IPO Update: Chi Ko Holdings Readies $8 Million U.S. IPO (Pending:CKHL)

A Quick Take On Chi Ko Holdings Limited

Chi Ko Holdings Limited (CKHL) has filed to raise $7.8 million in an IPO of its ordinary shares, according to an amended F-1/A registration statement.

The firm provides construction contracting services in Hong Kong.

Given CKHL’s slowing revenue growth rate, reduced net margin and ongoing risks from operating in the PRC, I’m on Hold for the IPO.

Chi Ko Overview

Hong Kong, PRC-based Chi Ko Holdings Limited was founded to provide site formation, general building construction and demolition services to commercial and residential properties located in the greater Hong Kong region.

Management is headed by Chief Executive Officer Mr. Chan Lee Chuen, who has been with the firm since 2021 and has nearly thirty years of experience in various types of construction engineering in Hong Kong.

The company’s primary offerings include the following:

• Foundation and site formation

• General building work

• Demolition

As of March 31, 2022, Chi Ko has booked fair market value investment of $2 million in equity and debt from investors, including Chairman Mr. Keung Yun Yuen.

Chi Ko – Customer Acquisition

The firm bids on new projects in both residential and commercial sectors in the greater Hong Kong region.

The company pursues a ‘one-stop shop strategy’ to provide a wide range of services either in-house or through hired subcontractors.

General & Administrative expenses as a percentage of total revenue have fluctuated as revenues have increased, as the figures below indicate:

General & Administrative	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended September 30, 2022	1.7%
FYE March 31, 2022	2.2%
FYE March 31, 2021	2.0%

Click to enlarge

(Source – SEC)

The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative expense, fell to 11.9x in the most recent reporting period, meaning the company has become less efficient at generating additional revenue, as shown in the table below:

General & Administrative	Efficiency Rate
Period	Multiple
Six Mos. Ended September 30, 2022	11.9
FYE March 31, 2022	21.1

Click to enlarge

(Source – SEC)

Chi Ko’s Market & Competition

According to a 2023 market research report by GlobalData, the Hong Kong market for construction services was an estimated $31.3 billion in 2022.

The market is forecast to grow at an Average Annual Grow Rate [AAGR] of over 2% from 2024 to 2027.

The main drivers for this expected growth are a further investment in ‘transportation, electricity, housing and industrial sectors.’

Also, the government is planning a large increase in investment in the construction of renewable energy and completion of projects ‘to upgrade and expand university healthcare teaching facilities…’

The Hong Kong construction services market is extremely fragmented, with hundreds of registered companies of all sizes resulting in a generally high degree of bidding competition.

Chi Ko Holdings Limited Financial Performance

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

• Growing top-line revenue but at a reduced rate of growth

• Decreasing gross profit and reduced gross margin

• Higher operating profit

• Uneven cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended September 30, 2022	$ 35,017,951	25.9%
FYE March 31, 2022	$ 60,724,303	87.4%
FYE March 31, 2021	$ 32,395,056
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended September 30, 2022	$ 3,375,974	-3.8%
FYE March 31, 2022	$ 5,949,838	35.1%
FYE March 31, 2021	$ 4,403,583
Gross Margin
Period	Gross Margin	% Variance vs. Prior
Six Mos. Ended September 30, 2022	9.64%	-3.0%
FYE March 31, 2022	9.80%	-27.9%
FYE March 31, 2021	13.59%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended September 30, 2022	$ 2,770,548	7.9%
FYE March 31, 2022	$ 4,609,527	7.6%
FYE March 31, 2021	$ 3,771,359	11.6%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended September 30, 2022	$ 2,297,079	6.6%
FYE March 31, 2022	$ 3,769,428	10.8%
FYE March 31, 2021	$ 3,290,181	9.4%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended September 30, 2022	$ 1,237,018
FYE March 31, 2022	$ 661,261
FYE March 31, 2021	$ 1,628,876
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of September 30, 2022, Chi Ko had $2.3 million in cash and $24.5 million in total liabilities.

Free cash flow during the twelve months ending September 30, 2022, was $4.0 million.

Chi Ko’s IPO Details

CKHL intends to sell 1.74 million shares of common stock at a proposed midpoint price of $4.50 per share for gross proceeds of approximately $7.83 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $55.7 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 13.39%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

As a foreign private issuer, the company can choose to take advantage of reduced, delayed or exempted financial and senior officer disclosure requirements versus those that domestic U.S. firms are required to follow.

The firm is an ‘emerging growth company’ as defined by the 2012 JOBS Act and may elect to take advantage of reduced public company reporting requirements; prospective shareholders would receive less information for the IPO and in the future as a publicly-held company within the requirements of the Act.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

Approximately 40% for purchasing machinery and robotics equipment;

Approximately 20% for employing additional staff; and

The balance to fund working capital and for other general corporate purposes.

(Source – SEC)

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

Regarding outstanding legal proceedings, management says the firm is not subject to any legal proceedings that would have a material adverse impact on its financial condition or operations.

The sole listed bookrunner of the IPO is EF Hutton.

Valuation Metrics For Chi Ko Holdings

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$58,455,000
Enterprise Value	$55,663,986
Price / Sales	0.86
EV / Revenue	0.82
EV / EBITDA	12.98
Earnings Per Share	$0.26
Operating Margin	6.32%
Net Margin	5.15%
Float To Outstanding Shares Ratio	13.39%
Proposed IPO Midpoint Price per Share	$4.50
Net Free Cash Flow	$3,983,443
Free Cash Flow Yield Per Share	6.81%
Debt / EBITDA Multiple	0.98
CapEx Ratio	23.68
Revenue Growth Rate	25.85%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About Chi Ko Holdings

CKHL is seeking U.S. public capital market investment to fund additional equipment purchases and for other general corporate purposes.

The firm’s financials have shown increasing top-line revenue but at a reduced rate of growth, lowered gross profit and reduced gross margin, increased operating profit and variable cash flow from operations.

Free cash flow for the twelve months ending September 30, 2022, was $4.0 million.

General & Administrative expenses as a percentage of total revenue have varied as revenue has increased; its General & Administrative efficiency multiple fell to 11.9x in the most recent reporting period.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the business. However, the company has paid substantial dividends in past years.

CKHL’s CapEx Ratio indicates it has spent moderately on capital expenditures as a percentage of its operating cash flow.

The market opportunity for providing construction services in Hong Kong is large but expected to grow at a slow rate of growth in the coming years. The industry is also highly fragmented and intensely competitive.

Like other firms with Asian country operations seeking to tap U.S. markets, the proposed listing entity operates as a Cayman Islands corporation that owns interests in its other country operations.

U.S. investors would only have an interest in an offshore firm with interests in or only agreements with operating subsidiaries (i.e., potentially no equity interests), some of which may be located in or have substantial operations in China or other Asian countries with restrictions or unpredictable regulatory environments regarding those interests.

Additionally, restrictions on the transfer of funds between subsidiaries within China or other Asian countries may exist.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable regulatory rulings that may affect such companies and their U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Asian companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

EF Hutton is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (58.7%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

Risks to the company’s outlook as a public company include recent changes in the Chinese government’s regulatory structure for governing Hong Kong and Macau Special Administrative Regions.

As for valuation expectations, management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 0.82x.

Given the firm’s slowing revenue growth rate, reduced net margin and ongoing risks from operating in the PRC, I’m on Hold for the IPO.

Expected IPO Pricing Date: To be announced