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A quick look at ZKH Group Limited
ZKH Group Limited (ZKH) has applied, pursuant to an F-1 registration, to raise $200 million in an initial public offering of its American Depositary Shares, which are the underlying Class A common stock Opinion.
The company operates a large and growing MRO sourcing platform in China but is generating significant operating losses.
I’ll provide a final opinion when we learn more about the IPO.
Overview of the ZKH Group
ZKH Group Limited, based in Shanghai, PRC, was established to develop an MRO (Maintenance, Repair and Operations) product platform and fulfillment network in China.
Management is led by Founder, Chairman and CEO Mr. Long Chen, who has been with the company ever since and previously attended the Executive MBA program at China Europe International Business School.
The company’s main offerings include the following:
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spare Parts
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chemicals
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manufacturing parts
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General consumables
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office supplies
As of December 31, 2022, ZKH Group has booked $1 billion in investments at market value from investors such as Eastern Bell, Genesis Capital, Tencent Mobility Limited and Internet Fund IV PTE. GMBH.
ZKH Group – customer acquisition
The company tracks clients of all sizes, from enterprise clients to micro-enterprises across China.
The company has 32 product lines, 17 million product SKUs (stock keeping units) and over 21,000 suppliers.
gross market value [GMV] surpassed $200 million in 2022.
Sales and marketing expenses as a percentage of total revenue have decreased while revenue has increased, as shown in the following figures:
|
Sales & Marketing |
Expenses vs. Income |
|
Period |
percentage |
|
2022 |
8.2% |
|
2021 |
9.0% |
click to enlarge
(Source – SEC)
The Sales & Marketing Efficiency Multiple, defined as how many dollars of incremental new revenue generated by each dollar of sales and marketing spend, was 1.0x for the most recent reporting period. (Source – SEC)
Market & competition of the ZKH Group
According to a 2022 market research article by Equal Ocean, the Chinese market for MRO products and services was estimated at US$1.9 trillion in 2021 and is expected to reach US$3.4 trillion by 2025.
This equates to a projected CAGR of 16% from 2022 to 2025.
The main drivers for this expected growth are the increased use of online platforms for MRO purchases by companies and the improvement of online offers and fulfillment services forced by the COVID-19 pandemic.
Also, below is a chart showing the recent development of the industrial B2B market in China and forecast up to 2024:
Size of the industrial B2B market in China (Same ocean)
Key contestants or other industry participants include:
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JD (JD)
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Alibaba (BAB)
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Yigongpin
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Xinfangsheng
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Leading future
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EHSY
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Fastening (FAST)
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grainer
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Other
Financial performance of ZKH Group Limited
The company’s recent financial results can be summarized as follows:
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Increasing sales
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Increase in gross profit and gross margin
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Reduced operating loss
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Reduced cash burn in operations
The following are relevant financial results arising from the company’s registration statement:
|
total revenue |
||
|
Period |
total revenue |
% variance vs. before |
|
2022 |
$1,171,160,000 |
8.6% |
|
2021 |
$1,078,111,408 |
|
|
gross profit (loss) |
||
|
Period |
gross profit (loss) |
% variance vs. before |
|
2022 |
$185,587,324 |
26.7% |
|
2021 |
$146,444,366 |
|
|
gross margin |
||
|
Period |
gross margin |
|
|
2022 |
15.85% |
|
|
2021 |
13.58% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
operating margin |
|
2022 |
$(96,578,310) |
-8.2% |
|
2021 |
$(156,400,000) |
-14.5% |
|
Overall result (loss) |
||
|
Period |
Overall result (loss) |
net margin |
|
2022 |
$(182,527,042) |
-15.6% |
|
2021 |
$(204,607,183) |
-17.5% |
|
Cash flow from operations |
||
|
Period |
Cash flow from operations |
|
|
2022 |
$(71,014,507) |
|
|
2021 |
$(194,753,803) |
|
|
(Glossary of terms) |
click to enlarge
(Source – SEC)
As of December 31, 2022, ZKH Group had $275.2 million in cash and $520.8 million in total debt.
Free cash flow for the twelve months ended December 31, 2022 was negative ($74.4 million).
ZKH Group Limited IPO Details
ZKH Group intends to raise gross proceeds of US$200 million from an initial public offering of its American Depositary Shares, which are the underlying Class A common stock, although the final figure may vary.
American Depositary Shares, representing the underlying Class A common shares.
The S&P 500 Index no longer includes companies with multiple share classes in its index.
No existing shareholder has expressed an interest in purchasing shares at the IPO price.
Management says it will use the net proceeds from the IPO as follows:
Proposed use of IPO proceeds (SEC)
(Source – SEC)
Management’s presentation of the company’s roadshow is not available.
With respect to pending lawsuits, management says that the Company is not currently facing any lawsuits that would materially adversely affect its financial condition or operations.
The listed bookrunners of the IPO are Goldman Sachs [Asia] and China Renaissance.
Commentary on the IPO of the ZKH Group
ZKH is seeking investments in the US public capital market to fund its growth initiatives, which may include acquisitions.
The company’s financials have resulted in increased revenue, increased gross profit and gross margin, reduced operating loss and reduced cash used.
Free cash flow for the twelve months ended December 31, 2022 was negative ($74.4 million).
Sales and marketing spend as a percentage of total sales has fallen as sales have increased, a positive sign; The multiplier for sales and marketing efficiency was 1.0x in the last calendar year.
The company currently plans not to pay dividends and to retain future profits to reinvest back into the company’s growth and working capital needs.
ZKH’s CapEx ratio indicates that it has spent on investments despite generating negative operating cash flow.
The market opportunity for online MRO procurement in China is large and is expected to grow at a high growth rate until 2025, so the company enjoys positive growth momentum in the industry.
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.
Goldman Sachs [Asia] is the lead underwriter and the only IPO led by the firm in the past 12 months has generated a return of 0.2% since its IPO. This is a mediocre performance for all major underwriters over the period.
The company is exposed to regulatory risks as it operates in jurisdictions subject to unpredictable changes in Chinese government policies.
The high operating loss results suggest that the stock could be negatively impacted by the prospect of higher costs of capital due to rising interest rates.
I will provide a final opinion when we hear more details on the IPO from management.
Estimated IPO Price Date: To be announced.
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