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A Quick Take On CCSC Technology International Holdings Limited
CCSC Technology International Holdings Limited (CCTG) has filed to raise $12.5 million in an IPO of its ordinary shares, according to an F-1 registration statement.
The firm designs and manufactures electronic interconnect products.
Given the risks associated with the firm’s primary operations being within China, its ongoing regulatory uncertainties and slowing topline revenue growth, I’m on Hold for the IPO.
CCSC Overview
Hong Kong, PRC-based CCSC Technology International Holdings Limited was founded to create and sell interconnect products to a diversified customer base in more than 25 countries in Asia, Europe and the Americas.
The firm’s products are used in the following industries:
-
Industrial
-
Robotics
-
Automotive
-
Computers
-
Medical Equipment
-
Telecommunications
-
Networking
-
Consumer Products
Management is headed by founder and Chairman Mr. Chi Sing Chiu, who has been with the firm since its inception and has over thirty years’ experience in the electronic interconnects industry.
The company’s primary offerings include the following:
-
Connectors
-
Cables
-
Wire harnesses
As of September 30, 2022, CCSC has booked fair market value investment of $2.0 million from investors, including CCSC Investment Limited (Founder Chiu) and Sky Interconnect Global Limited.
CCSC – Customer Acquisition
The company sells its products to OEMs (Original Equipment Manufacturers) and ODMs (Original Design Manufacturers).
The firm’s customers include companies such as Maersk, Bitzer, Danfoss, Linak, Philips, Osram, Harman, Vtech, Universal Robots and Flextronics.
Selling expenses as a percentage of total revenue have trended lower as revenues have increased, as the figures below indicate:
|
Selling |
Expenses vs. Revenue |
|
Period |
Percentage |
|
Six Mos. Ended September 30, 2022 |
3.6% |
|
FYE March 31, 2022 |
3.2% |
|
FYE March 31, 2021 |
5.1% |
(Source – SEC)
The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling expense, fell to 2.4x in the most recent reporting period, a negative trend, as shown in the table below:
|
Selling |
Efficiency Rate |
|
Period |
Multiple |
|
Six Mos. Ended September 30, 2022 |
2.4 |
|
FYE March 31, 2022 |
5.3 |
(Source – SEC)
CCSC’s Market & Competition
According to a 2022 market research report by KBV Research, the global market for passive and interconnecting electrical components was an estimated $163 billion in 2018 and is expected to reach $249 billion by 2028.
This represents a forecast CAGR of 5.3% through 2028.
The main drivers for this expected growth are a growing adoption of electronic devices such as laptops, tablets and smartphones as well as electronics within transportation and industrial applications.
Also, the chart below shows the passive and interconnect electronic market breakdown by application, as of 2021:
Electronic Interconnect Market (KBV Research)
Major competitive or other industry participants include the following:
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China Aviation Optical-Electrical Technology Co
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Shenzhen Deren Electronic Co
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Luxshare Precision Industry Co
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Shenzhen Everwin Precision Technology Co
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Guizhou Space Appliance Co
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Others
CCSC Technology International Holdings Limited Financial Performance
The company’s recent financial results can be summarized as follows:
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Growing topline revenue, although at a decelerating rate of growth
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Increasing gross profit but uneven gross margin
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Uneven operating profit
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Variable 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 September 30, 2022 |
$ 15,620,925 |
9.5% |
|
FYE March 31, 2022 |
$ 27,169,935 |
20.2% |
|
FYE March 31, 2021 |
$ 22,608,447 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
Six Mos. Ended September 30, 2022 |
$ 5,439,255 |
37.2% |
|
FYE March 31, 2022 |
$ 7,475,904 |
4.2% |
|
FYE March 31, 2021 |
$ 7,175,713 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
Six Mos. Ended September 30, 2022 |
34.82% |
|
|
FYE March 31, 2022 |
27.52% |
|
|
FYE March 31, 2021 |
31.74% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
Six Mos. Ended September 30, 2022 |
$ 2,101,575 |
13.5% |
|
FYE March 31, 2022 |
$ 2,461,929 |
9.1% |
|
FYE March 31, 2021 |
$ 2,490,174 |
11.0% |
|
Comprehensive Income (Loss) |
||
|
Period |
Comprehensive Income (Loss) |
Net Margin |
|
Six Mos. Ended September 30, 2022 |
$ 1,743,947 |
11.2% |
|
FYE March 31, 2022 |
$ 2,657,195 |
17.0% |
|
FYE March 31, 2021 |
$ 2,648,855 |
17.0% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
Six Mos. Ended September 30, 2022 |
$ 1,193,569 |
|
|
FYE March 31, 2022 |
$ 2,921,616 |
|
|
FYE March 31, 2021 |
$ 2,226,298 |
|
(Source – SEC)
As of September 30, 2022, CCSC had $5.9 million in cash and $7.7 million in total liabilities.
Free cash flow during the twelve months ending September 30, 2022, was $2.8 million.
CCSC Technology International Holdings Limited IPO Details
CCSC intends to raise $12.5 million in gross proceeds from an IPO of its ordinary shares, offering 2.5 million shares at a proposed midpoint price of $5.00 per share.
No existing shareholders have indicated an interest in purchasing shares at the IPO price.
Immediately after the IPO, the company will remain controlled by founder and Chairman Dr. Chiu.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $47 million, excluding the effects of underwriter over-allotment options.
The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 20.0%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Management says it will use the net proceeds from the IPO as follows:
Proposed Use Of IPO Proceeds (SEC)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management says the firm is not currently ‘a party to any material legal or administrative proceedings.’
The sole listed bookrunner of the IPO is Joseph Stone Capital, LLC.
Valuation Metrics For CCSC
Below is a table of relevant capitalization and valuation figures for the company:
|
Measure [TTM] |
Amount |
|
Market Capitalization at IPO |
$62,500,000 |
|
Enterprise Value |
$46,891,891 |
|
Price / Sales |
2.19 |
|
EV / Revenue |
1.64 |
|
EV / EBITDA |
14.81 |
|
Earnings Per Share |
$0.23 |
|
Operating Margin |
11.10% |
|
Net Margin |
10.53% |
|
Float To Outstanding Shares Ratio |
20.00% |
|
Proposed IPO Midpoint Price per Share |
$5.00 |
|
Net Free Cash Flow |
$2,845,915 |
|
Free Cash Flow Yield Per Share |
4.55% |
|
Debt / EBITDA Multiple |
0.08 |
|
CapEx Ratio |
40.21 |
|
Revenue Growth Rate |
9.49% |
|
(Glossary Of Terms) |
(Source – SEC)
Commentary About CCSC’s IPO
CCTG is seeking U.S. public capital market investment to fund its general growth and expansion plans.
The company’s financials have generated increasing topline revenue, although at a decelerating rate of growth, growing gross profit but uneven gross margin, variable operating profit and uneven cash flow from operations.
Free cash flow for the twelve months ending September 30, 2022, was $2.8 million.
Selling expenses as a percentage of total revenue have trended lower as revenue has increased; its Selling efficiency multiple fell to 2.4x in the most recent reporting period.
The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm’s growth and working capital requirements.
The company is subject to a number of controlling laws in the Cayman Islands and the PRC regarding the distribution of dividends.
CCSC’s CapEx Ratio indicates it has spent lightly on capital expenditures as a percentage of its operating cash flow in the trailing twelve-month period, although I suspect this will change substantially if the firm is successful in obtaining new funds.
The market opportunity for electronic interconnects is quite large but is expected to grow at a moderate rate of growth in the coming years. The industry features a number of very large competitors.
Joseph Stone Capital is the lead underwriter and the only IPO led by the firm over the last 12-month period has generated a return of negative (73.7%) since its IPO. This is a bottom-tier performance for all major underwriters during the period.
Like other companies with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.
The Chinese government’s crackdown on certain IPO company candidates combined with added reporting and disclosure requirements from the U.S. 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 outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.
Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.
Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.
As for valuation expectations, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 1.6x.
Given the risks associated with the firm’s primary operations being within China, its ongoing regulatory uncertainties and slowing topline revenue growth, I’m on Hold for the IPO.
Expected IPO Pricing Date: To be announced.