Samfine Creation Holdings Pursues $11 Million Mini-IPO (Pending:SFHG) -LSB

A Quick Takeover of Samfine Creation Holdings Group Limited

Samfine Creation Holdings Group Limited (SFHG) has filed to raise $11.25 million in an IPO of its common stock, according to an SEC F-1 registration statement.

The firm provides one-stop printing services in Hong Kong and mainland China.

Given SFHG’s declining top-line revenue, excessive valuation assumptions and low-margin business profile, my view on the IPO is to sell [Avoid].

Summary Samfine

Hong Kong, PRC-based Samfine Creation Holdings Group Limited was established to develop a range of printing services for various end-user markets.

Management is led by the founder, Chairman and CEO Mr. Wing Wah Cheng, who has been with the firm since its inception in 1993 and has decades of experience in the commercial printing industry.

The company’s main offerings include the following:

• Reserve products

• innovation and packaging products

• Stationery products

• Shopping bag

• Package boxes

• Other products.

As of June 30, 2023, Samfine has reserved a fair market value investment of $2 million from investors.

Samfine customer acquisition

The Company pursues new customer relationships through its direct sales and marketing efforts and through word of mouth and referrals.

Management intends to “further strengthen” its position in Hong Kong and expand into the United States market.

Sales and marketing expenses as a percentage of total revenue have increased as revenue has decreased, as the following figures show:

Click to enlarge

(Source – SEC.)

The sales and marketing efficiency multiple, defined as how many dollars of additional new revenue is generated from each dollar of sales and marketing spend, fell to negative (4.2x) in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source – SEC.)

Samfine’s Market and Competition

China’s printing services market, as a segment of the larger commercial printing market, is experiencing relatively low growth.

In 2023, the market size is estimated at $453 billion and is projected to reach $493 billion by 2028, according to a market. research report from Mordor Intelligence.

This projected growth represents a compound annual growth rate, or CAGR, of 1.67% over the five years to 2028.

In terms of market trends and driving factors, the Asia Pacific commercial printing industry is witnessing several trends:

• Personalized marketing messages are increasingly important, with demand for personalized print content driven by digital printing technologies such as variable data printing [VDP].

• There is a growing application of short-run production for a variety of materials, including books, direct mail, brochures, and catalogs. This also includes using digital marketing data to tailor print messages, resulting in improved customer engagement.

• Sustainability considerations are gaining importance. Commercial inkjet products, for example, are popular for their lower energy consumption, reduced carbon dioxide emissions and lack of toner dust emission.

• The industry has undergone significant transformations due to machine design, digitization and computerization, leading to increased productivity. However, rising costs of raw materials, including paper, ink and other chemicals, pose operational challenges.

Limited financial performance of Samfine Creation Holdings Group

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

• Decline in top line revenue

• Reduced gross profit

• Variable gross margin

• A swing to operating losses and cash used in operations.

Below are the relevant financial results extracted from the company’s registration statement:

Click to enlarge

(Source – SEC.)

As of June 30, 2023, Samfine had $2.2 million in cash and $8.8 million in total liabilities.

Free cash flow for the twelve months ending June 30, 2023, was negative ($292,207).

Samfine Creation Holdings Group Limited IPO Details

Samfine aims to raise $11.25 million in gross proceeds from an IPO of its common stock, offering 2.5 million shares at a proposed price of $4.50 per share.

No existing shareholders have expressed interest in purchasing shares at the IPO price.

The firm is also listing for sale about 1.8 million shares by selling shareholders. These shares, if sold in the market in the short term, would potentially adversely affect the share price.

The company is a “foreign private issuer” and an “emerging company,” both of which allow management to disclose much less information to public shareholders.

Such companies have typically performed poorly post-IPO.

Assuming a successful IPO, the company’s enterprise value at the IPO would approximate $85 million, excluding the effects of the underwriter’s over-allotment options.

The ratio of shares outstanding to shares outstanding (excluding entrepreneurs’ bonuses) will be approximately 12.2%.

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

Approximately 35% for strengthening our printing business in Hong Kong and expanding market presence in other international markets, particularly in the US:

we intend to strengthen the printing business of our operating subsidiaries in Hong Kong by recruiting suitable talent and/or improving the remuneration package of our existing talent; AND

we also intend to establish regional representative offices or centers in key strategic locations, particularly on the US East Coast where potential customers are located, to support the future development of our business and enable us to respond quickly to the needs of our customers.

Approximately 35% for the purchase of machinery and the improvement and improvement of the production equipment of our operating subsidiaries to increase the level of automation; AND

Approximately 30% for additional working capital and other general corporate purposes.

(Source – SEC.)

The presentation from the company’s road show management is not available.

Regarding pending legal proceedings, management said the firm is not aware of any material legal proceedings against it or its subsidiaries.

The sole listed holder of the IPO is Revere Securities.

Valuation metrics for Samfine

Below is a table of the relevant capitalization and valuation figures for the company:

Click to enlarge

(Source – SEC.)

Commentary About Samfine’s IPO

SFHG is seeking investment in the US public capital market to finance its expansion and working capital requirements.

The company’s financials have shown declining top-line revenue, lower gross profit, fluctuating gross margin and a swing to operating losses and cash used in operations.

Free cash flow for the twelve months ending June 30, 2023, was negative ($292,207).

Sales and marketing expenses as a percentage of total revenue have increased as revenue has decreased; Its sales and marketing efficiency multiple fell to negative (4.2x).

The firm currently plans to pay no dividends and retain any future earnings for reinvestment back into the firm’s growth and working capital requirements.

SFHG’s recent capital expenditure history shows that it has spent significantly on capital expenditure as a percentage of its operating cash flow.

The market opportunity for printing services in the Asia-Pacific region is large, but growing at a slow growth rate and presents strong competition in a highly fragmented industry.

Business risks for the company’s perspective as a public company include its planned expansion into the US market, as management does not have such prior experience.

Regulatory risks include subjection to Chinese laws and administrative actions, which have proven to be unpredictable and have favored large enterprises that government agencies can more easily regulate.

The company is seeking an enterprise value/earnings multiple of approximately 5.9x.

Given the firm’s declining revenues, excessive valuation assumptions and low margin business profile, my outlook on the IPO is to sell [Avoid].

Expected IPO Price Date: To be announced.