Analysis of US Stock IPOs | Despite impressive performance with annual revenue exceeding 700 million RMB, Chang'an Energy still struggles to obtain a high valuation

Due to the continuation of the Red Sea crisis and moderate growth in freight volume, the global shipping market in the first three quarters of 2024 entered a boom cycle, and shipping-related companies achieved significant performance growth. Taking China COSCO Shipping Corporation Limited (01919) as an example, the company's net profit in the first three quarters of 2024 was 43.34 billion yuan, a year-on-year increase of 66.67%.

Taking advantage of the high prosperity in the shipping market, well-known ship refueling service provider PTL Limited (hereinafter referred to as Chang'an Energy) has accelerated its pace towards listing in the United States. According to the information from the Zhitong Finance and Economics APP, after submitting the public version of the prospectus (F-1) to the SEC for the first time on July 30th this year, Chang'an Energy updated the prospectus twice on August 19th and September 20th, with a tight IPO progress.

According to the latest version of the prospectus, Chang'an Energy has applied to list on the Nasdaq with the code "PTLE". In this IPO, it will issue 1.25 million common shares at a price of $4 to $6 per share, raising up to $7.5 million. Calculated at an issuance price of $6 per share, Chang'an Energy's market value at listing will reach $75 million.

In terms of performance, Chang'an Energy has shown impressive results. Data shows that Chang'an Energy's revenue in 2023 was $102 million, a year-on-year increase of 36.5%, with a net profit of $936,100 during the period, a year-on-year increase of 139.4%.

Can Chang'an Energy achieve a high valuation during the industry boom period and win favor from the market after listing? The answer can be found through the company's prospectus.

Profitability reveals the essence of a distributor

Hong Kong is an important gateway connecting mainland China with the global market and one of the world's largest international trade and shipping centers. With excellent harbor conditions and advanced port facilities, Hong Kong has become an important transshipment point for goods, promoting trade between China and other countries worldwide. Chang'an Energy's headquarters is located in Hong Kong.

As a mature fuel service provider, Chang'an Energy mainly provides marine fuel logistics services for ships, especially container ships, bulk carriers, general cargo ships, and chemical tankers. Currently, Chang'an Energy has established a cooperation network including upstream suppliers and downstream customers, providing one-stop solutions for refueling ships.

In terms of fuel delivery locations, Chang'an Energy's revenue mainly comes from Hong Kong. According to the prospectus, in 2023, revenue from fuel delivered in Hong Kong accounted for 93.2%. It can be seen that Hong Kong is the core market for Chang'an Energy. However, Chang'an Energy has started to expand into new markets such as the United Arab Emirates and Singapore, aiming to create new growth curves in these regions. In 2023, revenue growth from these two markets was 442.3% and 214% respectively, but the revenue share is still low, totaling less than 5%.

There are multiple factors contributing to Changan Energy's impressive performance in 2023, starting with the industry level. Despite a contraction in demand in the container shipping market in 2023, the delivery of new ships has increased supply, to some extent boosting the demand for refueling services. At the same time, the continued steady export of Chinese goods has also benefited Changan Energy. More importantly, since mid-November 2023, the ongoing tension in the Red Sea has led some vessels passing through the Suez Canal to detour around the Cape of Good Hope, increasing the sailing distance by about 30% and the sailing time by 7 to 15 days (depending on vessel speed). According to Clarkson's data, approximately 10% of global maritime trade volume is transported through the Suez Canal, leading to a significant increase in demand for refueling services.

Changan Energy has clearly seized the industry opportunities by providing marine fuel services to more customers in 2023, with sales volume increasing from 98,013 tons in 2022 to approximately 163,738 tons, a year-on-year growth of 67.06%. As a result, Changan Energy's total revenue in 2023 increased by 36.5% to $102 million, with revenue from Hong Kong growing by 33.4% to $95.1866 million. It is worth noting that the slower growth rate of total revenue compared to sales volume is due to the decrease in oil prices in 2023 compared to 2022.

Due to the economies of scale generated by the significant increase in sales volume and the decrease in oil price costs, Changan Energy's gross profit margin in 2023 rose to 1.9%, an increase of 0.4 percentage points from 1.5% in 2022. Driven by the substantial increase in revenue and the improvement in gross profit margin, Changan Energy's net profit in 2023 surged by 139.4% to $9.3612 million, corresponding to a net profit margin of 0.92%, a significant increase from 0.52% in 2022.

From Changan Energy's profit level, it is evident that the essence of its business model is that of a distributor of marine fuels, with fuel costs accounting for nearly 100% of the company's costs. This means that Changan Energy has hardly ventured into other high value-added products and services.

Demand side faces hidden risks and multiple potential operational challenges

Despite Changan Energy's impressive performance in 2023, it is not enough to judge the company's true value solely based on this. After all, shipping is a typical cyclical industry, with profits exhibiting significant volatility, making it more important to study industry trends. The current shipping market has already entered a downturn phase.

In the first half of 2024, due to strong demand in the shipping market and the continuation of tensions in the Red Sea, the freight index (Europe line) futures main contract continued to rise, leading to a continued prosperity in the shipping market. Leading shipping companies such as COSCO Shipping Holdings achieved a significant increase in profits. However, starting from July, market demand began to decline. According to data from the Shanghai Shipping Exchange, on October 7th, the Shanghai Export Container Freight Index (Europe route) fell by 15.9% to 2662.75 points. In addition, the Shanghai Containerized Freight Index (SCFI) has been declining for six consecutive weeks, reaching a new low of 2135.08 points, with a widened decline of 9.77% The main reason for the significant decline in freight rates is due to the continued weakness in overseas demand, especially on the Asia to Europe routes. Secondly, new ships are being delivered one after another, gradually restoring capacity, while the global economic slowdown is also affecting trade demand. Although the recovery of capacity will to some extent boost bunkering service demand, if global market demand remains weak, it will also restrain bunkering service demand. It is worth noting that the United States cut interest rates by 50 basis points on September 18, and almost every time the U.S. cuts interest rates, it is accompanied by an economic recession. If the U.S. economy does not achieve a soft landing in the future, it will definitely add to the woes of global demand.

In addition to concerns on the demand side, Chang'an Energy also faces multiple operational challenges. Firstly, bunkering services for ships is a dispersed and fiercely competitive market. According to Frost & Sullivan data, there are about 100 companies in the Asia-Pacific region providing bunkering services, including bunkering service intermediaries and the bunkering service departments of oil giants or traders. In 2023, based on the volume of fuel oil and diesel supplied to Hong Kong operators, Chang'an Energy holds approximately 2.7% and 0.8% market share in Hong Kong respectively, with a small market share. Chang'an Energy aims to expand its scale by developing new regions, but whether these new regions can become growth drivers remains to be seen.

Secondly, Chang'an Energy has relatively high customer and supplier concentration. In 2023, revenue from the largest customer accounted for 20.3% of Chang'an Energy's total revenue, while revenue from the top five customers accounted for 44.3%. However, there are no long-term agreements signed with these customers, with business relationships lasting from two to three years. If major customers are lost, it will impact Chang'an Energy's business operations. On the supplier side, in 2023, Chang'an Energy purchased 42.2% of its supplies from the largest supplier, and 82.2% from the top five suppliers. While concentrating purchases from suppliers can improve profitability to some extent, it also increases supply chain risks.

Furthermore, Chang'an Energy has relatively high debt. Bunkering service providers require a large amount of operating capital to purchase fuel, and the collection of accounts receivable takes time. Coupled with relatively low profitability, this leads to the need for high debt to expand market size. In 2023, Chang'an Energy's total assets were $11.0362 million, total liabilities were $9.6861 million, and the debt-to-asset ratio was 87.77%.

It is worth noting that the biggest factor affecting the profitability of bunkering service providers is costs, as fuel costs account for nearly 100% of revenue costs. If fuel prices rise due to geopolitical reasons, but downstream demand remains low, the space for upstream price transmission to downstream will be compressed, potentially leading to Chang'an Energy's profitability turning into losses.

In conclusion, although Chang'an Energy achieved impressive results in 2023, the underlying fundamentals of the company are under pressure due to hidden concerns about future demand, as well as facing intense market competition, high customer and supplier concentration, and high debt. It is not easy for Chang'an Energy to achieve a high valuation in the market, and perhaps waiting for the industry to enter a high boom cycle may be the opportunity for valuation improvement