QMSK supersizes U.S. listing as Nasdaq cracks down on Chinese companies

The provider of aftermarket services for the auto insurance sector has quadrupled the size of its original IPO fundraising target to as much as $37 million

Key Takeaways:

• QMSK has sharply raised the size of its planned Nasdaq IPO, after the Nasdaq said it plans to require all listings by Chinese firms to raise at least $25 million
• The company’s revenue grew 38% in its latest fiscal year, but its profit fell nearly 10% as it spent heavily on expansion

By Doug Young

A newly updated Nasdaq listing application by QMSK Technology Co. Ltd. is most noteworthy for a huge upsizing of the company’s fundraising plan, rather than any news about this provider of aftermarket services for the auto insurance industry. But the supersizing of its fundraising target to as much as $37 million from a previous $9 million hardly reflects any new confidence by the company in strong investor appetite for its shares.

Instead, the radical upsizing appears to be the direct result of a looming crackdown by the Nasdaq announced earlier this month on small new listings by Chinese companies. Such listings have come to dominate new IPOs by Chinese firms on the Nasdaq, often raising miniscule sums of $10 million or less. They also typically contain very small floats, with well under 10% of a company’s shares typically available for trading.

The result of such small floats is often big price volatility, usually to the downside, which can leave less sophisticated retail investors with big losses when stock prices suddenly plunge. Compounding this issue is very aggressive valuations that many of these small Chinese companies list at, making big drops in their share prices post-IPO almost inevitable.

QMSK ticked all of those boxes when it first applied for its IPO back in March. The company, which provides aftermarket risk assessment and other value-added services to auto insurers, initially aimed to raise between $6 million and $9 million, according to its original application in January and an updated version in March. The 1.5 million shares it planned to sell at that time would have represented a float of about 9% of its total share capital.

Fast forward to this latest update, when the fundraising targets are much larger, at between $25 million to as much as $37.5 million, based on a share price between $4 and $6. Similarly, the 6.25 million shares the company now plans to sell is more than four times the original amount, and would represent a much larger float of nearly 30% of the company’s expanded share capital.

The increased fundraising and float size both appear to be a direct response to the Nasdaq’s Sept. 3 announcement of proposed changes to its listing standards for Chinese companies. Under the new standards, all Chinese listings would need to raise at least $25 million, and their public float would need to be worth at least $15 million. Additionally, a drop in the value of the public float below $5 million would automatically trigger an accelerated process for suspending and delisting the company’s shares.

QMSK’s updated prospectus, filed last Friday, contains direct mention of the pending new Nasdaq standards, which still require regulatory approval.

“If implemented, these rules could substantially raise the threshold for initial and continued listing eligibility for issuers like us,” the company said. “Failure to meet the revised listing requirements may prevent us from listing or maintaining our listing on the Nasdaq Capital Market, which could materially and adversely affect the liquidity, visibility, and overall marketability of our securities.”

High valuation

QMSK’s stated range of $4 to $6 per share and post-IPO share capital of 21.25 million shares would give the company a market value of anywhere from $85 million to as much as $127 million. The middle of that range would give the company a price-to-earnings (P/E) ratio of 47, based on its latest annual profit for its financial year through March 2025. Its price-to-sales (P/S) ratio would be 2.2 at the midpoint.

Both of those figures look relatively high compared to comparable companies from China’s auto insurance sector. Hong Kong-listed insurance broker Zhongmiao (1471.HK), whose products include car insurance, trades at a P/E of 37 and a P/S of 7.8. But money-losing insurance brokers Shouhui (2621.HK) and Cheche (CCG.US) trade at much lower P/S ratios of just 0.68 and 0.19, respectively.

While QMSK may feel it deserves higher multiples because it’s profitable and growing relatively quickly, investors may disagree. As we’ve previously noted, such aggressively valued Chinese companies often see big drops in their share prices when they start trading, with the stock frequently losing half or more of its value within months or even days.

We’ll need to wait and see if QMSK sticks with these high valuations, or if perhaps it is forced to lower them after such a big expansion that will require it to find more investors than it initially planned.

We’ll close this review with a look at the company’s financials, which admittedly look relatively strong. QMSK offers its services through a network of 10,651 service locations in most of China. Such services are quite cheap, with the average price for a risk assessment costing $50 in the company’s fiscal year through March 2025, up 2.5% from $48.80 in the previous year.

The company’s customer base grew quite a lot in the latest fiscal year, rising to 64 from 35 the previous year, according to the prospectus. That shows its customer base is concentrated but still relatively large, including some “major insurance companies,” according to the prospectus.

As its customer base grew and its average cost per risk assessment rose, the company’s revenue rose 38% year-on-year in its latest fiscal year to $47.7 million from $34.6 million in the 12 months to March 2024. Its gross margin was relatively steady, dropping to 9.2% in its latest fiscal year from 9.6% the previous year. But its operating expenses rose sharply, roughly tripling in the latest year as it added resources for its recent expansion. As a result, its profit fell 8% in its latest fiscal year to $2.25 million from $2.44 million in the previous 12-month period.

Overall, QMSK’s listing looks relatively solid, and the massive upsizing of its fundraising and float size is a sign of what we can expect to see from future Chinese companies seeking U.S. listings. The valuation it’s seeking still looks relatively aggressive, meaning it’s quite possible the company may ultimately be forced to lower its IPO share price below the current $4 to $6 range.

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