2451.HK
Luyuan makes Hong Kong IPO

The maker of battery-powered scooters and bicycles raised about $90 million in an oversubscribed Hong Kong listing

Key Takeaways:

  • Luyuan priced its IPO shares close to the top of their indicative range, though the stock is largely unchanged a week after its trading debut
  • The company’s revenue doubled in the two years to 2022, with its net profit growing even faster

  

By Warren Yang

Luyuan Group Holdings (Cayman) Ltd. (2451.HK) may not be a top dog in the crowded field of companies pumping out millions of electric scooters that are a fixture on Chinese roads. But investors seem impressed with its ability to boost sales, as well its highly profitable bottom line — a relatively rare “double happiness” combo for a Chinese company in the highly competitive space. Now, the newly listed company’s biggest challenge is to keep its sales growing briskly in China’s heavily congested market for electric two-wheeled vehicles.

Last Wednesday, the company raised about HK$706 million ($90 million) in a Hong Kong IPO, with plans to use the funds to boost product and development, and enhance its sales channels and production capabilities.

The maker of battery-powered two-wheelers drew slightly more investors than the number of shares on offer and priced them at HK$7.37 apiece, close to the top end of its indicative range of HK$6 to HK$8, according to a company filing with the stock exchange. Luyuan shares popped more than 9% at one point on their first trading day, although they gave up most of the gains by the end of the session to close just 0.4% higher.

The stock has largely remained in cruise mode since the listing, and at Tuesday’s close of HK$7.45 is about 1% above its IPO price. That suggests investors like the company, but want to see if it can continue to zoom before giving it a stronger thumbs up.

Luyuan operates in a fiercely competitive market, as many companies race to capitalize on consumer demand for nifty modes of transportation that are also environmentally friendly, an increasingly important factor as Beijing tries reduce carbon emissions. Growing demand for delivery and takeout services that require quick, short-distance trips is another trend powering the electric scooter market’s growth.

Luyuan has been around for quite some time, founded back in 2003. Still, its market share is relatively small, at just 4.5% in 2022 by revenue, according to its IPO prospectus. But that’s still large enough to make the company the fifth-largest maker of electric two-wheelers, because there are some 100 companies fighting for the remaining 40% of the market not controlled by the top three companies, which include Yadea Group (1585.HK) and AIMA Technology (603529.SH). The market used to be even more crowded with as many as 2,000 companies competing for a piece of the pie.

Luyuan has not only survived in such a competitive market for a good two decades, but has also managed to quickly grow both its revenue and profits in recent years. The former doubled to 4.8 billion yuan ($656 million) in just two years to 2022, though the growth rate slowed to 42% year-on-year in the first four months of this year.

Such revenue growth is impressive, given that the overall market for electric scooters expanded far more slowly during the period. The total number of units sold in China increased 16% from 2020 to last year, and is projected to grow just 5% this year, according to estimates included in Luyuan’s prospectus.

Dependent on China

Luyuan derives most of its revenue from China, with pretty simple product lines. Electric bicycles account for a little less than half of its overall sales, with electric motorcycles making up about 20%. Luyuan also makes electric mopeds, but their share of the company’s revenue shrank to less than 2% in the first four months of this year from 30% in 2020 because of new restrictions on specifications. Luyuan also generates revenue by selling spare vehicle parts, including batteries.

Geographically, the company targets smaller cities in China, and nearly doubled the number of its retail stores to more than 9,800 at the end of 2022 from two years earlier.

More impressive than its revenue growth, Luyuan has improved its profitability over the years by keeping its operating expenses in check. Its net profit nearly tripled over the two years to 2022, far outpacing its revenue growth during the period, as its net profit margin improved to 2.5% from 1.7%. Consequently, the company’s return on equity, a key profitability metric for stock investors, jumped to 19% from 8.3% during the period. The triple-digit profit growth continued this year, with the company’s net profit surging 150% year-on-year in the first four months of 2023.

Luyuan operates on thinner gross margins than its larger rivals because it sells its comparable products at lower prices to gain market share. The company was able to follow market trends to raise its average selling price from 2020 to 2022. But then the figure fell in the first four months of this year, partly because it gave more rebates to distributors to make its prices more competitive and expand its network of brick-and-mortar stores.

That pressure to cut prices may increase as growth in China’s electric scooter market slows. Overseas expansion can help to hedge that risk, and Luyuan says such a path is one of its long-term goals. Currently, the company’s products can be found in more than 35 countries and regions, including Thailand, Indonesia and the Philippines, all promising markets where motorcycles have been hugely popular. But overseas sales for now make up just a tiny proportion of Luyuan’s revenue.

Going global is also often easier said than done. Among other difficulties, regulatory compliance can be tricky since requirements often vary from market to market, especially for the electric bicycles that are Luyuan’s biggest revenue source. Making customers notice its brand and differentiating itself from the crowded field of products from China and other countries to foreign customers is another challenge.

Luyuan shares currently trade at a trailing price-to-earnings (P/E) ratio of about 20, higher than 16 for Yadea and 14 for AIMA. This shows that investors are giving the company an early thumbs up, which looks strong in current weak stock market. But the superior valuation may also be the result of early investor euphoria that could easily fade if there’s any sign of a business slowdown.

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