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Huadi International Attempts U.S. IPO Despite Revenue Drop (Pending:HUDI)

Quick Take

Huadi International Group (HUDI) has filed to raise $23 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm manufactures stainless steel seamless pipes, tubes and stainless steel bars.

HUDI is suffering from the effects of the Covid-19 pandemic on key sectors of demand.

When we learn more IPO details, I’ll provide a final opinion.

Company & Technology

Wenzhou, China-based Huadi was founded to design and manufacture steel pipe and related products for use in a variety of end markets and in over twenty countries worldwide.

Management is headed by founder and Chairman Mr. Di Wang, who has held numerous positions in industry associations and regional government.

Below is a brief overview video of how seamless stainless steel tubes are made:

Source: How its made

Huadi is focused on manufacturing high-end products and sells to over 400 customers in China and overseas, with a majority of its products being used in the oil & gas, electric energy and automotive industries.

The firm has received at least $22.5 million from investors including founder and Chairman Di Wang and Jueqin Wang.

Customer Acquisition

Huadi sells its products both through a direct sales force and through distributors depending on location and customer.

The firm’s major customers include China National Petroleum Corporation, Sinopec, and CRRC in China; in India its major customer is a ‘leading power company.’

Allied Stainless Group was its largest single customer and accounted for 10.13% of its 2019 revenue.

Selling, G&A expenses as a percentage of total revenue have been risen as revenues have fluctuated, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended March 31, 2020

7.6%

FYE Sept. 30, 2019

6.8%

FYE Sept. 30, 2018

5.5%

Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, swung to negative (3.4x) in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Six Mos. Ended March 31, 2020

-3.4

FYE Sept. 30, 2019

1.1

Source: Company registration statement

Market & Competition

According to a 2020 market research report by Grand View Research, the global steel pipes and tubes market was an estimated $142 billion in 2019 and is expected to reach $216 billion by the end of 2027.

This represents a forecast CAGR of 6.2% from 2020 to 2027.

The main drivers for this expected growth are a continued increase in oil & gas production, which is a major source of demand.

The outbreak of the Covid-19 pandemic has reduced demand in key industries such as manufacturing, oil & gas and construction.

Also, the United States is a very large user of steel pipes & tubes and the chart below shows its historical and forecast market size by application type:

Major competitive or other industry participants include:

  • ArcelorMittal (MT)

  • United States Steel (X)

  • Nippon Steel (OTCPK:NISTF)

  • Tata Steel

  • Jindal Steel & Power (OTC:JIZDY)

  • Rama Steel Tubes

  • Steel Authority of India

Financial Performance

Huadi’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Falling gross profit but increased gross margin

  • Reduced operating

  • Increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended March 31, 2020

$ 25,557,407

-20.5%

FYE Sept. 30, 2019

$ 65,518,316

8.5%

FYE Sept. 30, 2018

$ 60,386,004

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended March 31, 2020

$ 6,297,667

-4.5%

FYE Sept. 30, 2019

$ 14,622,672

10.4%

FYE Sept. 30, 2018

$ 13,243,254

Gross Margin

Period

Gross Margin

Six Mos. Ended March 31, 2020

24.64%

FYE Sept. 30, 2019

22.32%

FYE Sept. 30, 2018

21.93%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended March 31, 2020

$ 3,510,247

13.7%

FYE Sept. 30, 2019

$ 8,378,504

12.8%

FYE Sept. 30, 2018

$ 8,197,554

13.6%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended March 31, 2020

$ 2,681,239

FYE Sept. 30, 2019

$ 5,446,487

FYE Sept. 30, 2018

$ 5,248,532

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended March 31, 2020

$ 1,250,191

FYE Sept. 30, 2019

$ 2,346,607

FYE Sept. 30, 2018

$ 1,209,770

(Glossary Of Terms)

Source: Company registration statement

As of March 31, 2020, Huadi had $796,381 in cash and $43.1 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $450,377

IPO Details

Huadi intends to raise $23 million in gross proceeds from an IPO of its ordinary shares, although the final figure may differ.

The firm is offering to sell ordinary shares, which is unusual for a foreign firm. It is more typical to offer American Depositary Shares, which reduce the administrative burden on U.S. investors.

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

  • Product research and development

  • Marketing and business development

  • New production equipment

  • New business assessment and acquisition

  • Talent acquisition and training

  • Working capital

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

Listed bookrunners of the IPO are Craft Capital, R.F. Lafferty & Co. and Shengang Securities Company Limited.

Commentary

Huadi is seeking U.S. public capital for its growth plans and apparently to get it through the Covid-19 pandemic.

The firm’s financials indicate contracting topline revenue, reduced operating profit and net profit.

Selling, G&A expenses have fluctuated as revenues have contracted; its Selling, G&A efficiency rate swung into negative territory with the topline revenue contraction in the most recent period.

The market opportunity for steel pipe is robust in the long-term, however, the Covid-19 pandemic has negatively impacted demand in the near term.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm’s operational results.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Notably, many of the firm’s entities have been incorporated in Hong Kong, where in the past it has been easier for them to serve U.S. and other foreign customers.

With the recent crackdown by Beijing on Hong Kong, this advantage may be under some question as to the terms under which these businesses may operate.

When we learn more details about the IPO, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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