Cre8 Enterprise Seeks US IPO Amid High Valuation And Market Uncertainty (CRE)

A Quick Take On Cre8 Enterprise’s IPO

Cre8 Enterprise Limited (CRE) has filed to raise $7.9 million in an IPO of its Class A ordinary shares, according to an SEC F-1 registration statement.

Cre8 provides integrated financial printing services for companies in the financial and capital markets in Hong Kong.

The firm is growing revenue at a reasonable rate, but its operating results have been uneven, its financials are old, it is subject to a wide variety of regulatory and operational risks, and its proposed valuation at IPO is excessive.

My opinion on the CRE IPO is to Sell (Avoid).

Cre8 Overview and Market

Hong Kong, China-based Cre8 Enterprise Limited was founded to provide physical and electronic printing services for customer financial reports and compliance documents for companies located in Hong Kong.

Management is led by Chairman and Chief Executive Officer, Mr. Sze Ting CHO, who has been at the company since 2006 and was previously director and general manager at several financial printing companies and worked at RR Donnelley Financial.

The firm’s primary customer types include the following:

• Listed companies

• IPO applications

• Private companies

As of December 31, 2023, Cre8 has booked a fair market value investment of $645,109 from investors, including Cre8 Investments Limited and other investors.

CRE seeks clients from public, private and IPO candidate companies for a wide variety of its design, printing, and logistics for their financial and compliance documents and reports.

Cre8 also provides its customers with media placement services and E-submission filings with the Hong Kong Stock Exchange.

Selling and Marketing expenses as a percentage of total revenue have fallen as revenues have risen, as the figures below indicate:

Click to enlarge

(Source – SEC)

The Selling and Marketing efficiency multiple, how many dollars of additional new revenue are generated by each dollar of Selling and Marketing expense, was 0.9x in the most recent reporting period. (Source – SEC)

According to a 2024 market research report by Hong Kong TDC Research, the Hong Kong market for printing of all types is primarily supplied by small and medium-sized enterprises.

Major printers have generally relocated their production facilities to mainland China to reduce costs.

However, the overall Hong Kong printing services market fell by 15.5% for the period of January to November 2023, and the industry has produced several years of declining revenue, likely due to the twin effects of the social unrest in Hong Kong and the pandemic period.

Also, the Hong Kong Stock Exchange has produced highly variable trading volume, generally trending lower in recent years.

The company faces intense competition from a wide variety of large, medium and small enterprises competing on selection price and service bundle composition.

Cre8’s Recent Financial Results

CRE’s recent financial results are summarized as described here:

• Growing topline revenue

• Increasing gross profit and gross margin

• A swing to operating profit and cash flow from operations

Below are the financial results pulled from the firm’s latest IPO registration statement:

Click to enlarge

(Source – SEC)

As of December 31, 2023, Cre8 had $1.9 million in cash and $8.7 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2023, was $676,762.

Cre8’s IPO And Valuation Details

Cre8 intends to raise $7.9 million in gross proceeds from an IPO of its Class A ordinary shares, offering 1.75 million shares at a proposed midpoint price of $4.50 per share.

No existing shareholders have shown an interest in purchasing shares of the IPO.

The company’s enterprise value at IPO would approximate $104 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) is expected to be approximately 8.86%, indicating the stock will be a low-float stock likely to be subject to higher-than-average volatility.

Class A shareholders (the public) will have one vote per share, and Class B shareholders will be entitled to 20 votes per share.

The largest shareholder, Cre8 Investments Limited, will retain voting control of the company immediately post-IPO, with 87.8% of voting stock.

The S&P 500 Index no longer includes companies with multiple share classes in its index.

The firm will also be a ‘foreign private issuer’ and an ‘emerging growth company’, which will enable management to disclose substantially less financial and other information to shareholders.

Many of these types of company stocks have performed poorly post-IPO.

Management said it will use the proceeds from the IPO as follows:

approximately 25% or US$1.2 million is expected to be used for upgrading our Central Office and expanding our business through setting up a new business premise in other geographic market such as Southeast Asia or by strategic investment and acquisition of business in relation to financial printing services. As of the date of this prospectus, we have not specifically identified any business or assets to acquire, nor we have entered into any memorandum of understanding on acquisition of any business or assets;

approximately 15% or US$0.7 million is expected to be used for expanding our workforce and staff training;

approximately 30% or US$1.4 million is expected to be used for upgrading and/or acquiring equipment and IT systems; and

the balance of the net proceeds for working capital and other general corporate purposes.

(Source – SEC)

Leadership’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, the company has filed two lawsuits, one against a client who owes them HK$950,000 and another against an entity for service mark infringement.

Management said it is not aware of any legal claims that would have a material adverse effect on its operations or financial condition.

The listed bookrunners of the IPO are Benjamin Securities and Prime Number Capital.

Below is a handy reference table of capitalization and valuation figures for Cre8:

Click to enlarge

(Source – SEC)

My Commentary On Cre8’s IPO

CRE is seeking U.S. public capital market investment for its general working capital requirements.

The company’s financials have shown increasing topline revenue from a low base, higher gross profit and gross margin and a move to operating profit and cash flow from operations in the most recent calendar year.

Free cash flow for the twelve months ended December 31, 2023, was $676,762.

Selling and Marketing expenses as a percentage of total revenue have fallen as revenue has risen; its Selling and Marketing efficiency multiple was 0.9x in the most recent reporting period of calendar year 2023.

The firm currently plans to pay no dividends and will likely retain any earnings for its growth and working capital requirements.

Cre8’s recent capital spending history indicates it has spent lightly on capital expenditures as a function of operating cash flow.

The market opportunity for providing printing services in Hong Kong is sizable but has been declining in recent years for various reasons, including social unrest, pandemic lockdowns and foreign-domiciled companies leaving Hong Kong.

Risks to the company’s outlook as a public company include its operations in China, which leaves it subject to unpredictable regulatory actions, currency devaluation risks and uncertain relations between financial regulators in China and the U.S.

Management is seeking an Enterprise Value/EBITDA multiple of approximately 72x, an extremely high multiple.

While the company is growing revenue at a reasonable rate, its operating results have been uneven, its financials are out of date, it is subject to a wide variety of risks, and its proposed valuation at the IPO is wildly excessive.

Like so many Asia-based company IPOs, with its nominal pricing set at $4.50 per share, it is squarely aimed at retail investors since institutions will generally avoid such stocks.

So many of these companies have harmed investors and destroyed shareholder value, sometimes within minutes of beginning trading.

As a consequence, my outlook on the CRE IPO is to Sell (Avoid).

Expected IPO Pricing Date: To be announced.