Provider of online promotion and other services for insurers seeks to raise as much as $33 million through a Nasdaq IPO

Key takeaways:

•      Online insurance marketer U-BX has filed for a Nasdaq IPO that could raise up to $33 million

•      The company operates on a thin gross margin and only posted modest revenue growth in its latest fiscal year, which could limit its appeal to investors

By Warren Yang

A small business that operates on razor-thin margins and is growing only modestly is a tough sell for investors, no matter how you slice it. That reality may soon confront U-BX Technology Ltd. (UBXG.US) as it becomes the latest in a trickle of smaller Chinese companies seeking to restart the pipeline of such firms raising fresh funds through U.S. listings.

The Beijing-based company, which provides online promotion and other services for insurers, aims to sell 6 million new shares at $4.50-$5.50 each to raise as much as $33 million in an IPO on the Nasdaq, according to a preliminary prospectus filed late last month just before the Lunar New Year. The firm said it plans to use the funds for research and development, advertising and marketing, and general working capital.

The modest IPO comes around the same time as a similarly pint-sized offering by Yi Po International Holdings, an operator of smart parking systems, which was filed last week. Both plans show that Chinese companies are starting to list again in the U.S., following a half-year pause sparked by regulatory concerns on both sides of the Pacific that now are getting resolved.

U-BX is offering shares equal to about 27% of its current outstanding total. Co-founder and CEO Chen Jian, who previously worked at internet ventures including Qunar and Autohome, owns more than 80% of the company directly and through a British Virgin Island entity, which will be diluted to about 65% after the IPO.

U-BX describes itself as a “leading provider of insurance technology services,” giving the impression it’s among a group of “insurtech” plays that are hot nowadays. But that seems a little misleading. The company’s revenue mainly comes from luring consumers to click on insurers’ advertisements on social media platforms.

In its latest fiscal year through last June, such income accounted for more than half of its total, though it fell 10% from the previous year, which if continued, could be worrisome. Such “digital promotion services” probably require more expertise in social media marketing rather than deep familiarity with insurance.

U-BX does provide something more resembling an insurtech service that calculates payout risks for insurers, based on a proprietary algorithm named “Magic Mirror.” But that service is the smallest of its three main revenue sources, contributing less than 20% of the total in its last fiscal year, even after its sales rose 11% year-on-year. 

U-BX’s third line of business hardly requires insurance knowledge or even technology. That source comes from its sale of non-insurance products and services that insurers can offer in promotional bundles, such as car wash or car maintenance plans. Revenue from that part of the business increased at the fastest pace among its three segments in the last fiscal year, more than doubling.

U-BX’s overall revenue increased 18% to about $72.4 million in the last fiscal year from the prior 12 months. That’s rather underwhelming for a company that is still quite small and needs to impress investors with its growth potential.

Moreover, the company’s high costs are eating heavily into its profitability. In the last fiscal year, its cost of revenue, which includes fees for cloud services, amounted to more than 98% of total sales, resulting in a paltry gross margin of 1.4%. U-BX as a whole is quite small with just three dozen employees, so it doesn’t incur a lot of operating expenses. Even so, because the gross margin is so low, the company has been losing money with a negative cash flow from operations each year since its inception in 2018, which it warned may continue.  

One thing working in U-BX’s favor is China’s huge insurance market, which is second now only to the U.S. and projected to become the world’s largest in the next decade. In particular, growing car ownership as the country’s household incomes rise means that sales for auto insurers, a key customer group for U-BX, will also increase.

Competitive risks

One of U-BX’s biggest risks is that insurers may develop their own online marketing capabilities and no longer need its type of services. In its prospectus, the company also warned it already faces stiff competition from rivals such as Nan Yan Technology, Xiaomar and Botpy Technology, all unlisted. And the decline in revenue from digital promotion services last year doesn’t bode well for the company’s prospects.

U-BX says its key competitive advantages include an “experienced and visionary” management team, along with its online marketing and technological capabilities. Those factors, together with an editorial team that can produce high-quality content on insurance, look modest compared to the usual boastful language often found in IPO marketing materials.

Language aside, the company will need to develop more innovative products that bring substantial revenue to stay ahead of the competition. Perhaps it will be able to do that by beefing up its team and other resources using new funds from the IPO, which would make declining revenue from its social media marketing services less of a concern.

But major insurers with much deeper pockets are also investing heavily in new technologies, such as artificial intelligence, for use in underwriting and risk management. And a growing number of pure digital insurers like ZhongAn Online P&C Insurance (6060.HK), a joint venture by Alibaba-affiliated Ant Group, Tencent (0700.HK) and Ping An Insurance (2318.HK; 601318.SS), are especially adept in that area. Against this backdrop, it’s not clear how competitive U-BX’s insurtech services can be. 

On top of these drawbacks, Chinese stocks in general – especially those related to technology, a category that could include U-BX – aren’t the most attractive propositions for investors these days due to regulatory crackdowns on a wide-range of industries that rocked the entire group in the second half of last year.

Should U-BX price its IPO shares at $5 each, the midpoint of its target range, it will have a market capitalization of $142.5 million, translating into a price-to-sales (P/S) ratio of about 2 based on annual revenue for the last fiscal year. That’s actually a tad higher than 1.9 for pure insurtech stock ZhongAn, which has grown much faster from a much higher base. That relatively strong ratio could reflect lower risk U-BX faces due to its role as a service provider to the financial sector, without providing actual financial services that are more heavily regulated like ZhongAn’s.

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