IPO Update: Lizhi Readies $49 Million U.S. IPO Plan – LIZHI (Pending:LIZI)

Quick Take

Lizhi (LIZI) has filed to raise $49 million from an IPO of ADSs representing underlying Class A shares, per an amended F-1/A registration statement.

The company provides audio streaming services for Chinese consumers.

LIZI’s revenue growth rate is slowing, management hasn’t provided important subscriber retention metrics and the IPO appears richly priced, so I’ll be watching the IPO from the sidelines.

Company & Technology

Guangzhou, China-based Lizhi was founded in 2010 to develop a mobile audio platform for user-generated content that launched in 2013.

Management is headed by Founder, CEO and Director Jinnan (Marco) Lai, who was previously CEO at Shanghai Labox Information Technology.

Lizhi has developed a social audio platform for user-generated content that features tools which enable creators to create, edit, store and share their audio content.

In Q3 2019, Lizhi counted 46.6 million average total Monthly Active Users[MAUs], an increase of 26.7% from about 36.8 million average total MAUs in Q3 2018.

During the same period, the number of monthly active hosts increased by 12.3% from about 5.1 million to 5.7 million in Q3 2019.

The platform’s ‘average monthly total interactions’ in Q3 2019, representing the sum of monthly average number of comments, private messages, posts, likes and multi-user on-air dialogues, reached 2.5 billion, an increase of 27.6% from 2.0 billion during the same period last in 2018.

The firm’s platform offers podcasts across 27 categories, such as life and relationships, parenting, education, talk shows and music radio as well as 107 sub-categories that include love and bedtime stories, and family.

Lizhi also offers other types of audio media entertainment, including social, music, talk shows, animation, comics and games, as well as audio books.

Investors in Lizhi included Orchid Asia Group Management, Xiaomi, Morningside Private Investors, Shunwei Capital, and Matrix Partners China. Source: Crunchbase

The firm markets its services primarily through advertising brand marketing.

Selling and marketing expenses as a percentage of revenue have been uneven but trending lower as revenues have increased, per the table below:

Selling & Marketing

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended Sept. 30, 2019

22.0%

2018

16.9%

2017

45.6%

Source: Company registration statement

The selling & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of selling & marketing spend, lowered to 1.3x in the most recent six-month period, as shown in the table below:

Selling & Marketing

Efficiency Rate

Period

Multiple

Nine Mos. Ended Sept. 30, 2019

1.3

2018

2.5

Source: Company registration statement

Notably, management has provided no customer retention information, a critical aspect of evaluating subscription-based revenue models.

Market

According to a recent market research report by Daxue Consulting, the Chinese podcast market grew by 70% year-over-year in terms of total users, reaching 170 million in 2018.

The podcast industry in China is anticipated was projected to grow over $7.3 billion in 2018, primarily due to most podcasts being paid subscriptions with a focus on educational content, also known as the ‘pay for knowledge’ industry.

As a comparison, the US market is currently worth only $314 million annually and, while individual podcasters in China can make up to $8 million a year with 250,000 listeners, Serial, the most popular podcast in America, profited about $500,000 with 19 million downloads.

Data from iiMedia shows that the China audiobooks market was valued at 3.24 billion yuan ($460 million) in 2017, which further rose to 4.5 billion yuan ($650 million) in 2018 and is projected to reach 7.8 billion yuan ($1.15 billion) by 2020.

The overall China audio market is projected to generate more than 6.09 billion yuan ($840 million) by 2019, with 486 million users listening.

Financial Performance

LIZI’s recent financial results can be summarized as follows:

  • Growing topline revenue, although at a decelerating rate

  • Increasing gross profit, reduced gross margin

  • Increasing operating losses

  • Growing use of cash from operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 114,067,000

38.9%

2018

$ 116,146,000

74.1%

2017

$ 66,695,441

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 28,820,000

20.7%

2018

$ 33,878,000

87.7%

2017

$ 18,045,147

Gross Margin

Period

Gross Margin

Nine Mos. Ended Sept. 30, 2019

25.27%

2018

29.17%

2017

27.06%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended Sept. 30, 2019

$ (15,406,000)

-13.5%

2018

$ (1,745,000)

-1.5%

2017

$ (22,047,353)

-33.1%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

Nine Mos. Ended Sept. 30, 2019

$ (107,549,000)

2018

$ (32,417,000)

2017

$ (65,561,176)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended Sept. 30, 2019

$ (8,053,000)

2018

$ 2,031,000

2017

$ (4,607,941)

As of September 30, 2019, LIZI had $17.5 million in cash and $29 million in total liabilities, with no long-term debt.

Net free cash flow from the twelve months ended September 30, 2019 was a negative ($4.9 million).

IPO Details

LIZI intends to sell 4.1 million ADSs representing 82 million Class A ordinary shares (1 to 20) at a midpoint price of $12.00 per ADS for gross proceeds of approximately $49.2 million, not including the sale of customary underwriter options.

Affiliates of existing shareholders have indicated an interest to purchase ADSs in the IPO of up to $36 million in the aggregate, or 73% of the IPO. This is a positive signal for prospective IPO investors.

Class A stockholders will be entitled to one vote per share and Class B shareholders will have 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 $531 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.97%.

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

We plan to use 40% of the net proceeds of this offering to develop innovative products, 30% to invest in the application of our AI technologies, and 10% to expand our overseas business, as well as 20% for general corporate purposes.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Citigroup, Haitong International, AMTD, Needham & Company, Tiger Brokers, China Merchants Securities, Valuable Capital, and Prime Number Capital.

Commentary

LIZI is a fast-growing audio streaming company operating in a large and growing market in China.

The firm’s financials show a company that has grown quickly but that growth is slowing down and operating results are worsening along with operational cash use.

Sales and marketing expenses as a percentage of total revenue are trending downward but have risen in the most recent reporting period. Sales and marketing efficiency has dropped as well.

The market opportunity for audio streaming in China is significant and estimated grow, but is likely hampered by the subscription-based revenue model.

As a comparable-based valuation, management is asking IPO investors to pay nearly the same Price/Sales and EV/Revenue multiples as industry giant Spotify, which I find hard to accept.

Additionally, the firm has provided no subscription retention figures in its filing. For a subscription-based firm, this is a central omission, since we can’t determine how efficient the firm is at retaining subscribers from year to year.

Accordingly, while the affiliate investors plan to purchase most of the IPO, I’m concerned about LIZI’s slowing revenue growth, lack of transparency for important subscription metrics, and high IPO price.

Expected IPO Pricing Date: January 16, 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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