Not to sound like a broken record, but, it's been a tough go
of late for China-based IPOs. The last five -- Viomi Technology (VIOT), X
Financial (XYF), Qutoutiao (QTT), 111, Inc. (YI), and NIO (NIO) -- each priced
at or near the low end of their expected price ranges. With the trade wars
consistently in the headlines and with concerns that tariffs will put a dent in
China's GDP growth rate ongoing, it's no mystery why investors have been shying
away from Chinese IPOs.
This morning, though, there is some positive news to report, as LAIX's (LAIX) 5.75 mln IPO priced at $12.50, the mid-point of the $11.50-$13.50 expected price range. For a high-growth tech or pharmaceutical IPO, that would constitute a lackluster pricing. But considering the notable weakness surrounding Chinese IPOs, this mid-point position represents an encouraging step. Of course, one decent pricing isn't enough evidence to suggest a meaningful swing in sentiment is underway. And LAIX's high triple-digit revenue growth, coupled with the tier one underwriters behind the deal, may have given it a little extra push separate from macro-oriented sentiments.
Specifically, the IPO was backed by Morgan Stanley and Goldman Sachs, and it is listed on the NYSE, which gives the company some added credibility. The question now, though, is whether this improved pricing relative to the other recent Chinese IPOs will carry over to the public markets. That remains to be seen, as the stock is set to open later this morning on the NYSE.
LAIX is an artificial intelligence (AI) company in China that creates and delivers services and products to popularize English learning. Its proprietary AI teacher utilizes deep learning and adaptive learning technologies, big data, well-established education methods, and the mobile internet.
Since its inception in 2013, LAIX has built its AI-powered Liulishuo platform to deliver a user-centric, personalized, and effective English learning experience accessible to anyone, anywhere, at any time, overcoming the personnel and facility limitations associated with traditional classroom teaching. It provides its products and services on-demand via its mobile apps -- primarily its flagship “English Liulishuo” mobile app.
Its AI teacher can hear, understand, interact with, and evaluate the performance of platform users and has the ability to assess and understand their learning needs. Leveraging its massive volume of smart user data, its AI teacher continuously evolves and delivers more personally tailored learning programs to each user.
LAIX provides a variety of courses inspired by a broad range of topics and cultural themes to make English learning more interesting. Adding a human touch to the AI-fostered learning experience, LAIX also provides students with online study advisors, who organize online study groups, monitor users’ learning progress, answer user queries, and send individualized, motivating messages to users.
It says its business model is highly scalable and has powerful network effects, which has enabled it to develop a large and rapidly growing user base amid a rapidly growing total addressable market for English language learning in Chinese society. The number of its average monthly active users increased from 2.0 mln in 2016 to 4.4 mln in 2017, and further increased to 7.2 mln in the first half of 2018. Its freemium model allows it to attract users with free services and convert them into paying users.
For the six months ended June 30, 2018, net revenue surged by 480% year/year to RMB232.3 mln, primarily due to growth in subscription for its English standard classes. As a result of increased economies of scale, gross margin increased 44.8% to 76.3%.
Not surprisingly, operating expenses also soared by 288% to RMB347.1 mln, with Sales & Marketing costs rocketing higher by 313% to RMB259.8 mln.
With operating expenses out-pacing revenue, the company suffered an operating loss of RMB(169.8) mln, compared to RMB(71.6) mln in the year ago period.
LAIX also isn't yet generating positive cash flow, despite the surge in revenue. Specifically, for the six months ended June 30, 2018, its operations burned RMB(61.9) mln in cash.