Magic Empire Global Limited (MEGL) Pursues $23 Million U.S. IPO

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A quick overview of Magic Empire Global Limited

Magic Empire Global Limited (MEGL) has filed to raise $22.5 million in an IPO of its common stock, according to an F-1 registration statement.

The company provides various corporate financial services in Hong Kong, China.

MEGL has little to recommend it as its revenue is shrinking, it operates in a highly competitive and uncertain environment, and Chinese companies have generally performed poorly in recent years.

Although high-risk-tolerant day traders may find it beneficial to play the IPO, as an investment opportunity, I have a longer-term hold for MEGL.

Company

Magic Empire, based in Hong Kong, China, was founded to provide advisory services to companies when seeking to list their shares on Hong Kong stock exchanges.

Management is headed by Managing Director, Mr. Sze Hon, Johnson Chen, who has been with the company since the group was established in 2016 and was previously in the corporate finance division of Guotai Junan Capital Limited and is a CFA and CPA.

The company’s main offerings include:

  • IPO Sponsorship Services

  • Financial advice

  • Compliance advice

  • Underwriting Services

Magic Empire has reserved an investment at fair market value as of December 31, 2021 from investors such as Mr. Wai Ho Chan and Mr. Sze Hon, Johnson Chen.

Magic Empire – Customer Acquisition

The company seeks a diverse customer base by providing pre-IPO, IPO and post-IPO services.

MEGL has served at least 73 clients since the firm was established in 2016.

Selling, G&A expenses as a percentage of total revenue increased as revenue decreased, as shown in the figures below:

Sales, G&A

Expenses vs Income

Period

Percentage

2021

89.7%

2020

81.1%

(Source)

The sales effectiveness multiple, G&A, defined as the number of dollars of incremental new revenue generated by each dollar of sales spend, G&A, was negative (0.3x) during the most recent reporting period. (Source)

Magic Empire Market and Competition

Hong Kong is one of the largest stock markets in the world, despite recent social unrest and legal changes.

The industry grew at a CAGR of 31.3% from 2012 to 2017, compared to a global average of 23.1%, although recent growth has likely dropped.

The Hong Kong securities market is expected to reach $3.1 trillion in 2022, growing at a CAGR of 14.1% between 2018 and 2022.

The main market growth factors are an increasing number of online brokers (from 126 in 2007 to 274 in 2016), innovative technologies and increasingly active local and foreign investors.

The company faces intense competition for customers. For example, as of December 31, 2021, “there were 326 licensed companies and 31 registered institutions authorized or registered to carry on a Type 6 (corporate finance advisory) regulated business in Hong Kong”.

Another 129 licensees were able to conduct IPO sponsorship activities in Hong Kong.

Financial performance of Magic Empire Global Limited

The company’s recent financial results can be summarized as follows:

  • Contract main turnover

  • Reduction in operating profit and margin

  • A shift to positive operating cash flow

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

Total revenue

Period

Total revenue

% deviation from before

2021

$2,163,027

-18.5%

2020

$2,654,181

Operating profit (loss)

Period

Operating profit (loss)

Operating margin

2021

$221,779

10.3%

2020

$502,257

18.9%

Net profit (net loss)

Period

Net profit (net loss)

The net margin

2021

$202,398

9.4%

2020

$545,951

25.2%

Operating cash flow

Period

Operating cash flow

2021

$87,010

2020

$(518,338)

(Glossary of terms)

(Source)

As of December 31, 2021, Magic Empire had $1.5 million in cash and $2.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021 was $87,010.

Magic Empire Global Limited IPO Details

Magic Empire intends to raise $22.5 million in gross proceeds from an IPO of its common stock, offering 5 million shares at a proposed midpoint price of $4.50 per share.

No existing shareholders have expressed interest in purchasing shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at the time of the IPO would be approximately $70.6 million, excluding the effects of underwriter over-allotment options.

The free float-to-shares outstanding ratio (excluding subscriber over-allotments) will be approximately 25%. A figure below 10% is generally considered a “low float” stock that can be subject to significant price volatility.

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

Approximately 50% (approximately $10,230,109) for strengthening our corporate finance advisory business in Hong Kong and expanding our presence in other international financial markets, particularly in the United States;

Approximately 10% (approximately $2,046,022) for expansion in the asset management sector;

Approximately 10% (approximately $2,046,022) to enhance our brand and expand our office operations; and

The balance (approximately $6,138,066) to fund working capital and other general corporate purposes.

(Source)

The presentation by management of the company’s roadshow is not available.

With respect to pending legal proceedings, management asserts that the Company is not aware of any threat of legal proceedings that would have a material adverse effect on its financial condition or business.

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Evaluation metrics for Magic Empire

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Market capitalization at IPO

$90,000,000

Enterprise value

$70,629,499

Price / Sales

41.61

EV / Turnover

32.65

EV / EBITDA

318.47

Earnings per share

$0.01

Operating margin

10.25%

The net margin

9.36%

Free float to outstanding shares

25.00%

Average Proposed IPO Price Per Share

$4.50

Net free cash flow

$87,010

Free cash flow yield per share

0.10%

Debt / EBITDA Multiple

11.67

Revenue growth rate

-18.50%

(Glossary of terms)

(Source)

Magic Empire IPO Commentary

MEGL seeks financing in the US public capital market to invest in its international expansion efforts and for general corporate purposes.

The company’s financials led to lower revenue, lower profit and operating margin, a shift to positive cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was $87,010.

Selling, G&A expenses as a percentage of total revenue increased while revenue fell; its sales effectiveness multiple, G&A was negative (0.3x) in 2021.

The company currently plans to pay no dividends on its shares and plans to reinvest all future earnings back into its business.

The market opportunity to provide IPO and related business advisory services in Hong Kong is large but highly competitive.

Network 1 Financial Securities is the sole underwriter and IPOs conducted by the company over the past 12 months have generated a negative average return (84.4%) since their IPO. This is an underperformance for all major underwriters over the period.

The main risk to the company’s outlook is the uncertain legal and regulatory environment in Hong Kong.

By selling its shares at a midpoint price of $4.50, the company is following a recent common path for smaller issuers in the United States.

Typically, the first day of trading can be very volatile, with shares of these microcaps only appearing to fall shortly thereafter, sometimes well below their offer price.

MEGL has little to recommend it as its revenue is shrinking, it operates in a highly competitive and uncertain environment, and Chinese companies have generally performed poorly in recent years.

Although high-risk-tolerant day traders may find it beneficial to play the IPO, as an investment opportunity, I have a longer-term hold for MEGL.

Expected IPO pricing date: to be announced.

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