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A Quick Overview of YUKAI Health Group Limited

YUKAI Health Group Limited (YKAI) has applied to raise $20 million in an IPO of its common stock, according to an F-1 registration statement.

The company provides medical equipment management and maintenance services in China.

Considering the general regulatory uncertainties and a very high IPO price, I am waiting for YUKAI’s IPO.

Introducing YUKAI

YUKAI, based in Fuzhou, China, was originally founded to sell and distribute medical equipment, but has since focused on medical equipment maintenance and management.

Management is headed by Chairman and CEO Zhenyu Zheng, who has been with the company since its inception and was previously a doctor and then an employee of the Fujian Medical Equipment Company.

The company’s main offerings include:

  • Maintenance, material management

  • Provide replacement equipment during downtime

YUKAI has registered an investment at fair market value of $3 million as of December 31, 2021 from investors including ZhenYu Investment Holdings Limited and other medical investment groups.

YUKAI – Customer Acquisition

The company seeks customers from hospitals and business partners through direct tenders or outsourcing.

As of December 31, 2021, the company had 19 customers, including 13 hospitals and 6 business partners.

Sales and marketing expenses as a percentage of total revenue have increased from a low level as revenue has increased, as shown in the figures below:

Sales and Marketing

Expenses vs Income

Period

Percentage

2021

0.7%

2020

0.4%

(Source – SEC)

The sales and marketing effectiveness multiple, defined as the number of incremental new revenue dollars generated for every dollar spent on sales and marketing, was 24.6x during the most recent reporting period. (Source – SEC)

YUKAI Market and Competition

According to a 2020 market research report by Grand View Research, the global medical equipment maintenance market was estimated at $35.3 billion in 2020 and is expected to reach $60 billion by 2027.

This represents a projected CAGR of 7.9% from 2021 to 2027.

Key drivers of this expected growth are growing demand for medical devices of all types, higher diagnostic rates, and an aging global population taking advantage of new innovations.

Also below is a graph showing the historical and projected trajectory of the US market for medical equipment maintenance services:

US medical equipment maintenance market

US Medical Equipment Maintenance Market (Grand View Research)

  • Major competitors or other industry participants include:

  • Shanghai Kedu Health Technology

  • Shanghai Kunya Medical Apparatus Co.

  • Others

Management said the company is the largest in Fujian Province in terms of the number of bids won from January 2018 to March 2022, as shown in the table below:

YUKAI Health Auction Performance

Performance of the company’s offers (SEC EDGAR)

YUKAI Health Group Financial Performance

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

  • Revenue growth

  • Increase in gross profit and gross margin

  • Increase in operating profit and operating margin

  • A shift to positive operating cash flow

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

Total income

Period

Total income

% deviation from before

2021

$9,650,305

19.2%

2020

$8,094,290

Gross profit (loss)

Period

Gross profit (loss)

% deviation from before

2021

$2,300,056

90.4%

2020

$1,208,293

Gross margin

Period

Gross margin

2021

23.83%

2020

14.93%

Operating profit (loss)

Period

Operating profit (loss)

Operating margin

2021

$1,322,211

13.7%

2020

$265,741

3.3%

Net profit (net loss)

Period

Net profit (net loss)

The net margin

2021

$935,824

9.7%

2020

$7,743

0.1%

Operating cash flow

Period

Operating cash flow

2021

$3,087,585

2020

$(1,069,389)

(Glossary of terms)

(Source – SEC)

As of December 31, 2021, YUKAI had $1.2 million in cash and $2.2 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021 was $2.8 million.

YUKAI Health Group Limited IPO Details

YUKAI intends to raise $20 million in gross proceeds from an IPO of its common stock, offering 4 million shares at a proposed midpoint price of $5.00 per share.

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

Assuming a successful IPO, the company’s enterprise value at the time of the IPO would be approximately $60.0 million, excluding the effects of underwriter over-allotment options.

The free float-to-shares outstanding ratio (excluding subscriber over-allotments) will be approximately 25%. A figure below 10% is generally considered a “low float” stock that can be subject to significant price volatility.

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

[i] buy spare equipment, [ii] continue the development of our software system, [iii] purchase properties for our offices and head office, and [iv] working capital and other general business objectives.

(Source – SEC)

The presentation by management of the company’s roadshow is not available.

Regarding ongoing legal proceedings, management says the company is “not currently a party to any significant legal proceedings.”

The sole listed bookrunner of the IPO is Univest Securities.

Evaluation metrics for YUKAI

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

Measurement (TTM)

Rising

Market capitalization at IPO

$80,000,000

Enterprise value

$59,781,299

Price/Sales

8.29

EV/Revenue

6.19

EV/EBITDA

45.21

Earnings per share

$0.06

Operating margin

13.70%

The net margin

9.70%

Free float to outstanding shares

25.00%

Average Proposed IPO Price Per Share

$5.00

Net free cash flow

$2,760,875

Free cash flow yield per share

3.45%

Multiple Debt/EBITDA

0.51

CapEx Ratio

9:45 a.m.

Revenue growth rate

19.22%

(Glossary of terms)

(Source – SEC)

YUKAI IPO Commentary

YKAI seeks investment in the US public capital market to fund its general growth initiatives.

The company’s financials delivered higher revenue, growth in gross profit and gross margin, increased operating profit and operating margin, and a shift to positive cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was $2.8 million.

Sales and marketing expenses as a percentage of total revenue were minimal; its sales and marketing effectiveness multiple was an impressive 36.4x in the last reporting period.

The company currently plans to pay no dividends and anticipates that it will use any short-term future earnings to reinvest in the business.

The market opportunity for medical equipment maintenance is significant and expected to grow at a moderate growth rate over the next few years as the healthcare system in China continues to develop and requires greater efficiency to operate at scale. .

Like other companies with Chinese operations seeking to tap into US markets, the company operates within a WFOE structure or wholly foreign 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, restrictions on the transfer of funds between subsidiaries in China may exist.

The Chinese government’s recent crackdown on IPO candidate companies, combined with additional reporting and disclosure requirements imposed by the United States, has seriously hampered Chinese or related IPOs, dragging down performance generally poor post-IPO.

Potential investors would be well advised to consider the potential implications of specific laws regarding the repatriation of profits and changing or unpredictable Chinese regulatory decisions that could affect these companies and US stock listings.

Univest Securities is the largest underwriter, and the two IPOs conducted by the company in the past 12 months have generated an average return of 215.4% since their IPO. This is a leading performance for all major underwriters during the period.

The main risk to the company’s outlook is the uncertain regulatory environment Chinese companies face from an activist central government.

On the valuation side, management is asking IPO investors to pay an EV/Income multiple of approximately 6.2x.

However, compared to comparable US company Agiliti (AGTI), which is currently valued at an EV/Sales of around 3.7x for even higher revenue growth, YKAI’s IPO looks excessively expensive.

Considering the general regulatory uncertainties and a very high IPO price, I am waiting for YUKAI’s IPO.

Expected IPO pricing date: to be announced.