Huachen Ai Parking Seeks US IPO On Thin Margins And High Valuation (Pending:HCAI)

Huachen Is Growing, But Net Results Are Slim

Huachen Ai Parking Management Technology Holding Co. Ltd (HCAI) has filed to raise $25 million in an IPO of its ordinary shares, according to an SEC F-1 registration statement.

Huachen provides various smart parking equipment and solutions to parking facility operators in China.

The company is growing revenue from a small base, but net margin is tiny, and its proposed valuation is excessive, so my outlook on the IPO is Neutral (Hold).

What Does Huachen Do?

Pinghu City, China-based Huachen Ai Parking Management was founded to develop various parking equipment systems and products for smart parking applications in several environments.

Management is headed by Chairman and CEO Mr. Bin Lu, who has been with the firm since October 2016 and was previously General Manager of Shanghai Huachen Industrial Co.

The company’s primary offerings include the following:

• Cubic (vertical) parking products

• Design, repair, and maintenance

• Charging facilities.

As of December 31, 2023, Huachen has booked fair market value investment of approximately $3.9 million from investors, including Huayue [BVI] Holding, Hiaxuan [BVI], Huamao [BVI] and Huajing [BVI].

The firm seeks customers from among parking facility operators such as governments, property management companies, hospitals, institutions, real estate companies, residential communities and other operators of parking lots or garages.

In 2023, nearly 75% of the company’s revenue came from equipment structural parts, and 23% came from sales of its cubic parking garage systems.

This was nearly the opposite in percentage terms to 2022’s financial results.

Selling expenses as a percentage of total revenue have dropped as revenues have risen, as the figures below indicate:

Click to enlarge

(Source — SEC.)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling expense, was a very high 83.6x in the most recent reporting period. (Source — SEC.)

What Is Huachen’s Market?

According to a 2024 market research report by Precedence Research, the global smart parking systems markets were an estimated $7.5 billion in 2023 and are expected to exceed $55 billion in 2033.

This represents a forecast CAGR of 22.2% from 2024 to 2033.

The main drivers for this expected growth are continued urbanization of populations and greater use of personal vehicles, along with increasing demand for more efficient parking technologies by operators.

Furthermore, the Asia-Pacific region is expected to grow at the highest rate of growth through 2033, exceeding 25% CAGR, as a result of increased focus by regional governments on reducing air pollution and traffic congestion while enhancing parking management capabilities.

By application, the smart parking industry is roughly divided between three segments, as shown in the graphic here:

The smart parking solutions market remains significantly fragmented and is characterized by intense competition from companies of all sizes.

Huachen’s Recent Financial Results

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

• Growing top-line revenue

• Decreasing gross profit and gross margin

• Reduced operating profit

• Increased cash used in operations.

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

Click to enlarge

(Source — SEC.)

As of December 31, 2023, Huachen had $499,745 in cash and $26.9 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2023, was negative ($3.4 million).

Huachen’s IPO And Valuation Details

Huachen intends to raise $25 million in gross proceeds from an IPO of its ordinary shares, offering 5 million shares at a proposed midpoint price of $5.00 per share.

No shareholders have indicated any interest in purchasing additional shares of the company at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $167.5 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) would be around 14.3%.

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

The company’s presentation of its IPO roadshow is not currently available.

Regarding outstanding legal proceedings, management states the firm is not subject to any legal proceedings that would have a material adverse effect on its financial condition or results from operations.

The only listed bookrunner of the IPO is EF Hutton.

Below is a table of various capitalization and valuation figures for Huachen Ai Parking:

Click to enlarge

(Source — SEC.)

My Thoughts On Huachen’s IPO

HCAI is seeking U.S. public capital market investment to fund its general growth plans.

The firm’s financials have produced quickly growing top-line revenue, reduced gross profit and gross margin, lower operating profit, but higher cash used in operations.

Free cash flow for the twelve months ended December 31, 2023, was negative ($3.4 million).

Selling expenses as a percentage of total revenue have fallen as revenue has increased; its Selling efficiency multiple was a very high 83.6x in the most recent reporting period.

The firm currently plans to pay no dividends and intends to keep future earnings, if any, to finance its working capital and growth requirements.

There are also numerous restrictions on dividends by both Chinese laws and Cayman Islands regulations.

HCAI’s recent capital spending history shows that it has continued to spend on capital expenditures despite increasingly negative operating cash flow.

The market opportunity for providing smart parking systems is large and expected to grow substantially in the coming years, so the firm enjoys a positive industry tailwind but significantly fragmented and intense competition.

Risks to the company’s outlook as a public company include its ‘foreign private issuer’ and ‘emerging growth company’ status, which enables management to disclose substantially less information to shareholders.

Chinese companies also have typically communicated very little with shareholders and are subject to a wide variety of potentially capricious and arbitrary regulatory risks.

The public firm will also operate its wholly foreign-owned entities in China [WFOEs], so public shareholders would not have direct ownership interests in any operating entities, only in a Cayman Islands shell company.

The vast majority of such company stocks have performed very poorly post-IPO.

Management is seeking an Enterprise Value/EBITDA multiple of approximately 65 on an extremely low margin.

While the company is growing revenue from a small revenue base, but profits are slim in a low-margin business and the firm is burning cash.

Given the ongoing risks the company faces, worsening net results and high valuation expectations, my outlook on the HCAI IPO is Neutral (Hold).

Expected IPO Pricing Date: To be announced.