Planet Image International Targets $27M US IPO

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A quick look at Planet Image International

Planet Image International Limited (PLIM) has applied to raise $27 million in an initial public offering of its Class A common stock, according to an F-1 registration statement.

The company produces and sells compatible printer toner cartridges worldwide.

While PLIM has grown impressively during the pandemic era, inflation could hurt much of its earnings potential for the foreseeable future.

I’m waiting for the IPO.

Company & Technology

Located in Xinyu City, China, Planet Image was established to design, manufacture and sell a variety of compatible toner cartridges under different labels worldwide.

Management is led by co-founder and CEO Mr. Shaofang Weng, who has been with the company since its inception in 2011 and was previously an engineering manager at Zhuhai Seine Technology Co.

The company’s main offerings include:

  • Original design manufacturer cartridges

  • White label for foreign dealers

  • Direct to consumer via proprietary brands

Planet Image has booked an investment at market value of US$15 million as of June 30, 2021 from investors including Aster Excellent Limited, Juneng Investment (Hong Kong) and Eagle Heart Limited.

Planet Image – customer acquisition

The Company sells its products to others who resell under their own brand names, who design their own versions, and direct to end-user customers.

PLIM has localized sales offices in the US, Italy, France, Germany and the UK. Sales in the US and Europe account for the majority of sales, while Mexico and Poland have seen strong growth in recent years.

The share of sales costs in total sales has fallen as sales have increased, as the following figures show:

sale

Expenses vs. Income

period

percentage

Six months ending June 30, 2021

21.9%

2020

23.8%

2019

23.8%

(Source)

The sales efficiency multiple, defined as how many dollars of incremental new revenue generated by each dollar of sales spend, increased 0.8 times over the most recent reporting period, as shown in the table below:

sale

efficiency rate

period

Several

Six months ending June 30, 2021

0.8

2020

0.5

(Source)

Planet Image market and competition

According to a 2022 market research report by Maximize Market Research, the global printer ink cartridge market value was estimated at US$13.3 billion in 2021 and is expected to reach US$19 billion by 2027.

This equates to a projected CAGR of 6.2% from 2022 to 2027.

The main drivers for this expected growth are increasing demand from the Asia-Pacific region due to a surge in the education sector.

The MENA region (Middle East and North Africa) also offers the potential for strong future growth in the industry.

Key contestants or other industry participants include:

Financial performance of Planet Image International Limited

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

  • Increasing topline earnings

  • Increase in gross profit and gross margin

  • Fluctuating operating result

  • A change to cash used in operations

The following are relevant financial results arising from the company’s registration statement:

total revenue

period

total revenue

% variance vs. before

Six months ending June 30, 2021

$71,684,000

21.6%

2020

$132,791,000

15.0%

2019

$115,440,000

gross profit (loss)

period

gross profit (loss)

% variance vs. before

Six months ending June 30, 2021

$27,935,000

22.8%

2020

$48,427,000

2.9%

2019

$47,063,000

gross margin

period

gross margin

Six months ending June 30, 2021

38.97%

2020

36.47%

2019

40.77%

Operating Profit (Loss)

period

Operating Profit (Loss)

operating margin

Six months ending June 30, 2021

$6,601,000

9.2%

2020

$4,104,000

3.1%

2019

$9,981,000

8.6%

Overall result (loss)

period

Overall result (loss)

net margin

Six months ending June 30, 2021

$5,195,000

7.2%

2020

$5,029,000

7.0%

2019

$10,546,000

14.7%

Cash flow from operations

period

Cash flow from operations

Six months ending June 30, 2021

$(1,463,000)

2020

$6,929,000

2019

$1,827,000

(Glossary of terms)

(Source)

As of June 30, 2021, Planet Image had $34.4 million in cash and $76.4 million in total debt.

Free cash flow for the twelve months ended June 30, 2021 was $5.3 million.

Planet Image International Limited IPO details

Planet Image intends to raise $27 million in gross proceeds from an initial public offering of its Class A common stock and is offering 6 million shares at a proposed midpoint of $4.50 per share.

Class A common shareholders have one vote per share and the Class B shareholder, the company’s founder, has 10 votes per share.

The S&P 500 Index no longer includes companies with multiple share classes in its index.

No existing shareholder has expressed an interest in buying shares at the IPO price.

Assuming a successful IPO, the Company’s enterprise value at IPO would be approximately $240 million excluding the impact of underwriters’ over-allotment options.

The free float to outstanding share ratio (excluding over-allotments by underwriters) will be approximately 10.23%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

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

approximately 85.0% or $20.06 million to construct a full-scale, multi-tier manufacturing center;

approximately 2.0% or $0.47 million for research and development;

approximately 1.5% or $0.35 million for updating our own websites’ software systems;

Approximately 1.5% or $0.35 million to set up additional warehouses at overseas locations;

approximately 10.0% or $2.36 million for general corporate purposes, which may include working capital needs and other corporate uses.

(Source)

Management’s presentation of the company’s roadshow is not available.

Regarding pending litigation, management said, “On November 12, 2021, ML Products, Inc. filed a lawsuit against Aster US, a subsidiary of the Company, and five other defendants in the United States District Court for the Central District of California. claims that Aster US [i] violated the Lanham Act by engaging in false advertising, [ii] Violated California Business and Professions Code §17200 by engaging in unfair competition, and [iii] Violated California Business and Professions Code §17500 by providing false advertising. […] We believe this lawsuit to be unfounded and are vigorously defending ourselves. However, there is uncertainty as to the ultimate resolution of this lawsuit.’

The sole public bookrunner for the IPO is Network 1 Financial Securities.

Rating metrics for Planet Image

Below is a table of relevant cap and valuation numbers for the company:

Measure [TTM]

amount

Market capitalization at IPO

$263,842,200

Enterprise value

$239,842,200

price / sale

1.81

EV / Revenue

1.65

EV / EBITDA

29.34

earnings per share

$0.13

operating margin

5.62%

net margin

5.47%

Ratio of float to shares outstanding

10.23%

Proposed IPO midpoint price per share

$4.50

Net Free Cash Flow

$5,348,000

Free cash flow yield per share

2.03%

sales growth rate

21.64%

(Glossary of terms)

(Source)

Commentary on Planet Image’s IPO

PLIM is seeking to raise US investment capital to fund expansion of its manufacturing facilities and other working capital needs.

The company’s financials show increasing revenues, growing gross profits and gross margins, variable operating profits and a shift to cash used in operations.

Free cash flow for the twelve months ended June 30, 2021 was $5.3 million.

The share of sales costs in total sales has fallen as sales have increased; its sales efficiency multiple increased to 0.8x in the last reporting period.

The company currently plans not to pay dividends on its shares and anticipates that it will retain future profits to reinvest in the company.

The Printer Cartridges market opportunity is large and is expected to grow at a moderate growth rate in the coming years and is facing strong competition from large, established players in the market.

Like other Chinese firms looking to enter US markets, the company operates within a WFOE structure, or a wholly foreign-owned entity. US investors would only have an interest in an offshore company with contractual rights to the company’s operating results but would not own the underlying assets.

In addition, foreign wholly-owned enterprises are subject to the Foreign Investment Law of the People’s Republic of China promulgated by the National People’s Congress on March 15, 2019.

Foreign investors and foreign-owned enterprises conducting investment activities in China are subject to the Special Administrative Measures (Negative List) on Access to Overseas Investment, the latest version of which came into effect in July 2020, and the Catalog of Encouraged Industries for Overseas Investment, which came into effect in January 2021 kicked.

These areas are at risk of changes in government regulation, which have been widespread in recent times. Potential investors for the IPO would have to consider these important structural aspects.

In addition, the Chinese government’s recent crackdown on IPO candidates, coupled with additional reporting and disclosure requirements from the US, has put a serious damper on China’s IPOs and their post-IPO performance. Until these regulatory concerns are resolved, investing in China-based companies will entail significantly higher risk.

Network 1 Financial Securities is the lead underwriter and IPOs led by the firm over the past 12 months have generated an average negative return (61.9%) since its listing. This is a lowest performance for any major underwriter over the period.

The main risk to the company’s prospects is a high inflationary environment, which could make it more difficult to pass commodity price increases on to customers and put pressure on margins.

While PLIM has grown impressively during the pandemic era, inflation could hurt much of its earnings potential for the foreseeable future.

I’m waiting for the IPO.

Estimated IPO Price Date: To be announced.

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