chain service network and potential acquisition of local warehouses and service centers in the United States:

Approximately US$[2.0 million] (U.S$[2.3 million] upon full exercise of the over-allotment option) or 15% for expanding and upgrading our technology infrastructure:

Approximately US$[1.3 million] (U.S$[1.6 million] upon full exercise of the over-allotment option) or 10% for establishment of regional offices and distribution network in the United States:

Approximately US$[1.4 million] (U.S$[1.6 million] upon full exercise of the over-allotment option) or 10% for hiring additional workers;

The balance of US$[4.0 million] (U.S$[4.7 million] upon full exercise of the over-allotment option) for general working capital and corporate purposes.

(Source – SEC)

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

With respect to pending legal proceedings, management said that the company is not involved in any pending material legal or administrative proceedings.

The sole public bookrunner for the IPO is Univest Securities.

Valuation key figures for the PSI Group

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

Measure [TTM]	Crowd
Market capitalization at IPO	$125,000,000
Enterprise value	$105,526,973
price / sale	1.03
EV / Revenue	0.87
EV / EBITDA	11.44
earnings per share	$0.31
operating margin	7.57%
net margin	6.39%
Ratio of float to shares outstanding	13.00%
Proposed IPO midpoint price per share	$5.00
Net Free Cash Flow	$6,531,255
Free cash flow yield per share	5.23%
Debt / EBITDA multiple	0.08
investment rate	04/23
sales growth rate	-15.34%
(Glossary of terms)

click to enlarge

(Source – SEC)

Commentary on the IPO of the PSI Group

PSIG is seeking investments in the US public capital market to fund its service expansion initiatives.

The Company’s financials resulted in decreased revenue, significantly lower gross profit and gross margin, lower operating profit and operating margin, and lower cash flow from operations.

Free cash flow for the twelve months ended June 30, 2022 was $6.5 million.

G&A expenses as a percentage of total revenue have decreased as revenue has decreased; its multiple for general and administrative efficiency fell to negative (6.7x) in the last reporting period.

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

PSIG’s CapEx ratio shows that it has made small investments as a percentage of its operating cash flow.

The market opportunity for freight forwarding services is large but is expected to grow at a relatively low growth rate in the coming years.

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 crackdown on certain company 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.

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

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

In addition, the post-IPO disclosures from management of smaller Chinese companies that have become public in the US have been patchy and superficial, indicating a lack of interest in communicating with shareholders and only the bare minimum required by the SEC and a general one inadequate approach to keeping shareholders informed of management’s priorities.

Univest Securities is the sole underwriter and the IPOs it has led over the past 12 months have generated an average negative yield (60.0%) since its IPO. This is a lowest performance for any major underwriter over the period.

Risks to the Company’s prospects as a public company include intense competition from a variety of competitors and the Company’s small capitalization.

As for valuation expectations, management is asking investors to pay an enterprise value/revenue multiple of around 0.87x.

Given the company’s ongoing regulatory risks in China, its patchy revenue growth history, and fragmented industry with low barriers to entry, I will refrain from going public.

Estimated IPO Price Date: To be announced.