Aspire Global, Inc. – IPO of a Chinese e-cigarette manufacturer

The market for tobacco products and alternatives that reduce damage at $ 936 billion ends of 2020, and by 2023, according to forecasts, will grow to $ 1.017 trillion. The consumption of traditional cigarettes, according to various estimates, continues to grow, but no more than 3-5% per year. The total number of cigarette users is 1.1 billion, and despite the decline, it will exceed one billion in the next five years. The most significant number of tobacco users in China is 286.7 million adults.

Alternative products are replacing traditional tobacco. They can into three classes: smokeless (including chewing tobacco), vaping (electronic cigarettes), and heated tobacco.

The number of e-cigarette smokers, according to Euromonitor, is approaching 55 million. The market volume at $ 22 billion. The e-cigarette market to grow average rate of 25% from 2019 to 2024, bringing its share to 9. 3% of the total cigarette market. The largest markets are the USA and Europe. is reflected in Aspire’s revenue: 61% of the company comes from the European market, 22.6% from North America.

Although 90% of e-cigarettes in China, only 10% are smoked Chinese themselves – the rest is sold to other countries. Researchers Frost & Sullivan estimated the volume of the Chinese e-cigarette market in 2019 at $ 2.7 billion. CIC has a lower estimate – the company estimated the Chinese market in 2019 at only $ 1.5 billion but predicts it will grow to $ 11 billion by 2023. The growth rate of the Chinese market is at 65.9%. Aspire’s revenue in China and other East Asian countries is growing even faster, accounting for 1% of sales in 2019 and 16.3% in 2020.

Globally, the non-refillable closed vaping segment accounts for about a third of the market. The other two-thirds are open-type vapes, which the smoker can refill on their own. At the same time, in China, on the contrary, closed-type electronic cigarettes occupy 74.1% of the market, and in 2023 their share will be 97.1%.

In the United States, the Juul brand gained popularity with a market share reaching 70%, and in China, Smoore is in the lead, placing its shares in Hong Kong in July 2020.

Business model

Aspire Global (ASPG) is a vertically integrated business engaged in the research and development, design, commercialization, manufacturing, sales, and distribution of branded e-cigarette products, including branded cotton wool.

The company sells closed and open vapes, as well as their components. In addition, the company is developing cannabis-based vapes. Aspire operates on OEM models, producing standard products for customers who sell them under their brands and ODM, which includes developing customized models.

In 2020, 61% of the company’s sales were in Europe, which increased compared to 2019, when it was 58%. The share of North America fell from 41% to 22.6%, while the share of China and other East Asian countries rose from 1% to 16.3%.

Financial results of the company

The revenue of Aspire Global, Inc. in 2020 amounted to $ 79 million, which is 35.4% less than a year earlier ($ 122.2 million). The drop in revenue was the lockdown in Europe, which caused a decrease in consumer activity. As a result, aspire had to stop production for an entire quarter practically. As a result, financial indicators have changed in proportion to these losses.

In 2020 were $ 45.8 million, down 26.1% from the prior year of $ 61.9 million.

Gross profit in 2020 fell by 45% – to $ 33.2 million. The gross profit margin was 42% against 49.3% a year earlier.

Operating profit in 2020 fell year-on-year from $ 49.9 million to $ 19.1 million. As a result, the operating margin in 2020 decreased to 24.1%. In 2019, it reached 40.8%.

Net profit in 2020 decreased by 54.8% – $ 19.1 million against $ 42.2 million a year earlier. As a result, the net profitability in 2020 decreased to 24.1%; in 2019, it reached 34.5%.

The company has $ 51.9 million in cash and no debt.

Plans for the use of raised funds

The company intends to use the amount raised through the IPO, which will amount to $ 108.6 million when placed at the average price of the range, as follows:

30% to expand production in the USA and China;

25% for research and development;

15% for promotion and marketing;

30% for general corporate needs and replenishment of working capital.

Business Model Attractiveness Factors

The growth rate of the e-cigarette market from 2019 to 2024 will be 25%;

The growth rate of the Chinese electronic cigarette market at 65.9%, by 2023, the market will grow to $ 11 billion;

In China, closed-type electronic cigarettes occupy 74.1% of the market, and in 2023 their share will be 97.1%;

Aspire is profitable despite three months of downtime during lockdowns in Europe;

In the past, the company paid dividends to shareholders.

The main risks

The company’s risks are on 32 pages of the prospectus. We briefly list the most important ones:

In the future, e-cigarettes may cause significant health damage, which could lead to a decrease in sales;

• The e-cigarette market may grow more slowly than expected;
• In the future, forced delisting of Chinese companies (including VIE structures) from American exchanges are possible, as is happening now with Chinese telecoms;
• Potential for significant consumer lawsuits;
• The company uses a variable interest structure (VIE). A Chinese company (in a sector closed to foreign investment) by another Chinese company owned by a foreign holding. Chinese authorities may restrict the capabilities of VIE structures;
• The company will, in fact, remain a family business: Tuanfan Liu and Jinyang Zhu will continue to control 72.5% of the votes of the shareholders’ meeting, and the top management as a whole will hold more than 90% of the votes;

Over the last year, Aspire’s profitability figures have dropped significantly.

The company intends to list 18.75 million common shares on NASDAQ (NASDAQ Global Markets). The call option, which the company grants to underwriters, is 2.25 million ordinary shares. After the IPO, the total number of claims will be 165 million common shares, excluding the option of the underwriters (165 million including the vote). Free float will be 11.3% of ordinary shares, and if the underwriters exercise the option – 12.5%.

Founder and CEO Tuanfan Liu will hold 101.2 million shares (67.5% of the vote). The founder’s spouse, Jinyang Zhu, will own 7.5 million shares (5% of the vote). Other largest shareholders are Fortune Genesis (5%), Lead Point (5%), Ace Prestige (5%), Extreme Lead (5%), Incentive Gain (5%). These are structures owned by top managers of the company.

The offering ranges from $ 7 to $ 9 per share, with an average of $ 8.

The placement volume ranges from $ 131.25 million to $ 168.75 million, averaging $ 150 million.

The organizers of the placement estimate the company’s capitalization from $ 1.155 billion to $ 1.485 billion, on average – $ 1.320 billion. They are considering the option of underwriters, capitalization increases and ranges from $ 1.170 billion to $ 1.505 billion, on average – $ 1.338 billion.

Recall that the company’s revenue for 2020 amounted to $ 79 million. Thus, the organizers of the placement use a capitalization-to-revenue (P / S) multiple of 16.70. However, considering that the year before, the revenue exceeded $ 122 million, and the market to recover, the multiplier is 10.8. is it a reasonably moderate value compared to analogs from the e-cigarette industry?

Assessment of the company’s capitalization

Aspire Global, Inc. works in the tobacco industry, but her specialty is electronic cigarettes. We took as a basis the same list of peers that we previously used in the IPO of RLX Technology, Inc. (RLX). RLX Technology is the market leader in non-refillable e-cigarettes. The median P / S for the tobacco industry is 3.83. For comparison, let us point out that the P / S multiple of Altria Group Inc. (MO) is 4.3.

Using the median multiple and revenue for the last 12 months of the year ($ 79 million), Aspire Global, Inc. can purchase at $ 302 million, and the value of a share – at $ 1.83, that is, 77.13% lower than the average valuation of a claim by the organizers of the placement.

However, the P / S multiple of the RLX mentioned above Technology, Inc. (RLX) is 11.8. This company listed shares in January with a multiple to sell 35. The range of the share price was $ 8-10. After the placement, the share price skyrocketed to $ 35 but has since dropped almost eightfold and is now $ 4.

Discussion of IPO prospects

The stock market remains high in interest in IPOs, including from Chinese companies. The situation on the market in recent days is generally unstable; the indices may significantly decline, which is a negative factor for new issuers—the placement by a small number of underwriters led by Tiger Brokers, who specialize in Chinese companies. The company’s technological developments using cannabis are narrowing the circle of underwriters in a certain way. Given the combination of these factors, we do not expect significant growth in the value of Aspire Global, Inc. (ASPG) to close on the first day of trading about the average of the range. In the future, the share price will depend on implementing the company’s plans, primarily to restore revenue.