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A Quick Take On HW Electro Co., Ltd.
HW Electro Co., Ltd. (HWEP) has filed proposed terms to raise $15 million in gross proceeds from the sale of American Depositary Shares of its common stock in an IPO, according to an amended SEC registration statement.
The company markets and sells imported electric light commercial vehicles in Japan.
I previously covered the firm’s initial IPO filing here.
Given the firm’s tiny revenue base, short history, high risks and extremely high valuation assumptions, my opinion on the HW Electro Co., Ltd. IPO is to Sell [Avoid].
HW Electro Overview And Customer Acquisition
Japan-based HW Electro Co., Ltd. distributes electric vehicle, or EV, light commercial and passenger vehicles in Japan.
The firm is led by founder and CEO Mr. Weicheng Hsiao, who has been with the firm since May 2019 and also participates in the operations of Goodride Japan Inc., a wholesale tire company.
The company’s primary offerings include the following:
As of March 31, 2023, HW Electro has booked fair market value investment of $19.8 million from investors, including Autobacs Seven and others.
HWEP sells vehicles through its dedicated direct sales force to companies and governmental departments in Japan.
For the fiscal year of September 30, 2023, the company sold 66 electric light commercial vehicles to 15 customers.
As of its most recent fiscal year-end, the firm had orders for 262 vehicles and expects “to deliver an aggregate of 1,782 electric light commercial vehicles during the fiscal year ending September 30, 2024.”
Selling, G&A expenses as a percentage of total revenue have fallen as revenues have increased, as the figures below indicate:
|
Selling, G&A |
Expenses vs. Revenue |
|
Period |
Percentage |
|
Six Mos. Ended March 31, 2023 |
217.6% |
|
FYE Sept. 30, 2022 |
549.5% |
|
FYE Sept. 30, 2021 |
–% |
(Source – SEC.)
The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, rose to 0.4x in the most recent reporting period, a positive development, as shown in the table below:
|
Selling, G&A |
Efficiency Rate |
|
Period |
Multiple |
|
Six Mos. Ended March 31, 2023 |
0.4 |
|
FYE Sept. 30, 2022 |
0.2 |
(Source – SEC.)
Per a 2021 market research report by Maximize Market Research, the market for electric vehicles in Japan was an estimated $670 million in 2020 and is expected to exceed $1.6 billion by 2027.
If achieved, this represents a forecast CAGR (Compound Annual Growth Rate) of 13.7% from 2021 to 2027.
The primary reason for this expected growth is the Japanese government’s promise to be carbon neutral by 2050, requiring by 2035 that all new passenger vehicles sold in Japan must be electric.
Also, the graphic below shows various metrics for the market:
Maximize Market Research
Major competitive or other industry participants include the following:
-
Mitsubishi Motors
-
ASF Co. Ltd.
HW Electro Co., Ltd. Financial Performance
The company’s recent financial results can be summarized as follows:
-
Growing top line revenue from a tiny base
-
A swing to gross loss and negative gross margin
-
Increasing operating losses
-
Growing cash used in operations.
Below are relevant financial results derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
Six Mos. Ended March 31, 2023 |
$ 1,255,752 |
4468.0% |
|
FYE Sept. 30, 2022 |
$ 442,789 |
–% |
|
FYE Sept. 30, 2021 |
$ – |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
Six Mos. Ended March 31, 2023 |
$ (178,769) |
880.1% |
|
FYE Sept. 30, 2022 |
$ 139,143 |
–% |
|
FYE Sept. 30, 2021 |
$ – |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
% Variance vs. Prior |
|
Six Mos. Ended March 31, 2023 |
-14.24% |
52.1% |
|
FYE Sept. 30, 2022 |
31.42% |
–% |
|
FYE Sept. 30, 2021 |
–% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
Six Mos. Ended March 31, 2023 |
$ (6,609,286) |
-526.3% |
|
FYE Sept. 30, 2022 |
$ (5,185,449) |
-1171.1% |
|
FYE Sept. 30, 2021 |
$ (1,653,031) |
–% |
|
Comprehensive Income (Loss) |
||
|
Period |
Comprehensive Income (Loss) |
Net Margin |
|
Six Mos. Ended March 31, 2023 |
$ (5,816,543) |
-463.2% |
|
FYE Sept. 30, 2022 |
$ (5,219,590) |
-1178.8% |
|
FYE Sept. 30, 2021 |
$ (1,334,198) |
–% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
Six Mos. Ended March 31, 2023 |
$ (3,921,824) |
|
|
FYE Sept. 30, 2022 |
$ (2,191,507) |
|
|
FYE Sept. 30, 2021 |
$ (1,843,194) |
|
|
(Glossary Of Terms.) |
(Source – SEC.)
As of March 31, 2023, HW Electro had $3.2 million in cash and $2.6 million in total liabilities.
Free cash flow during the twelve months ending March 31, 2023, was negative ($4.6 million).
HW Electro IPO Details
HWEP intends to sell 3.75 million American Depositary Shares representing underlying ordinary shares of stock at a proposed price of $4.00 per share for gross proceeds of approximately $15.0 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.
The company’s enterprise value at IPO (excluding underwriter options) will approximate $147 million.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 8.97%.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
approximately 50% for the purchase of electric vehicles and other general corporate purposes;
approximately 30% for research and development of “PUZZLE”;
approximately 10% for marketing; and
approximately 10% for further research and development to update and upgrade the HW ELECTRO Platform Service.
(Source – SEC.)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management said the firm is not a party to any legal or administrative proceedings that would have a material adverse effect on its financial condition or operations.
The sole listed bookrunner of the IPO is Univest Securities.
Valuation Metrics For HW Electro
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:
|
Measure [TTM] |
Amount |
|
Market Capitalization at IPO |
$167,299,552 |
|
Enterprise Value |
$147,164,494 |
|
Price / Sales |
100.12 |
|
EV / Revenue |
88.07 |
|
EV / EBITDA |
-16.58 |
|
Earnings Per Share |
-$0.20 |
|
Operating Margin |
-531.21% |
|
Net Margin |
-496.37% |
|
Float To Outstanding Shares Ratio |
8.97% |
|
Proposed IPO Midpoint Price per Share |
$4.00 |
|
Net Free Cash Flow |
-$4,562,932 |
|
Free Cash Flow Yield Per Share |
-2.73% |
|
Debt / EBITDA Multiple |
-0.02 |
|
CapEx Ratio |
-7.72 |
|
Revenue Growth Rate |
4468.03% |
|
(Glossary Of Terms.) |
(Source – SEC.)
Commentary About HW Electro
HW Electro is seeking U.S. public capital market funds for further expansion of its BEV import business.
HWEP’s financials have produced growing top line revenue from a tiny base, a swing to gross loss and negative gross margin, increasing operating losses and more cash used in operations.
Free cash flow for the twelve months ending March 31, 2023, was negative ($4.6 million).
Selling, G&A expenses as a percentage of total revenue have fallen as revenue has increased; its Selling, G&A efficiency multiple rose to 0.4x in the most recent reporting period.
Management currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm’s growth and working capital needs.
HWEP’s recent capital spending history indicates it has continued to spend on capital expenditures despite negative operating cash flow.
The market opportunity for battery electric vehicles in Japan is currently moderate in size and is expected to reach $1.6 billion by 2027, growing at a relatively robust growth rate of 13.7% from 2020 until then.
Business risks to the company’s outlook as a public company include large automobile manufacturers within Japan and restrained demand by users beyond initial early adopters.
The company is also very small and is thinly capitalized, leading to increased risk of larger entities competing effectively against it.
For U.S. investors, the firm is a “foreign private issuer” and an “emerging growth company,” which will afford management the ability to provide less information to public shareholders.
Such companies have been highly speculative, and their stocks have typically performed poorly post-IPO.
Management is seeking an Enterprise Value / Revenue multiple of around 88x on a tiny revenue base.
Given the firm’s miniscule revenue base, short history, high risks and extremely high valuation assumptions, my opinion on the HW Electro Co., Ltd. IPO is to Sell [Avoid].
Expected IPO Pricing Date: To be announced.