Autozi Internet Technology Begins U.S. IPO Rollout (Pending:AZI)

A Quick Take On Autozi Internet Technology (Global) Ltd.

Autozi Internet Technology (Global) Ltd. (AZI) has filed to raise $28.75 million in an IPO of its Class A ordinary shares, according to an SEC F-1 registration statement.

The firm operates a network of sales and service centers for automobiles in China.

AZI’s top line revenue has declined sharply in its most recent reporting period due to the negative effects of the COVID-19 lockdowns at the time.

I’ll provide a final opinion when we learn more IPO details from management.

Autozi Overview

Beijing, China-based Autozi Internet Technology (Global) Ltd. was founded to develop an online platform and offline network of multi-brand sales and service capabilities for imported cars, EVs, and hybrid automobiles in the PRC.

Management is headed by founder, Chairman and CEO Dr. Houqi Zhang, who has been with the firm since its inception and was previously vice president of Lenovo Group Limited, responsible for strategy and corporate operations.

The company’s primary offerings include the following:

• NEV (New Energy Vehicle) sales

• Supply chain cloud platform

• Network of independent service centers

• New car and parallel import car sales

• Auto parts and accessories sales

• Automotive insurance-related services.

As of March 31, 2023, Autozi has booked fair market value investment of $147.3 million in equity from investors, including Qizhi Investment Management, Qichuang Development Co, Huachuang (Fujian) Equity Investment Enterprise, and JiuZhou JY Investment Limited.

Autozi – Customer Acquisition

The firm markets its services to consumers wishing to purchase new cars or accomplish repair and maintenance requirements.

Most of its service centers are currently located in Tier 3 and Tier 4 cities.

As of March 31, 2023, the company had 252 stores across five provinces and 17 cities.

Selling and Marketing expenses as a percentage of total revenue have been stable as revenues have decreased, as the figures below indicate:

Click to enlarge

(Source – SEC.)

The Selling and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing expense, fell to negative (22.3x) in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source – SEC.)

Autozi’s Market & Competition

According to a 2023 market research report by Maximize Market Research, the Chinese market for automotive parts and repair aftermarket is expected to reach $3.3 trillion by 2029.

The specialty auto parts market attained a $2.1 trillion level by the end of 2022.

The main drivers for this expected growth are the growing purchases of automobiles in China and the consequent need to repair them on a timely basis.

Also, the Chinese automotive parts market is primarily by foreign-owned suppliers that had a 70% revenue share in 2022.

The company faces fierce competition from new & used car dealers as well as highly fragmented vehicle repair options for consumers.

Autozi Internet Technology (Global) Ltd.’s Financial Performance

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

• Sharply dropping topline revenue

• Tiny gross profit and gross margin

• Material operating loss and cash used in operations.

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

Click to enlarge

(Source – SEC.)

As of March 31, 2023, Autozi had $1.8 million in cash and $39.2 million in total liabilities.

Free cash flow during the twelve months ending March 31, 2023, was negative ($4.0 million).

Autozi’s IPO Details

Autozi intends to raise $28.75 million in gross proceeds from an IPO of its Class A ordinary shares, although the final figure may vary.

Class A ordinary shareholders will be entitled to one vote per share and the sole Class B ordinary shareholder, founder Dr. Houqi Zhang, will be entitled to twenty votes per share.

The company will be a controlled company immediately after the IPO, per Nasdaq’s rules.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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

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.

Management says the firm qualifies as 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.

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

approximately 50% for enhancing our supply chain management capabilities, expanding and optimizing our warehouse coverage, integrating supply chain resources of automotive and auto parts;

approximately 30% for expanding the size and coverage of our MBS stores network, conducting marketing activities to enhance brand awareness and expanding our operating and supporting team;

approximately 10% for investment in technology innovations to continue upgrading our proprietary and self-developed online supply chain cloud management platform and SaaS platforms; and

approximately 10% for general corporate purposes, which may include strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.

(Source – SEC.)

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

Regarding outstanding legal proceedings, the company founder is subject to a legal claim totaling RMB81.5 million which the firm is actively negotiating a settlement in relation to.

The sole listed bookrunner of the IPO is US Tiger Securities.

Commentary About Autozi’s IPO

AZI is seeking U.S. public capital market investment to fund its growth initiatives and working capital requirements.

The company’s financials have produced declining topline revenue, small gross profit and gross margin and significant operating losses and cash used in operations.

Free cash flow for the twelve months ending March 31, 2023, was negative ($4.0 million).

Selling and Marketing expenses as a percentage of total revenue have been stable as revenue has decreased; its Selling and Marketing efficiency multiple fell to negative (22.3x).

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the company’s growth and working capital requirements.

AZI is also subject to various Cayman Islands and PRC regulations regarding the payment of dividends.

The market opportunity for sales and repair & maintenance of vehicles and their components in China is large and growing.

However, the market is highly fragmented and subject to intense competition.

US Tiger Securities is the sole underwriter, and the two IPOs led by the firm over the last 12-month period have generated an average return of negative (14.9%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

Like other companies with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The Chinese government’s crackdown on certain IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.

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

The Chinese government may intervene in the company’s business operations or industry at any time and without warning and has a recent history of doing so in certain industries.

Additionally, post-IPO communications from the management of smaller Chinese 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.

When we learn more details about the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.