iHuman (IH) intends to raise $84 million from the sale of ADSs representing underlying Class A stock in an IPO, according to an amended registration statement.
Beijing, China-based iHuman was founded to create a subscription and advertising supported online service that provides the ability for young children to learn languages, math science and culture in a fun environment.
Management says it is the number one provider of online childhood edutainment in China, according to a Frost & Sullivan report that it commissioned and paid for.
Management is headed by founder, and Chairman Michael Yufeng Chi, who was previously founder of Beijing Jinhongen Co. and Perfect World Group, a ‘global entertainment company focusing on original content creation and technology.’
Below is a brief overview video of iHuman:
Source: iHuman Chinese
The company’s primary content offerings include:
- Languages – Chinese, Pinyin, English
- STEM courses
iHuman has received at least $53 million from investors including Academy Management (Michael Yufeng Chi), HPF Fusion, Lei Hong DP and Tianjin Share Xinghan Enterprise Management Consulting.
The company markets its offering through online apps included in major mobile app stores such the Apple App Store and Google Play Store.
Management plans to market its system via social media, Internet video and live streaming promotional campaigns.
The firm will cross-sell its products to encourage parents and users to try its other applications to drive engagement and spending.
Sales and Marketing expenses as a percentage of total revenue have been uneven as revenues have increased.
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose to 3.2x in the most recent reporting period.
According to a 2020 market research report by Mordor Intelligence, the global market for edutainment is expected to grow at a CAGR of 17% from 2016 to 2025, as the chart shows below:
The largest market by region is expected to remain North America, but the Asia Pacific region is forecast to grow at the fastest rate during the period.
The main drivers for this expected growth are game design simplicity, continued increase in the number of smartphone and tablet users, belief in enhancement of children’s social skills and a strong platform use case for subjects including language and history.
However, there continues some skepticism about the educational value of ‘edutainment’ as well as a lack of serious recognition by traditional education systems for the genre.
The online childhood edutainment industry is fragmented as there are many definitions of how much or little education is included in entertainment offerings for children and the firm faces numerous competitive threats from major game and information platforms.
iHuman’s recent financial results can be summarized as follows:
- Strong topline revenue growth, at an accelerating rate
- Sharply increased gross profit and gross margin
- A swing to operating profit and net income
- Growing cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Source: Company registration statement
As of June 30, 2020, iHuman had $21.9 million in cash and $37.7 million in total liabilities.
Free cash flow during the twelve months ended June 30, 2020, was $15 million.
IH intends to sell 7 million ADSs representing underlying Class A stock at a midpoint price of $12.00 per ADS for gross proceeds of approximately $84.0 million, not including the sale of customary underwriter options.
No existing shareholders have indicated an interest to purchase ADSs at the IPO price.
Class A ordinary shareholders will be entitled to one vote per share and the company founder will hold all Class B shares, which will entitle him to ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $609.7 million.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 13.39%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
approximately 35% for expanding our product and service offerings, both domestically and overseas;
approximately 25% for our development of existing products and services;
approximately 20% for improving our technology infrastructure;
approximately 10% for marketing and brand promotions; and
the balance for general corporate purposes, which may include funding working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.
Management’s presentation of the company roadshow is available here.
Listed underwriters of the IPO are Credit Suisse, Citigroup, Tiger Brokers, CMBI and CLSA.
iHuman seeks public market investment for its expansion initiatives, which notably include overseas growth plans.
The firm’s financials indicate significant topline revenue growth, positive earnings and operating & free cash flow.
Sales and Marketing expenses as a percentage of total revenue have been uneven as revenues have increased, while its Sales and Marketing efficiency rate has also grown markedly in the most recent reporting period.
The market opportunity for providing edutainment to younger demographics in Asia is expected to grow at an impressive 17% CAGR over the near term.
Like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.
This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.
A business risk is that the iHuman is not formally allied with a major platform in China, so may have more limited or costly distribution than it would have otherwise.
Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (8.6%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.
As to valuation, management is asking investors to pay an Enterprise Value/Revenue multiple of 14x at IPO.
While this multiple is not cheap, given the firm’s revenue growth trajectory, profitability and positive free cash flow metrics, management is building quite a tidy business.
The firm is well positioned to take advantage of the continued Covid-19 pandemic’s effects on schooling and keeping younger children engaged at home.
My opinion on the IPO is a BUY at up to $12.00 per ADS.
Expected IPO Pricing Date: October 9, 2020.
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(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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