|THE NEXT BIG THING |
Analysis of upcoming IPOs and spin-offs, as well as secondary plays on highly-anticipated new issues.
|Eight Recent IPOs That Investors Should Know
About (BORN, JKS, HSFT, CIS, FN, QLIK, MMYT, RP)
With only a handful of exceptions, the IPO market in 2010 has been terrible, with dozens of mediocre deals pushed out the door that were priced too aggressively, which unsurprisingly found little institutional support once they began trading. However, over the past week we've been alerting our readers to a small number of recent IPOs (specifically BORN and MMYT) that are starting to see some legitimate investor interest. There are now maybe ten new issues that fit this description, and in most cases the catalyst for this newfound investor interest has been better than expected earnings reports -- their first as public companies.
Below, we present eight recent IPOs that have solid fundamentals but are still flying well below most investors' radar screens. The first six have rallied sharply following their earnings reports, while the latter two still have their debut earnings reports ahead of them. Most of these should be thought of as "pullback long" candidates, given the sharp run-ups following their reports.
Qlik Technologies (QLIK, July 16): Recent Turnaround Story Building on Positive Momentum; Seeing Strong Demand Across All Global Regions
Qlik Technologies (QLIK) priced its 11.2 million share IPO on July 16 at $10, above the expected range of $8.50-$9.50. It opened 10% above its IPO price and then cruised higher over the next few weeks, reaching post-IPO highs of just over $16 on August 4. At the high point, QLIK was ~60% above its IPO price, although it pulled back ahead of August 19 earnings report. As discussed in yesterday's spot analysis on In Play, QLIK's Q2 results were very strong, and served to put this company on the map for growth stock investors.
For some background, QLIK is a developer of business intelligence software that helps companies make better and faster business decisions. Its software platform is called QlikView, which allows users to consolidate, search, visualize, and analyze all data sources to improve business insight. QLIK believes its software represents a "disruptive" force in the business intelligence space as its product offering is faster to deploy, much easier to use, has a lower cost, and ultimately helps customers gain real-time insights. QlikView allows customers to analyze multi-dimensional data with a simple, point-and-click platform based on their patented in-memory associative technology, which the company sees as a competitive advantage in the market. Unlike most business intelligence software companies, QLIK focuses on small and medium sized businesses, which is an underserved segment of the market. In addition to the business intelligence market, the company believes its software can expand to adjacent markets, such as search and discovery software.
Regarding its Q2 results, QLIK swung to a profit of $0.05 per share from $(0.03) a year ago while revenue rose 56% YoY to $51.1 million. Non-GAAP operating margin came in at 12.5% vs a negative margin a year ago. During the quarter, QLIK added over 1,400 new customers to bring its total customer count to over 15,000. The company also released its QlikView for iPad, which allows for a new level of touch-based interactivity. Management provided further color on the quarter by stating, "We saw strong demand across each of our major global regions, and business was well balanced across both new and existing customers as we executed against our land and expand strategy. This performance also contributed to a strong increase in our company's operating profitability and margin."
It also guided Q3 EPS to $0.02-$0.03 on revenue of $44-$47 million. For FY10, the company expects EPS of $0.21-$0.23 on revenue of $204-$207 million. There are not any analyst estimates yet for QLIK. However, we can take a look at FY09 results to get a feel for its year-over-year growth. According to its prospectus, QLIK earned $0.06 a share in FY09, so that would equate to 267% growth, at the mid-point of its guidance. It's worth noting though that comparing FY10 EPS with FY09 EPS may not be a completely clean comparison as it shifted to a public company this year, but nonetheless, the y/y improvement is impressive. On the top line, revenue growth would equate to 31% at the mid-point of guidance. It's hard to formulate a valuation without estimates. However, based on the company's full year guidance of $0.21-0.23, it trades at a hefty P/E of 68x.
China New Borun (BORN, IPO date June 11): Provider of Edible Alcohol Products Growing Rapidly Due to Capacity Expansion, New Market Penetration
On August 13, China New Borun (BORN) was an IPO that we revisited in our weekly column for "The Next Big Thing." We highlighted it as a forgotten IPO from June 11 that was beginning to quickly move higher on increasing volume following its second quarter earnings results. Prior to reporting Q2 earnings on August 4 -- its first quarterly report as a public company -- BORN was essentially a "left-for-dead" IPO that nobody was familiar with. Its IPO was a dud, as it was forced to cut the expected price range to $8-$9 from $12-$14, and then still priced below that range at $7. It opened and closed at $7, and then steadily drifted lower over the next month-and-a-half to eventually trade under $5 per share. From there, shares started slowing creeping higher, albeit on light volume, until it reported eye-popping results in early August. That acted as the catalyst to catapult the stock higher to post-IPO highs which put it on many more traders' radars, as indicated by the very strong, building volume.
The China-based maker of corn-based edible alcohol saw its sales surge 155% to RMB 432.5 million, or $63.7 million, slightly ahead of the analysts' expectations of $63.02 million. Edible alcohol sales, which account for 70% of revenue, grew by 156% and DDGS Feed products (18% of revenue) grew by 108%. Corn germ sales, which is still a very small portion of the overall business, soared 286%. The massive boost in sales for its edible alcohol was driven by an increase in sales volume (+118%), due to higher production capacity resulting from additions at both its manufacturing facilities. Additionally, there was an increase in price per ton. On the bottom line, net income jumped 155% to RMB 67.1 million, or $57.6 million, for an EPS of $0.46, which was inline with consensus estimates. Cash flow from operations was strong at $24.3 million. Finally, the company's balance sheet is very healthy, with $57.6 million in cash and no long-term debt.
In addition to second quarter results, the company also provided FY10 revenue guidance of $243-$245.9 million, which equates to 55.7-57.5% annual growth. EPS guidance was not given, but the Street is forecasting EPS of $1.63 compared to $1.22 in FY09. Those figures may not be completely comparable since BORN is now a public company, but that would equate to growth of 34%.Looking further out, analysts expect EPS and revenue to grow 23% and 41%, respectively, in 2011. While that is a slow down in growth, those rates are still respectable, and the company certainly has the catalysts to meet or exceed those forecasts.
BORN is in the midst of a major expansion of its capacity, adding on to plants in Daqing and Shouguang, using proceeds from its IPO. Following the completion of the Daqing facility, which is expected by the end of this year, it will be capable of producing 120,000 tons of Grade B edible alcohol, making it the second largest edible alcohol producer in China. It is increasing its capacity because demand for edible alcohol is very healthy, and is expected to be strong in coming years. Specifically, according to a report by Frost & Sullivan, demand for edible alcohol will increase at a CAGR of 16.6% from 2009 to 2012. Not only is demand healthy, but BORN is in an optimal position to capitalize on it because the PRC government is not allowing any new construction of edible alcohol facilities and is also forcing plants with less than 30,000 tons of capacity to shut down. Furthermore, BORN's plants are located in key corn producing regions in China, which allows it to purchase corn (accounts for 80% of input costs) at lower prices than its competitors. So, clearly, the company has a few potentially lucrative catalysts ahead of it, but another intriguing piece of this story is its valuation. Despite the near 100% run-up since mid-July, BORN still has a miniscule forward P/E of just 6x projected FY10 earnings.
Jinko Solar (JKS, May 14): Improving Demand in Solar, JKS' Transition to Modules, and Capacity Expansion Fueling Growth
Jinko Solar (JKS) is a China-based maker of silicon wafers and solar cells and modules that has been skyrocketing higher since mid-June, up ~185% since then. Like BORN, its volume has been steadily building in recent weeks. It hasn't been an easy road, though, for JKS. The company originally attempted to go public back in early February, but was forced to shelve its IPO. The solar market, and solar-related stocks, were very weak during this time, which is primarily why we had a negative bias on its IPO in our original preview. Just a few weeks earlier, another China-based solar IPO -- Daqo New Energy -- pulled the plug on its IPO due to weak market conditions.
When JKS did go public on May 14, it did so to little fanfare. Its IPO priced at $11, at the low end of the $11-$13 expected price range, and then opened and closed flat at $11. The stock quickly slid lower and chopped around in a $9-$11 range until July 7 when it popped higher by 15%, pushing it through that trading area . There wasn't any company-specific news issued that day (at least that we are aware of), but solar stocks as a whole were very strong, as momentum for the group was beginning to build. Solar stocks were put back in play after a couple upbeat reports from ReneSola (SOL) and SMA Solar Technology, which both raised their outlooks for 2010. There are a few other factors that have acted as catalysts for this group, including a rebound in the Euro and news from Germany that the country -- which is a leading market for solar -- may not lower solar subsidies as much as originally feared.
While sentiment for solar stocks in general had been improving, analysts were
also issuing positive opinions on JKS. The company was initiated with an
Outperform by Oppenheimer on June 23, a Buy at Collins Stewart on June 29, and
then an Outperform by Credit Suisse on August 6. The string of bullish analyst
reports kept the upward momentum going for JKS, leading up to its exceptional
second quarter results on August 16. Specifically, JKS reported EPS of $1.39,
which included an $11 million gain as a result of a change in the fair value of
foreign exchange forward contract derivatives. This may not have compared to the
consensus estimate of $0.58. Revenue grew by an astounding 207% to $132.8
million, which was easily ahead of the Street's $116.5 million estimate. Total
solar product shipments hit a record of 99.9 megawatts, and gross margin also
came in at the best level in company history at 26.9%. For comparisons sake,
gross margin was a paltry 6.7% in the year-ago period. The expansion in margin
was due to lower non-silicon costs as a result of the increased vertical
integration of the company's production process.
As a new supplier in the solar cell market, the company has had success establishing new commercial agreements. At the end of the quarter, it had agreements in place with more than 40 customers spanning 15 countries, and is actively exploring new markets such as the U.S., Canada, Australia, and India. On the pricing side, ASPs for module products declined slightly to $1.70 from $1.71 in the first quarter, but the company sees upside for selling prices in the second half of the year, supported by strong market demand and improved sales capabilities. Analysts are expecting a dramatic turnaround in results as well, as the FY10 EPS consensus estimate of $2.65 suggests. Although FY09 financial data is unavailable, we note that the company lost ($0.52)/ADS for the nine months ended September 30, 2009. Looking further ahead, the Street is projecting EPS and revenue to grow 18% and 36%, respectively, in 2011. On a valuation basis, JKS currently has a forward P/E of 10.8x expected FY10 earnings, which compares favorably to peer LDK Solar (LDK), which has a forward P/E of 15x.
HHiSoft Tech (HSFT, June 30): Emerging Trends in IT and Regulation Overhauls Boosting Business for Consulting Firms Like HSFT
HiSoft Tech (HSFT) is a China-based company that offers IT outsourcing and consulting services -- an industry that has been hot lately. Many investors and traders are probably familiar with Cognizant Technology Solutions (CTSH), which is a larger U.S. based IT consulting firm that has been growing quickly and has seen its stock soar by some 73% since this time last year. There are a few other companies operating in this space that have performed well on both a financial and stock appreciation basis, including iGATE (IGTE), Infosys (INFY), Diamond Management & Technology (DTPI), and recent IPO, Camelot Information Systems (CIS).
Cognizant is probably the most recognizable name in the industry, and it is also one of the rare companies that has achieved year-over-year growth in both earnings and revenue in each of the past eight quarters. For 2Q10, reported on August 3, it reported its highest revenue growth in over two years. To get a better idea of what has been driving this growth -- not necessarily for CTSH, but for the industry as a whole -- we took a look at CTSH's second quarter earnings conference call transcript. We found a few broad based trends that are benefitting this group of companies. CTSH's management noted how regulatory changes in both the financial and healthcare sectors continue to drive new projects, as the impact of these new changes are still being assessed. The company believes that this factor will continue to have a positive impact into 2011 and beyond. Additionally, on the technology side, it stated that the emerging trends of cloud computing, virtualization, and social technologies are generating considerable interest from clients. It stands to reason that companies like HSFT, which targets companies in the financial services industry, is also reaping the rewards of these developments.
For more background on HiSoft's business, the company offers its services primarily for companies in the U.S. and Japan, but it is currently seeking to rapidly expand its business in China. Its IT services include application development, testing and maintenance services for custom applications as well as implementation and support services for packaged software. Its research and development services include software and hardware testing as well as software globalization services. In 2009 and for the three months ended March 31, 2010, IT services contributed 51.5% and 51.1% of net revenues, respectively, while research and development services contributed 48.5% and 48.9% of our revenues, respectively. HSFT's top clients include General Electric, Microsoft, Nomura Research Institute, and UBS. The company turned profitable last year, earning $7.4 million, despite the fact that revenue declined by 9% to $91.5 million. It was able pull that feat off because gross margin was much better in 2009 at 35.7% against 30.1% in 2008. The company attributes this to continued efforts to improve service delivery processes. It states that its efforts to develop offshore delivery centers in China, especially in cities with relatively lower wage levels, has allowed it to decrease the overall compensation expenses related to our professionals.
Revisiting its IPO day, we note that HSFT went public on June 30, pricing at $10, below the expected range of $11-$13. It opened modestly higher that day and then trickled steadily upward, supported by a couple positive analyst calls, including Buy initiations by Stifel Nicolaus and Deutsche Bank. The stock then made a more dramatic move, spiking higher following strong second quarter results on August 18. HSFT reported GAAP earnings per ADS of $0.17 versus consensus of $0.15, and versus $0.09 a year ago. Revenue shot higher by 64% to $34.7 million. Gross margin was materially higher at 37.2% compared to 35.8% a year ago, driven by strong revenue growth and productivity improvement in service delivery during the quarter. Overall, it was a very solid quarter for the company, as management summed it up this way: "During the second quarter, we had positive momentum across all business sectors and higher levels of strategic engagement from our key customers. We are seeing a substantial increase in the volume of work coming from within the domestic China market."
HiSoft also offered FY10 earnings and revenue guidance, seeing GAAP EPS of $0.56-$0.59 -- which may not have compared to the prior $0.62 Thomson Reuters consensus -- and revenue of $139-$142 million versus the $129.1 million consensus. The current FY10 Thomson Reuters consensus shows an EPS estimate of $0.71 on revenue of $135 million, so analysts seem to be excluding certain charges from their estimates. According to HSFT's IPO filing, it earned $0.36 per share in FY09 on $91.5 million in revenue. While the FY09 EPS figure is likely not comparable to the FY10 consensus estimate, that still provides a general sense that earnings are growing a healthy clip. In terms of valuation, HSFT has a forward P/E of 22x expected FY10 earnings. Given their similar sizes, IGTE is a reasonable comparison, and that company has a slightly lower forward P/E 20.2x. HSFT's balance sheet looks to be in good shape with $51.5 million in cash and equivalents and no long term debt.
Camelot Information Systems (CIS, July 21): China' Economic Growth and Banking Expansion Boosting Business for CIS
Like HiSoft Tech, Camelot Info Systems (CIS) is a China-based provider of IT and enterprise application services. However, CIS focuses primarily on the Chinese market, mostly providing SAP-based ERP (enterprise resource planning) services, so its business and its catalysts are not exactly identical. CIS's growth drivers are mostly related to China's economic expansion, that has led to a dramatic increase in the number of large domestic enterprises and to greater competition among them. This, in turn, is resulting in a growing number of Chinese companies looking to outsource their IT and other non-core activities.
CIS provides services to a wide range of industries, including financial services, resources and energy, manufacturing and automobile, technology, as well as telecommunication, media and education. CIS has two primary service lines: 1). Enterprise Application Services, which consists of packaged software services for leading ERP software packages, and software development services; and 2). Financial Industry IT Services, which consists of software solutions, system support and maintenance, as well as IT consulting services for the financial industry. The company provides its services to enterprise customers directly as well as indirectly through international IT service providers such as IBM, Accenture and HP. As part of CIS' long-term collaboration with IBM, it entered into a number of strategic initiatives, including the joint development of a service delivery center focused on enterprise application software and services. /p>
Last night, CIS reported exceptionally strong second quarter results. Adjusted ADS came in at $0.18, for a $0.04 beat, on 90% year-over-year revenue growth to $44.1 million. In the earnings press release, management commented that, "...As the Chinese banking industry becomes more sophisticated and competition increases, banks are facing growing pressure to improve customer operations and financial product innovation, giving rise to a new phase of industry-wide development and opportunity for Camelot. Going into the second half of 2010, we expect the growth momentum across our business lines, especially in Enterprise Application Services, will continue." The company also issued upside EPS and revenue guidance for the third quarter and fiscal year 2010. For Q3 it guided for EPS of $0.20 versus the $0.18 single analyst estimate and revenue of $46.4 million versus the $44 million estimate; and for FY10 it sees EPS of $0.69 versus the $0.63 estimate. There currently aren't any estimates for FY10, but the growth rates look robust if we compare the guidance to FY09 results. CIS' prospectus shows that it earned $0.10 per share last year on revenue of $118 million. Again, last year's EPS figure may not be exactly comparable, but it does give a sense of how quickly business is growing.
Looking back to CIS' IPO day back on July 21, it did not price particularly well, starting at $11 versus the $11-$13 proposed range. It opened lower by 8%, and then it did essentially nothing for the next few weeks, trading between $10.50 and $11 on virtually no volume. Interestingly, on August 18 and 19, just before the company reported second quarter earnings, the stock rocketed higher by 16%, clearly indicating that strong results were expected. The company did not disappoint as the upside report has pushed the stock higher by another 5% so far today.
FFabrinet (FN, June 25): High Growth Expected For Optical Communications Market as Service Providers Are in Need of Upgrade
Fabrinet (FN) priced its 8.5 million share IPO (led by Morgan Stanley and Deutsche Bank) on June 25 at $10, below the expected range of $12-14. Following its poor debut over the first month, the stock has been rocketing higher the past couple of weeks, up nearly 60% as investors have started to take notice. The company makes optical components and other precision mechanical assemblies on a contract basis for OEMs. It manufactures optical and selective switches, beam splitters, power monitoring modules, printed circuit boards, lasers, sensors, and related products. The company offers a range of capabilities, from the design, process engineering and testing. FN believes there is no other manufacturing services provider with a similar breadth and depth of capabilities.
Fabrinet focuses primarily on low-volume production of highly complex products, which are higher margin. Its customers include four of the largest six optical communications components and module OEMs, as well as four of the top six industrial laser producers. Major customers include Coherent, Finisar, Infinera, JDS Uniphase, Newport, Emcore and Opnext. Of note, Fabrinet is generally its customers' sole-source manufacturer for the majority of the devices it builds. Its facilities are primarily located in Thailand and in China, to a lesser extent. /p>
Fabrinet currently serves three growing markets: optical communications, high-powered lasers and sensors. Growth in the optical communications market is expected to grow 13% a year for the next 3-5 years, stemming from continued demand for bandwidth from new applications such as high-definition video on demand and cloud computing. Fabrinet has also branched into the laser market, which is becoming an increasingly important area for the company (now represents 20% of sales vs 9% a year ago). Growth in the laser market is being driven by increasing demand for laser surgery and semiconductor wafer processing. Finally, demand for sensors is being driven by a variety of applications, including medical devices, semiconductor capital equipment and automotive equipment.
Clearly, Fabrinet was impacted by the recession and financial crisis as the company saw sales decline each quarter in calendar 2009. However, growth has resumed the past couple of quarters. Most recently, on August 18, Fabrinet reported impressive Q4 (Jun) results. EPS more than tripled to $0.43 from $0.13 a year ago. Revenue jumped 91% YoY and 15% sequentially to $157.4 million. Revenue has been accelerating over the past few quarters: -43%, -33%, -11%, +61% then +91% in JunQ. As is the case with many EMS companies, margins are relatively thin, but they showed improvement in the quarter. Gross margin came in at 12.3% vs 10.1% a year ago. What's impressive about Fabrinet is that is remained profitable each quarter during the downturn.
On a final note, as you can see in the table below, the valuation is pretty much in-line with other EMS stocks. FN trades at a forward P/E of 8.0x with EPS expected to grow 24% for a PEG ratio of 0.3x. Looking ahead, Fabrinet says its visibility remains strong. Continued demand for more bandwidth and the increased number of applications utilizing industrial lasers, optics and sensors positions the company well in the future.
Two Recent IPOs That Have Yet To Report Earnings
Although the two recent IPOs highlighted below have not yet reported their first quarterly results as public companies -- there aren't any dates set, nor are there any estimates -- we wanted to bring readers' attention to them as they are two of the best performing IPOs of 2010. With that said, earnings results do pose a potential risk to these stocks, especially given how strongly they have performed compared to virtually every other IPO this year. These are high quality companies, though, so should there be a pull-back following their results, an attractive entry point could be presented-- so long as the fundamental remain in tact.
MakeMyTrip (MMYT, August 12): Investors and Traders Jump at Opportunity to Own High-Growth, India-Based Online Travel Provider
MakeMyTrip (MMYT), India's largest online travel company, is the best performing IPO of 2010, up 120% so far versus its IPO price. In our original write-up, we felt that interest would be strong for this IPO because investors would be compelled to get in on the ground floor of a high growth Indian company -- an opportunity that doesn't come around very frequently. Its IPO did not disappoint when it priced on August 12, starting at $14 versus the $12-$14 projected range. It then opened at $22 and soared higher throughout the day, finishing 89% above its IPO price. We've been monitoring it closely since then, commenting on August 17 how rare this type of performance has been for recent IPOs, while also pointing out that investors have been willing to overlook the fact that MMYT is not profitable. It is still a high-quality company, however, and has been trending towards profitability (FY10 loss per share of $0.18 vs. $0.38 a year ago). Importantly, the company is also cash flow positive. Currently, there aren't any estimates available, but its growth potential is exciting given the sheer size of the Indian market, the fact that internet penetration is just 7% there, and due to a growing middle class that is increasingly traveling and using credit and debit cards as a means of payment.
Realpage (RP, August 12): Solid Financial Results, Large Market Opportunity, and Improving Rental Housing Data Bode Well for RP
Realpage (RP), a provider of on-demand software services for the rental housing industry, is another one of 2010's best performing IPOs, up 52% versus its IPO price. Like MakeMyTrip, RP priced on August 14. But, unlike MakeMyTrip, RP did not price particularly well, coming in at $11 versus the $13-$15 expected price range. Additionally, RP cut the deal size to12.3 million shares from 13.5 million. RP is a rare case in which it was able to shake off a poor pricing, and then immediately perform well in the aftermarket. It opened at $13, or 18% above the IPO price and has steadily charged higher since then. We were also high on this IPO, giving it a grade of "A/B" in our original preview, citing a turnaround in its financial performance in 2009 despite a soft rental housing market. Recent data has indicated that the multi-family rental market has shown some recovery, which should further enhance its growth. It has several other possible catalysts ahead of it, as it plans to fuel growth through new product launches, entrance into new markets (RP has an addressable market opportunity of approximately $34.7 million housing units), and through potential acquisitions.
-- Dennis Hobein, Robert Reid, Jim Busch