Graphex Group (GRFX) has filed proposed terms for an $8 million IPO

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A quick overview of the Graphex Group

Graphex Group Limited (GRFX) has filed a request to collect $8.0 million in gross proceeds from the sale of U.S. Depository Shares representing underlying common stock in an IPO, according to a amended registration statement.

The company sells graphene-based products that are used in lithium-ion batteries for a variety of growing markets.

Given the firm’s revenue contraction, worsening operating losses and ongoing regulatory uncertainty, I’m on hold for the GRFX IPO, although day traders may see a opportunity in a potentially very volatile stock.

Introducing Graphex

Graphex, based in Hong Kong, PRC, was founded to develop graphene products for lithium-ion batteries, especially for electric vehicles and clean energy storage applications.

Management is headed by Managing Director Andross Yick Yan Chan, who has been with the company since January 1991 and was previously a director of Earth Asia Limited.

The company’s main offerings include:

  • spherical graphite

  • High purity graphite

  • Micronized graphite

Graphex has reserved an investment at fair market value of $53 million as of June 30, 2021 from investors, including various individuals.

Graphex – Customer Acquisition

The company derives most of its revenue from spherical graphite sales in the PRC and Hong Kong.

GRFX’s current facilities have a production capacity of approximately 10,000 metric tons of graphene products per year.

Sales and marketing expenses as a percentage of total revenue have declined as revenue has fallen, as shown in the numbers below:

Sales and marketing

Expenses vs income

Period

Percentage

2021

2.6%

2020

3.6%

(Source)

The sales and marketing effectiveness multiple, defined as the number of dollars of incremental new revenue generated by each dollar of sales and marketing spend, fell to negative (0.3x) in the most recent reporting period. report. (Source)

Graphex Market and Competition

According to a 2021 market research report by Grand View Research, the global graphene market was estimated at $94.4 billion in 2020 and is expected to reach $1.67 billion by 2028.

This represents a projected CAGR of 43.2% from 2021 to 2028.

The main drivers of this expected growth are growing demand for these products in a wide variety of industries, including biomedical, composites and coatings, electronics, water and wastewater treatment, and chemical storage. energy.

In addition, below is a graph showing the historical and projected future growth trajectory of the US graphene market:

US graphene market

US graphene market (Grand View Research)

(Source)

Major competitors or other industry participants include:

  • Angstron Materials, Inc.

  • Hardware ACS, LLC

  • BGT Materials Ltd.

  • CVD Equipment Corp.

  • Grafoid Inc.

  • graphene

  • Graphene NanoChem

  • NanoXplore, Inc.

  • G6 Materials Corp.

  • XGSciences

  • Thomas Swan & Co. Ltd.

  • 2D Carbon Graphene Material Co., Ltd.

  • Haydale Graphene Industries plc

  • Applied Graphene Materials (OTCQX:APGMF)

Financial performance of Graphex Group Limited

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

  • Contract main turnover

  • Lower gross profit and lower gross margin

  • Increase in operating losses

  • A switch to cash used in operations

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

Total income

Period

Total income

% deviation from before

2021

$50,133,000

-0.8%

2020

$50,550,760

Gross profit (loss)

Period

Gross profit (loss)

% deviation from before

2021

$19,019,000

-6.8%

2020

$20,412,340

Gross margin

Period

Gross margin

2021

37.94%

2020

40.38%

Operating profit (loss)

Period

Operating profit (loss)

Operating margin

2021

$(9,749,000)

-19.4%

2020

$(8,810,620)

-17.4%

Comprehensive income (loss)

Period

Comprehensive income (loss)

The net margin

2021

$(13,792,000)

-27.5%

2020

($7,093,710)

-14.1%

Operating cash flow

Period

Operating cash flow

2021

$(3,729,000)

2020

$798,200

(Glossary of terms)

(Source)

As of December 31, 2021, Graphex had $3.9 million in cash and $120.3 million in total liabilities.

Free cash flow for the twelve months ended December 31, 2021 was negative ($3.8 million).

Graphex IPO Details

GRFX intends to sell 3.2 million ADS representing the underlying common stock at a proposed midpoint price of $2.50 per ADS for gross proceeds of approximately $8.0 million, not including the sale of the usual subscription options.

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

The company’s shares are currently listed on the OTCQX market under the symbol “GRFXY”.

Assuming a successful IPO in the middle of the proposed price range, the company’s enterprise value at the time of the IPO (excluding underwriters’ options) would be approximately $64.1 million.

The free float to outstanding shares ratio (excluding underwriters’ options) will be approximately 10.57%. A figure below 10% is generally considered a “low float” security that may be subject to significant price volatility.

According to the company’s latest regulatory filing, it plans to use the net proceeds as follows:

We expect to use approximately US$3.3 million of the proceeds for the improvement and expansion of production facilities for our graphene products business.

We plan to use approximately US$3 million of the proceeds to repay short-term debt to reduce our financing costs, which debt will be determined by GGL prior to pricing this offer and disclosed in an amendment to this prospectus.

The remaining proceeds of this offering will be used for working capital and general corporate purposes.

(Source – SEC)

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

Regarding ongoing legal proceedings, management says the company is not subject to any significant legal claims, although it is pursuing claims related to the acquisition of a stake in the Suzhou Wenlvge Hotel Management Industrial Park. Company Limited.

The sole listed bookrunner of the IPO is EF Hutton.

Evaluation Metrics for Graphex

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

Measure [TTM]

Rising

Market capitalization at IPO

$75,673,269

Enterprise value

$64,118,739

Price / Sales

1.51

EV / Turnover

1.28

EV / EBITDA

-6.58

Earnings per share

-$0.45

Operating margin

-19.45%

The net margin

-27.51%

Free float to outstanding shares

10.57%

Average Proposed IPO Price Per Share

$2.50

Net free cash flow

-$3,828,000

Free cash flow yield per share

-5.06%

Debt / EBITDA Multiple

0.00

CapEx ratio

-37.67

Revenue growth rate

-0.83%

(Glossary of terms)

(Source – SEC)

Comment on Graphex

Graphex is seeking investment in the US public capital market to expand production and pay down debt.

The company’s financial statements produced reduced top revenue, less gross profit and lower gross margin, higher operating losses, and a wobble in cash used in operations.

Free cash flow for the twelve months ended December 31, 2021 was negative ($3.8 million).

Sales and marketing expenses as a percentage of total revenue decreased as revenue declined slightly and its sales and marketing effectiveness multiple was negative (0.3x) over the past reporting period.

The company currently plans to pay no dividends on its share capital and “is subject to restrictions on its ability to pay dividends.”

The market opportunity for graphene-based products is expected to grow at a high growth rate as the lithium-ion battery market is expected to witness marked growth in the coming years.

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, many of which are 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.

EF Hutton is the sole underwriter and IPOs conducted by the company over the past 12 months have generated a negative average return (66.4%) since their IPO. This is an underperformance for all major underwriters over the period.

A significant risk to the company’s outlook is the uncertain regulatory environment for technology companies in China.

Because Graphex operates in a potentially sensitive area of ​​technology, the company may be subject to regulatory changes with little notice and shareholders should assume they are at high risk of potential stock volatility as a result.

The stock will also have low float, which can further exacerbate volatility.

Additionally, the nominal IPO price of $2.50 per share at the midpoint means traders and individuals can create intense volatility for the stock within minutes and hours of the start of trading. .

Given the company’s shrinking revenue, worsening operating losses and regulatory uncertainty, I’m waiting for GRFX’s IPO, although day traders may see an opportunity in a potentially very volatile stock.

Expected IPO pricing date: to be announced.

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