XCHG Limited’s Revenue Growth Is Slowing
XCHG Limited (XCH) has filed to raise $50 million in an IPO of its American Depositary Shares representing underlying Class A shares, according to an SEC F-1 registration statement.
The company has developed a network of electric vehicle (“EV”) charging stations.
XCH’s revenue growth is decelerating and operating results are uneven, so the IPO may be challenged.
What Does XCHG Do?
Cayman Islands-based XCHG Limited was founded to develop a line of DC charging stations and related charging services for battery electric vehicles in various global regions.
Management is headed by Chief Executive Officer Mr. Yifei Hou, who has been with the firm since May 2015 and was previously project manager at Tesla APAC.
The company’s primary offerings are its C6, C7 and NZS integrated charging stations located primarily in Europe, followed by other countries including the “United States, China, Brazil and Chile.”
As of September 30, 2023, XCHG has booked fair market value investment of $47.3 million from investors, including Future EV Limited, Next EV Limited, Beijing Foreign Economic and Trade Development Guidance Fund, GGV (Xcharge), Shell Ventures, Zhen Partners and Wuxi Shenqi Leye Private Equity Funds.
XCHG seeks to locate its chargers in low power locations or places with no site improvements or ability to provide higher power.
Management believes that its chargers serve a need where conventional, faster chargers cannot be located, and is thus able to serve large, underserved markets.
Selling and Marketing expenses as a percentage of total revenue have trended lower as revenues have grown, as the figures below indicate:
|
Selling & Marketing |
Expenses vs. Revenue |
|
Period |
Percentage |
|
Nine Mos. Ended Sept. 30, 2023 |
14.4% |
|
2022 |
11.9% |
|
2021 |
18.4% |
(Source – SEC.)
The Selling and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing expense, fell to 2.2x in the most recent reporting period, indicating slowing efficiency in this regard, as shown in the table below:
|
Selling & Marketing |
Efficiency Rate |
|
Period |
Multiple |
|
Nine Mos. Ended Sept. 30, 2023 |
2.2 |
|
2022 |
4.6 |
(Source – SEC.)
What Is XCHG’s Market?
According to a 2023 market research report by Grand View Research, the global market for electric vehicle charging infrastructure was an estimated $26 billion in 2023 and is forecasted to reach $126 billion by 2030.
This represents a forecast CAGR (Compound Annual Growth Rate) of a whopping 25.4% from 204 to 2030.
The main drivers for this expected growth are an increase in adoption of electric vehicles and promotion of infrastructure by government incentives and regulatory actions.
Also, the fast charger segment accounted for 72.4% of global revenue in 2023 and is also expected to grow at the fastest rate through 2030.
Management sees its business as “charger as a service” and relies on OEMs to manufacture its systems.
The market for DC chargers is fragmented, but a report commissioned by the firm and prepared by Frost & Sullivan suggests that the company is a leading supplier of energy for battery storage in Europe.
XCHG Limited Recent Financial Results
The company’s recent financial results can be summarized as follows:
-
Decelerating top line revenue growth
-
Increasing gross profit and gross margin
-
A swing to operating loss and cash used in operations.
Below are relevant financial results derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
Nine Mos. Ended Sept. 30, 2023 |
$ 27,994,143 |
46.0% |
|
2022 |
$ 29,423,540 |
123.7% |
|
2021 |
$ 13,155,892 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
Nine Mos. Ended Sept. 30, 2023 |
$ 12,366,913 |
77.0% |
|
2022 |
$ 10,704,589 |
131.3% |
|
2021 |
$ 4,627,281 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
% Variance vs. Prior |
|
Nine Mos. Ended Sept. 30, 2023 |
44.18% |
7.7% |
|
2022 |
36.38% |
3.4% |
|
2021 |
35.17% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
Nine Mos. Ended Sept. 30, 2023 |
$ (5,665,886) |
-20.2% |
|
2022 |
$ 1,654,981 |
5.6% |
|
2021 |
$ (1,927,535) |
-14.7% |
|
Comprehensive Income (Loss) |
||
|
Period |
Comprehensive Income (Loss) |
Net Margin |
|
Nine Mos. Ended Sept. 30, 2023 |
$ (6,123,318) |
-21.9% |
|
2022 |
$ 4,192,955 |
14.3% |
|
2021 |
$ (2,832,218) |
-21.5% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
Nine Mos. Ended Sept. 30, 2023 |
$ (3,081,787) |
|
|
2022 |
$ 848,699 |
|
|
2021 |
$ (6,479,107) |
|
|
(Glossary Of Terms.) |
(Source – SEC.)
As of September 30, 2023, XCHG had $16.4 million in cash and $26.6 million in total liabilities.
Free cash flow during the twelve months ending September 30, 2023, was negative ($1.7 million).
XCHG Limited’s IPO Details
XCHG intends to raise $50 million in gross proceeds from an IPO of its American Depositary Shares representing underlying Class A shares, although the final figure may differ.
No existing shareholders have indicated an interest in purchasing shares at the IPO price.
Class A shareholders will be entitled to one vote per share and Class B shareholders will have 10 votes per share.
The S&P 500 Index (SP500) no longer admits companies with more than one class of shares into its index.
Management says it will use the net proceeds from the IPO as follows:
approximately 50% for investment in our planned new manufacturing facility in Texas, including expenditures in land leases, construction and renovation, procurement of equipment, among others.
approximately 20% for research and development, especially the development of energy management and battery management technologies;
approximately 20% for our global market expansion; and
approximately 10% to supplement our working capital for general corporate purposes.
(Source – SEC.)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management said the firm is not subject to any legal proceedings that would have a material adverse effect on its financial condition or operations.
The listed bookrunners of the IPO are Deutsche Bank, Huatai Securities and Tiger Brokers.
XCHG Sees Slowing Revenue Growth
XCH is seeking U.S. public capital market investment to fund its planned manufacturing facility in the U.S. and for its continued expansion efforts.
The company’s financials have produced reduced top line revenue growth, but higher gross profit and gross margin and a swing to operating loss and cash used in operations.
Free cash flow for the twelve months ending September 30, 2023, was negative ($1.7 million).
Selling and Marketing expenses as a percentage of total revenue have trended lower as revenues have increased; its Selling and Marketing efficiency multiple fell to 2.2x in the most recent reporting period, so the company has become less efficient at generating incremental revenue.
The firm currently plans to pay no dividends and to retain future earnings, if any, for its general corporate and expansion needs.
XCH’s recent capital spending history indicates it has continued to spend on capital expenditures despite negative operating cash flow.
The market opportunity for providing battery storage energy as a service for transportation systems is large and growing, but features strong competition in certain areas of the markets in various regions.
XCH’s focus on low-power systems may be a competitive edge in that market.
XCH Faces Material Risks
Risks to the company’s outlook as a public company include a dropping demand for battery EV, or BEV, vehicles from larger parts of the population, as early adopters may have been less price sensitive than the mass market, which is balking at paying higher prices for such vehicles.
XCHG will also be an “emerging growth company” and a “foreign private issuer,” which means management will be able to disclose substantially less information to shareholders.
Many such company stocks have performed poorly post-IPO.
Its NZS charger system is new, and its revenue model associated with its rollout is also uncertain.
The firm also has material revenue concentration risks, with 45% of its total revenue for the nine months ended September 30, 2023 coming from one customer.
Investors would also face risks given the firm’s domicile in China. Based on U.S.-China relations, public companies with China headquarters have seen wild gyrations on their stock price from changing regulations on auditing standards [HFCAA] and unpredictable Chinese government regulatory actions.
With the possibility of a change in U.S. administrations to a potentially more confrontational approach toward China, regulatory-related risks are substantial.
Also, investors would only have an interest in a Cayman Islands company with subsidiaries in China and elsewhere.
Additionally, there may be extensive restrictions on the transfer of cash between the China-based operating entities and the Cayman Islands firm, as well as restrictions from the Cayman Islands.
The company also routinely transacts in currencies other than the U.S. dollar and does not hedge such currency transactions. If the U.S. dollar continues to rise in value against such currencies, that would have a negative effect on its dollar-based financial results.
With slowing revenue growing and a variety of market and regulatory risks, the XCHG Limited IPO may be a difficult sell.
Expected IPO Pricing Date: To be announced.
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