IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/27160" target="_blank" data-smartkarma-citation="entities:27160:1">Qeeka Home (QKHM HK)</a> is the operator of <a href="http://www.jia.com/" target="_blank">jia.com</a>, which is the largest online interior design and construction (IC&amp;D) platform in China. At the mid-point of the IPO price range of HK$6.80-9.00 per share, Qeeka will raise HK$1,779 million ($231 million), resulting in a market cap of $1.2 billion. Qeeka is backed by <a href="https://www.smartkarma.com/entities/179" target="_blank" data-smartkarma-citation="entities:179:1">Baidu Inc (ADR) (BIDU US)</a> which is an 11.5% shareholder.Qeeka is a play on a market which is driven by structural drivers such as Chinese consumers’ rising disposable income, desire for better living standards and demand for efficient online services. Over the last three years, Qeeka had grown revenue rapidly which has been accompanied with narrowing operating losses and a marginal reduction in FCF cash burn. Overall, on a fundamental basis, we are positive on Qeeka Home because:<ol><li>Profitability is at hand as platform services, the highest margin business, is now the largest revenue stream. Platform services revenue as a percentage of group revenue has increased from 37% in 2017 to 52% in the first four months of 2018. Consequently, Qeeka’s margin expansion is gaining momentum as gross margin has expanded from 41.5% in 2015 to 63.0% in the first four months of 2018.</li><li>Platform services revenue is a function of user recommendations made and average revenue per recommendation. Crucially, platform services revenue growth was driven solely by the growth in user recommendations made in 2016 and 2017. In the first four months of 2018, the growth in average revenue per recommendation started contributing to revenue growth.</li><li>Tier B and Tier C cities are the key growth market for platform services but tend to have low average revenue per recommendation. Pleasingly, Qeeka has enjoyed some success in increasing the low average fees as the average revenue per recommendation for Tier B and C cities increased by 54% and 63% respectively in 2017. This trend continued in 2018 which helped the group revenue per recommendation significantly increase from RMB359 in 2017 to RMB400 in the first four months of 2018.</li><li>Self-operated ID&amp;C (59% of revenue in 2017) growth has sharply reduced from 342% in 2016 to 45% in 2017. However, the decline is due to the exit from a low margin brand (Qiyu) in 3Q17. Excluding Qiyu, self-operated ID&amp;C grew 136% in 2017. Notably, Qiyu’s lower revenue contribution has helped self-operated ID&amp;C gross margins improve from 14.5% in 2015 to 24.7% in 2017.</li></ol>For valuation, we used a peer group of Chinese decoration companies and major internet companies to reflect Qeeka’s online/offline mix. Based on our estimates and at IPO mid-point, Qeeka trades at a 2019 P/E of 36x and PEG of 0.1x. This compares to the median Chinese decoration companies’ P/E of 11x and major Chinese internet companies’ P/E of 28x. Qeeka’s IPO price range can be justified on the premise that it should be valued as a pure internet company. There is some logic to this assumption as we estimate that the online platform business will account for around 60% of revenue but a higher 80% of gross profit in 2019. Notably, at the low-end price range of HK$6.80, Qeeka trades at a small premium to the median Chinese internet companies 2019 P/E. <div class="content-highlight">Our overall view is that we are inclined to participate in the Qeeka Home IPO at the low-end of the proposed pricing range.</div>

Qeeka Home (QKHM HK) is the operator of jia.com, which is the largest online interior design and construction (IC&amp;D) platform in China. At the mid-point of the IPO price range of HK$6.80-9.00 per share, Qeeka will raise HK$1,779 million ($231 million), resulting in a market cap of $1.2 billion. Qeeka is backed by Baidu Inc (ADR) (BIDU US) which is an 11.5% shareholder.Qeeka is a play on a market which is driven by structural drivers such as Chinese consumers’ rising disposable income, desire for better living standards and demand for efficient online services. Over the last three years, Qeeka had grown revenue rapidly which has been accompanied with narrowing operating losses and a marginal reduction in FCF cash burn. Overall, on a fundamental basis, we are positive on Qeeka Home because:Profitability is at hand as platform services, the highest margin business, is now the largest revenue stream. Platform services revenue as a percentage of group revenue has increased from 37% in 2017 to 52% in the first four months of 2018. Consequently, Qeeka’s margin expansion is gaining momentum as gross margin has expanded from 41.5% in 2015 to 63.0% in the first four months of 2018.Platform services revenue is a function of user recommendations made and average revenue per recommendation. Crucially, platform services revenue growth was driven solely by the growth in user recommendations made in 2016 and 2017. In the first four months of 2018, the growth in average revenue per recommendation started contributing to revenue growth.Tier B and Tier C cities are the key growth market for platform services but tend to have low average revenue per recommendation. Pleasingly, Qeeka has enjoyed some success in increasing the low average fees as the average revenue per recommendation for Tier B and C cities increased by 54% and 63% respectively in 2017. This trend continued in 2018 which helped the group revenue per recommendation significantly increase from RMB359 in 2017 to RMB400 in the first four months of 2018.Self-operated ID&amp;C (59% of revenue in 2017) growth has sharply reduced from 342% in 2016 to 45% in 2017. However, the decline is due to the exit from a low margin brand (Qiyu) in 3Q17. Excluding Qiyu, self-operated ID&amp;C grew 136% in 2017. Notably, Qiyu’s lower revenue contribution has helped self-operated ID&amp;C gross margins improve from 14.5% in 2015 to 24.7% in 2017.For valuation, we used a peer group of Chinese decoration companies and major internet companies to reflect Qeeka’s online/offline mix. Based on our estimates and at IPO mid-point, Qeeka trades at a 2019 P/E of 36x and PEG of 0.1x. This compares to the median Chinese decoration companies’ P/E of 11x and major Chinese internet companies’ P/E of 28x. Qeeka’s IPO price range can be justified on the premise that it should be valued as a pure internet company. There is some logic to this assumption as we estimate that the online platform business will account for around 60% of revenue but a higher 80% of gross profit in 2019. Notably, at the low-end price range of HK$6.80, Qeeka trades at a small premium to the median Chinese internet companies 2019 P/E. Our overall view is that we are inclined to participate in the Qeeka Home IPO at the low-end of the proposed pricing range.

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Qeeka Home IPO Preview: A Pricey Way to Bring Home the Bacon