Junee Limited (JNEE) Starts U.S. IPO Effort

A Quick Take On Junee Limited

Junee Limited (JNEE) has filed to raise an undisclosed amount in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides interior design, construction and maintenance services in Hong Kong.

When we learn more about Junee’s assumptions on pricing and valuation, I’ll provide an update.

Junee Overview

Hong Kong, China-based Junee was founded to provide a range of interior design services in the residential and commercial markets in Hong Kong.

Management is headed by co-founder Executive Director Yuk Ki (Francis) Chan, who has been with the firm since inception in 2011 and has over 30 years’ experience in the interior design and fit-out industry in Hong Kong.

The company’s primary offerings include:

• Interior design

• Fit-out (construction & renovation)

• Maintenance

Junee has booked fair market value investment of $1.34 million as of December 31, 2021 from investors including senior management and other individual-directed entities..

Junee – Client Acquisition

The firm bids on new projects in both residential and commercial sectors in the greater Hong Kong region.

Junee focuses on project management and typically hires subcontractors to perform fit-out and maintenance services.

Selling & Marketing expenses as a percentage of total revenue have varied as revenues have fluctuated, as the figures below indicate:

(Source – SEC)

The Selling & Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, was 152.1x in the most recent reporting period, as shown in the table below:

(Source – SEC)

Junee’s Market

According to a 2021 market research report by HKTDC Research, the Hong Kong market for design and related services is extremely fragmented.

As of the end of 2020, the market counted over 6,900 firms providing services, with more than 18,000 employees in total. The number of firms grew by 161% from the approximately 2660 firms operating in 2000.

These figures were inclusive of various design disciplines outside of interior design.

However, due to recent social turmoil, property prices in Hong Kong have essentially plateaued at a record high value in aggregate, leaving questions as to the future demand growth for interior design services.

Junee Limited Financial Performance

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

• Variable topline revenue

• Growing gross profit and gross margin

• Uneven operating profit/loss

• Fluctuating cash flow from operations

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

(Source – SEC)

As of December 31, 2021, Junee had $895,280 in cash and $2.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021, was negative ($66,925).

Junee Limited IPO Details

Junee intends to raise an undisclosed amount in gross proceeds from an IPO of its ordinary shares.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

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

After going public, we aim to further enhance our service capacity, including building an in-house team of electrical fit-out workers and an in-house team of repair and maintenance service workers.

A portion of net proceeds will be reserved for potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities.

We aim to reserve a portion of net proceeds from this Offering for general working capital needs and use as daily operation, including but not limited to, funding sales and marketing efforts and developing web interface. This can serve as a buffer to deal with the fluctuating economic environment and at the same time provide a stable finance backup for daily operational use.

(Source – SEC)

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

Regarding outstanding legal proceedings, management said the company was not a party to any material legal or administrative proceedings, as of June 30, 2021.

The sole listed bookrunner of the IPO is Univest Securities.

Commentary About Junee’s IPO

JNEE is seeking U.S. public capital market investment to build out its in-house capabilities and for general working capital.

The firm’s financials have reported uneven topline revenue, increasing gross profit and gross margin, variable operating profit/loss and fluctuating cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was negative ($66,925).

Selling & Marketing expenses as a percentage of total revenue have varied as revenue has fluctuated; its Selling & Marketing efficiency multiple rose sharply to 142.1x in the most recent reporting period.

The firm currently plans to pay no dividends and to retain future earnings for investment back into the company’s growth initiatives and operating requirements.

The market opportunity for interior design and fit-out work in Hong Kong is difficult to determine. The region has experienced social unrest in recent years and a crackdown by authorities on various activities, so businesses face uncertain prospects for growth.

Like other firms 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 recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

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.

Univest Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 213.2% since their IPO. This is a top-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are the uncertain regulatory and economic environment in the Hong Kong region as well as increased inflation pressures.

Additionally, COVID-19 variant outbreaks continue to occur in China and the potential for lockdowns which harm business activity remain.

When we learn more about the firm’s assumptions on pricing and valuation, I’ll provide an update.

Expected IPO Pricing Date: To be announced.