Quick Take

Green Grass Ecological Technology Development Co. (QQCY) has filed to raise $23 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm performs specialty farming of alfalfa and related agriculture harvesting for biomass and other purposes.

QQCY has intriguing market dynamics in its favor. When we learn more details about the IPO, I’ll provide an update.

Company & Technology

Huhehaote City, Inner Mongolia-based Green Grass was founded to grow alfalfa for livestock feed and sell biomass waste products (corn and wheat straw) to power generation plants and paper mills.

Management is headed by Chairman and CEO Mr. Jian Sun, who has been with the firm since May 2019 and was previously president of Inner Mongolia Green Grass Yuan Ecological Technology Development.

Below is a brief overview video of Mongolia’s alfalfa farming operations (in Spanish):

Source: China Xinhua Espanol

The firm has signed cooperative agreements with the Guoneng Biomass Power Generation Group and three other biomass power plants in Guoneng.

Management seeks to expand its specialty alfalfa farming business and other products for biomass purposes, as it sees a shortfall in supply compared to the demand for its products in China.

Green Grass has received at least $13 million from investors, including JIAN Grasslands Holdings (Chairman and CEO controlled), Liling Grasslands Holdings, Lihua Grasslands Holdings, Xianho Grasslands Holdings, Jinyi Grasslands Holdings and XIAO Grasslands Holdings.

Customer Acquisition

The firm sells its products to livestock operators and to large power plants using a direct sales approach.

Green Grass’s service team ‘provides inter-state services for an operating radius of more than 2,000 kilometers in Mongolia and in surrounding provinces.’

Selling, G&A expenses as a percentage of total revenue, have dropped as revenues have fluctuated, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended Dec. 31, 2019

2.1%

FYE June 30, 2019

3.9%

FYE June 30, 2018

3.2%

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Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, swung to negative (0.9x) in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Six Mos. Ended Dec. 31, 2019

-0.9

FYE June 30, 2019

2.2

Source: Company registration statement

Market & Competition

According to a 2020 market research report, the global market for alfalfa hay is expected to be worth $29.3 billion by the end of 2020 and grow to $29.5 billion by the end of 2026. This represents a forecast CAGR of only 0.1% from 2021 to 2026.

The United States accounted for 51.7% of global production in 2016 and was the world’s largest exporter of alfalfa hay in that year.

Also, China imports much of its alfalfa from the United States, but no doubt seeks to reduce that dependency with increasing purchases from nearshore operators such as Green Grass and others.

Major competitive or other industry participants include:

  • Huishan Dairy

  • Qiushi Grass Industry

  • Beijing HDR Trading

  • Beijing Lvtianyuan Ecological Farm

  • Modern Grassland

  • Inner Mongolia Dachen Agriculture

  • Inner Mongolia HuangYangwa Grass Industry

Financial Performance

Green Grass’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Reduced gross profit and fluctuating gross margin

  • Increased operating profit and uneven operating margin

  • Decreased cash flow from operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended Dec. 31, 2019

$ 20,457,909

-1.9%

FYE June 30, 2019

$ 24,131,248

9.3%

FYE June 30, 2018

$ 22,080,450

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended Dec. 31, 2019

$ 5,917,968

-26.9%

FYE June 30, 2019

$ 8,561,596

42.4%

FYE June 30, 2018

$ 6,013,075

Gross Margin

Period

Gross Margin

Six Mos. Ended Dec. 31, 2019

28.93%

FYE June 30, 2019

35.48%

FYE June 30, 2018

27.23%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended Dec. 31, 2019

$ 4,503,159

22.0%

FYE June 30, 2019

$ 6,130,409

25.4%

FYE June 30, 2018

$ 4,866,073

22.0%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended Dec. 31, 2019

$ 4,515,721

FYE June 30, 2019

$ 5,868,562

FYE June 30, 2018

$ 5,107,109

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended Dec. 31, 2019

$ 1,006,989

FYE June 30, 2019

$ 1,853,364

FYE June 30, 2018

$ 4,297,041

(Glossary Of Terms)

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Source: Company registration statement

As of December 31, 2019, Green Grass had $17,600 in cash and $1.7 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was $2.9 million.

IPO Details

Green Grass intends to raise $23 million in gross proceeds from an IPO of its ordinary shares, although the final figure may vary.

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

to increase our production and storage capacity of biomass straw business

for improvement of filer and dust collection equipment and system; and

for general corporate purposes.

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

There are no listed bookrunners of the IPO.

Commentary

Green Grass is seeking U.S public capital market investment to fund its expansion plans for its alfalfa hay product business, primarily in the biomass raw materials industry.

The company’s financials indicate the firm has been negatively impacted by the COVID-19 pandemic but is back to full operations after a few-month closure during 1H 2020.

Accordingly, its Selling, G&A expenses as a percentage of total revenue have fluctuated; its Selling, G&A efficiency rate has swung to slightly negative territory as revenue has declined in 2020.

The market opportunity for providing raw biomass straw products is large, especially as China appears to have a strong desire to reduce its importing of U.S. straw and source the products closer to home, so the firm has positive industry dynamics in its favor.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

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This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

There is no disclosed underwriter as of the most current filing.

When we learn more IPO pricing and valuation details, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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