Happiness Biotech Prepares Terms For U.S. IPO - Happiness Biotech Group (Pending:HAPP)

Happiness Biotech Group has filed to raise $13.2 million in a U.S. IPO.

The firm manufactures and sells Chinese nutraceuticals to consumers in China.

While HAPP has grown appreciably and is profitable and cash flow positive, we don't have recent numbers, so we can't tell how the firm is performing lately.

Happiness Biotech (HAPP) has filed to raise gross proceeds of $13.2 million from a U.S. IPO, according to an F-1/A registration statement.

The firm researches, develops and markets nutraceutical and dietary supplements in China.

HAPP has grown moderately well, is profitable and cash flow positive, but hasn’t provided recent financials so we can’t tell if that picture has changed in the past year during a difficult Chinese economic period.

Nanping City, China-based Happiness Biotech was founded to research, develop, manufacture and market nutraceutical and dietary supplements to the residents of China.

Management is headed by CEO and Director Xuezhu Wang, who has been with the firm since 2015, was previously CEO of Fujan Happiness Biotech and obtained an MBA degree from the University of Wales.

Happiness Biotech has developed 32 products which it categorizes in six main categories, namely Lucidum spore powder products, Cordyceps mycelia products, Ejiao solution products, Vitamins and dietary supplements products, American ginseng products, and others.

Of those, Lucidum, Cordyceps and Ejiao products are the company’s primary source of income.

Lucidum, also known as glossy ganoderma or ganodermalucidum, is a therapeutic mushroom that has been used in China for a long time, whose spores are protected by layers of rigid chitinic walls, consequently limiting research and use of Lucidum spores until recent technological advancements.

The company’s main product under the Lucidum product line is the “Happiness” Lucidum Spore Powder Capsule which has been approved by the State Food and Drug Administration of China [SFDAC] for adults with a weak immune system.

Management claims that Cordyceps mycelia is an effective substitute for natural Cordyceps, one of the traditional nourishment Chinese herbs, and until recently a hard to mass-produce product.

Using biological fermentation technology, Happiness extracts effective mycelia from natural Cordyceps, inoculates and cultivates it into a large volume medium, after which it can be fermented massively at a much lower cost compared to traditional cultivation methods.

The firm’s main product under the Cordyceps product line is “Daguangrong” Cordyceps Mycelia Oral Liquid, which has been approved by the SFDAC for adults with a weak immune system.

Ejiao is the solid gum decocted and concentrated from the skin of donkeys and has been used in China for a long time.

Happiness’ main product under the Ejiao product line is “Happiness” Ejiao Astragalus Oral Liquid that has been approved SFDAC for people with physical deficiency, weak immune system, and nutritional anemia, excluding children.

Happiness Biotech has a network of over 400 distributors and more than 20,000 sales terminals spread across 27 provinces in China with whom the company keeps a close relationship with to negotiate better terms with its suppliers and purchasers.

Sales and marketing expenses as a percentage of revenue have decreased in the most recent reporting period, per the table below:

The sales efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, fell sharply to 1.5x in the most recent year, as shown in the table below:

According to a 2018 market research report by IBIS World, the traditional Chinese medicine [TCM] market was valued at $37 billion in 2018.

This represented a CAGR of 11% between 2013 and 2018.

According to other data from S&P Global Market Intelligence, the China TCM market accounted for 40.3% of the China pharmaceuticals market and is anticipated to grow further in the coming years.

This growth can be attributed primarily due to government efforts to promote the use of TCM as well as potential improvements to regulatory standards.

Major competitors that provide or are developing traditional Chinese medicine products include:

HAPP’s recent financial results can be summarized as follows:

Below are relevant financial metrics derived from the firm’s registration statement:

As of March 31, 2018, the company had $8.9 million in cash and $8.9 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2018, was $12.8 million.

HAPP and selling shareholders intend to raise $13.2 million in gross proceeds from an IPO of 2.4 million shares of its common stock at a midpoint price of $5.50 per share, not including customary underwriter options.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $128.6 million.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

Management’s presentation of the company roadshow is available here.

The sole listed underwriter of the IPO is Univest Securities.

HAPP is seeking U.S. public investor capital after a spate of Chinese companies going public in the past few years.

Unfortunately, out of eleven Chinese company IPOs in 2019, seven are below their IPO price year-to-date.

HAPP’s financials show a growing and profitable company with a healthy gross margin and operating margin. Sales and marketing efficiency was reasonable as well.

However, the financials are stale and are only available through Q1 2018. This means investors have no insight into recent financial results, especially in light of lowered Chinese consumer confidence over the past year in the context of a worsening domestic economy amid trade tensions with the U.S.

The market for a modern take on traditional Chinese medicine has been growing quite well and appears to have the support of the current Chinese regulatory environment which seeks to encourage its wider use.

As to valuation, management is asking investors to pay approximately 2.0x multiple of EV / Revenue and more than 6x EBITDA.

If we had more recent financials, I might be more amenable to supporting the IPO.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

Powered by NewsAPI.org

Keywords:

Biotechnology • Initial public offering • Biotechnology • Biotechnology • Initial public offering • Business • China • Nutraceutical • Consumer • China • Profit (economics) • Cash flow • Business • Biotechnology • J. A. Happ • Initial public offering • Nutraceutical • Dietary supplement • China • Profit (economics) • Cash flow • China • Economy • Nanping • China • Happiness • Biotechnology • Medical research • Manufacturing • Marketing • Nutraceutical • Dietary supplement • China • Management • Chief executive officer • Chief executive officer • Business • Chief executive officer • Biotechnology • Master of Business Administration • Cardiff University • Biotechnology • Spore print • Cordyceps • Mycelium • Donkey-hide gelatin • Vitamin • Dietary supplement • American ginseng • Cordyceps • Donkey-hide gelatin • Ganoderma • Mushroom • China • Time • Spore • Spore • Spore print • Microphone • China Food and Drug Administration • Immunodeficiency • Cordyceps • Mycelium • Cordyceps • Nutrition • Chinese herbology • Mass production • Biology • Fermentation • Technology • Mycelium • Nature • Cordyceps • Tradition • Horticulture • Cordyceps • Cordyceps • Mycelium • Oral administration • Liquid • Immunodeficiency • Donkey-hide gelatin • Solid • Chewing gum • Concentration • Skin • China • Donkey-hide gelatin • Donkey-hide gelatin • Talus bone • Immunodeficiency • Nutritional anemia • Biotechnology • Distribution (business) • Sales • China • Company • Supply chain • Sales • Marketing • Expense • Revenue • Financial statement • Sales • Efficiency • Interest rate • United States dollar • Revenue • United States dollar • Sales • Marketing • Market research • Ibis (hotel) • Traditional Chinese medicine • Traditional Chinese medicine • Compound annual growth rate • S&P Global • China • Traditional Chinese medicine • China • Pharmaceutical industry • Market (economics) • Economic growth • Government • Traditional Chinese medicine • Regulation • Competition • Traditional Chinese medicine • Finance • Finance • Business • Company • Free cash flow • Shareholder • Initial public offering • Share (finance) • Common stock • Price • Share (finance) • Underwriting • Option (finance) • Initial public offering • Company • Enterprise value • Initial public offering • Business • Internet • Initial public offering • Management • Company • Public company • Underwriting • Initial public offering • Security (finance) • United States dollar • Investor • Capital (economics) • China • Company • Initial public offering • China • Company • Initial public offering • Initial public offering • Price • Finance • Profit (economics) • Company • Gross margin • Operating margin • Sales • Marketing • Finance • Finance • China • Consumer confidence • Trade • Market (economics) • Traditional Chinese medicine • Valuation (finance) • Management • Investor • Enterprise value • Revenue • Earnings before interest, taxes, depreciation, and amortization • Finance • Initial public offering • Corporation • Stock • Seeking Alpha • Stock •