As has been the case for 4+ years now, we've a detailed analysis report on every deal before pricing/open at http://www.tradingipos.com

2009-06-16
DGW - Duoyuan Global Water

DGW - Duoyuan Global Water plans on offering 5 million ADS at a range of $13-$15. The offering will be 5.75 million ADS if the over-allotment is exercised. Piper Jaffray is leading the deal, Oppenhemier and Janney Montgomery co-managing. Post-ipo, DGW will have 21.3 million ADS equivalent shares outstanding for a market cap of $298.2 million on a pricing of $14. IPO proceeds will be used to build and upgrade manufacturing facilities and production lines as well as R&D. 　

Director, Chairman and CEO Wenhua Guo will own 58% of DGW post-ipo.

From the prospectus:

'We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.'

Water treatment products in China. Customers include wastewater treatment plants, water works facilities, manufacturing plants, commercial businesses, residential communities and individual customers.

DGW offers 80 products in three categories. 35 of these products were introduced in 2008.

Circulating Water Treatment Equipment - Electronic water conditioners, fully automatic filters, circulating water central processors, cyclone filters and water softeners, used in the process of treating water and removing buildup in circulating water systems. DGW derived 41% of their 2008 revenues from this segment.

Water Purification Equipment - Products for residential and commercial end-users utilizing ultraviolet, ozone, membrane-based and electrodeionization, or EDI, technologies. 21% of 2008 revenues were derived from this segment.

Wastewater Treatment Equipment - Products to treat municipal sewage and industrial and agricultural wastewater. DGW derived 38% of their 2008 revenues from this segment.

As with most companies in China selling a product, DGW utilizes distributors and not a direct sales staff. DGW's distribution network consists of over 80 distributors in 28 Chinese provinces.

Sector - As China becomes more industrial and urban, clean non-polluted water has become a precious commodity. China's government has promoted and investing in water treatment projects turning the sector into a growth industry in the country. The demand for water treatment products in China is estimated to increase nearly 15.5% annually through 2012. Growth drivers are rapid population growth, industrialization and urbanization, and more recently, the economic stimulus plan being implemented by the Chinese government.

Seasonality - DGW derives lower revenues in the winter months due to slowdown in construction as well as Chinese New Year. The 3rd quarter of the year tends to be the strongest, with the first quarter the weakest.

Financials

$4 per share in cash post-ipo. Note that DGW plans on spending a significant chunk of this cash on capacity expansion, including building new manufacturing facilities and production lines. In addition DGW plans on spending $10 million on a new R&D facility.

DGW has been profitable since at least 2005.

Taxes - DGW will be taxed at a 25% rate beginning 2009.

Gross margins were 45% in 2008 a strong improvement over 2007's 37%. The increase was due to the sharp drop in commodity prices the back half of 2008. DGW expects favorable pricing on their commodity purchases in 2009 due to long term supply agreements. Expect 2009 gross margins to remain in the 45% ballpark.

2008 - Revenues grew 40% in '08 to $86.8 million. As noted above, gross margins were 45%. Operating expense ratio was 15%, putting operating margins at 30%. Plugging in the 25% post-ipo tax rate, net margins were 22.5%. Earnings per share were $0.91. On a pricing of $14, DGW would trade 15 X's 2008 earnings.

2009:

First quarter is DGW's slowest annually. However DGW grew revenues by approximately 38% year over year in the 3/09 quarter keeping pace with 2008 growth rates.With continued strong gross margins due to supply agreements in place through '09, DGW is off to a solid start for 2009. DGW has also done a nice job keeping expenses in line the past two years, allowing for economies of scale. They appear to be selling more with roughly the same expense outlays.

Revenues for 2009 should be in the $110 million range, a 26% increase over 2008. I was conservative here in estimating as DGW had a huge 3rd quarter of 2008 that may be difficult to duplicate. If the third quarter inproves year over year on the '08 Q, the $110 million estimates will be a little low.

Gross margins should be 45%. Operating expense ratio should dip to 13%, putting operating margins at 32%. Plugging in a 25% tax rate, net margins should improve to 24%. Earnings per share should be $1.25. On a pricing of $14, DGW would trade 11 X's 2009 earnings. Note too that these are 25% taxed earnings and not the usual China ipo low to no taxed earnings per share.

Conclusion - Nothing real proprietary here it appears, although DGW does devote substantial resources to R&D to stay current with worldwide water treatment technologies. I have seen this compared to ERII, but not quite. ERII is a water tech company that is involved in large water projects worldwide. DGW is a pureplay on Chinese population, infrastructure and urbanization growth which brings about a greater demand for clean water. Growth here has been very strong and the multiple does not look extreme at all. Good growth, low multiple, wind at back due to China internals, plus factor in the huge recent China stimulus package. DGW should not be a high multiple stock due to it 'nuts and bolts' type business. However the multiple here with the strong growth makes for an easy recommend in range. good growth and low multiple = strong recommend in range.

2009-05-04
DGI - DigitalGlobe

DGI - DigitalGlobe plans on offering 17 million shares(assuming over-allotments are exercised) at a range of $16-$18. **Note that insiders are selling 13.33 million shares in this deal, DGI will be selling only 3.6 million shares in this 17 million share deal. Morgan Stanley and JP Morgan are leading the deal, Citi, Merrill Lynch and Jefferies co-managing. Post-ipo DGI will have 47 million shares outstanding for a market cap of $799 million on a pricing of $17. IPO proceeds will be utilized for general corporate purposes.

Morgan Stanley, the lead underwriter in this deal, will own 30% of DGI post-ipo.

**DGI will have $200 million in net debt post-ipo. Actual debt will be $341 million, while cash on hand post-ipo will equal $140 million assuming over-allotments exercised. DGI would be a much stronger company post-ipo were insiders not making up the bulk of this deal. DGI participates in a hefty capital expenditure sector, launching and operating satellites. I would much prefer to see a debt free DGI post-ipo than one with debt on the books. Had insiders waited until the lock-up to begin selling, it would have allowed DGI to offer the bulk of shares in this deal and pay off some of the debt on the books. That is not the case however.

From the prospectus:

'We are a leading global provider of commercial high resolution earth imagery products and services. Our products and services support a wide variety of uses, such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management.'

High resolution satellite operator helping companies and governments map the physical world.

DGI currently operates two high resolution imagery satellites which produce DGI's earth imagery content which allows customers to map, monitor, analyze and navigate the physical world. DGI's imagery is currently used in location based applications including Google Maps and Microsoft Virtual Earth, and mobile devices from vendors such as Garmin and Nokia. DGI's satellites take both black and white, and multi-spectral imagery, which shows visible color and non-visible light, such as infrared. One million square kilometers of imagery is added/updated daily to DGI's image library. The image library currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. **DGI believes their image library is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available.

**DGI will be launching their third satellite, WorldView-2, in October '09. The WorldView-2 will nearly double DGI's collection capabilities to nearly two million square kilometers per day. In addition it will enable intra-day revisits to a specific geographic area, including collecting up-to-date imagery in those areas of greatest interest to customers. The WorldView-2 will be the only commercial earth imagery satellite with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater. It reads as if the WorldView-2 launch is designed to expand their governmental defense and intelligence based business.

Sector - Estimates peg the 'earth imagery' sector at $1.9 billion in 2007 with expectations of $3.2 billion in annual revenues by 2012. DGI would appear to have approximately a 10%-15% total market share in this segment. Growth drivers include: 1)increase in government reliance on unclassified earth imaging; 2) Growth of imagery usage to monitor economic development; 3) Consumer application growth including internet and GPS.

Barriers to entry are significant. DGI estimates launching a high resolution imagery satellite is a four year endeavor. Factor in the prohibitive cost of launching and maintaining the satellites, the licenses needed, and the inability to quickly replicate DGI's historical image library and you have a pretty significant entry barrier for new competitors. DGI does have one publicly trading pure-play competitor in GeoEye(GEOY). In the financials section, we will compare the two.

DGI's largest customer is the US government in the form of the National Geospatial-Intelligence Agency, or NGA. NGA accounted for 58% of 2007 revenues and 74% of 2008 revenues. 17% of revenues were derived internationally. Approximately 80% of 2008 revenues were derived from government defense and intelligence agencies, 20% from commercial clients. The bulk of DGI's government revenues comes from tasking orders. These would be up to date data directly from the satellites, often following specific directions from the agencies. Only 12% of government revenues are derived from use of DGI's image library. By contrast approximately 80% of DGI's commercial revenues are derived from their image library.

Capital expenditures - As one would surmise, this is a hefty capital expenditure sector. In the past three years, DGI has had capital expenditures of: $83 million in 2006; $238 million in 2007; $142 million in 2008.

Risks - Two large ones here:

1) The loss of government revenues. As most of the competition in the high res imagery satellite sector is non-US based, there is only one company that poses a serious threat to DGI's government related revenues stream. That one company is GeoEye, who recently commissioned a multi-spectral satellite into operations. GEOY's new multi-spectral satellite is anticipated to derive more US government business than their predecessor satellites. **Note** - It appears the US government remains intent on utilizing both GEOY and DGI's imagery. In fact in a recent long term plan from the Obama administration the government will increase its use of imagery from each of the two companies. Currently it appears to this analyst as if there is plenty of revenues from the NGA for both DGI and GEOY. In fact it seems the NGA prefers using two satellite imagery providers and not relying on one company. Of note, the US government has made a mess of their own plans to launch satellites, which has opened the door for strong revenues growth for both GEOY and DGI. There are long-range plans for the US government owned imagery satellites, however nothing is imminent at this time. That alone makes DGI/GEOY interesting public companies.

2) Failure of a timely launch for the WorldView-2 satellite. As DGI will be a public company when the launch is scheduled, any delay or launch mishap would harm the stock price. Should be noted that GEOY's recent satellite launch was delayed a number of times. DGI's first satellite is due to be decommissioned in 2010. Their second satellite(WorldView-I in operation since 11/07) is expected to remain operational until 2018.

Financials

A significant amount of debt on the books at $341 million. Post-ipo, DGI will also have a substantial amount of cash on hand, approximately $140-$150 million. Much of this cash will be utilized the remainder of 2009 on the launch of their new satellite Worldview-2. Most likely come early 2010, DGI will have $300+ million in net debt, compared to $200 million net debt post-ipo.

***Even with the substantial net debt on hand, DGI will only book $3-$5 million in net debt expense in 2009. Most of the current interest expenses will be capitalized under the construction of the new WorldView-2 satellite and will be expensed over the expected life of the satellite under depreciation & amortization. Once the satellite is launched and commissioned and final expenses are in however, future annual interest expenses will revert to that line item. Expect the interest expense line item to grow substantially by 2011.

Revenues have grown swiftly, kicking into another gear after the late 2007 launch of WorldView-1. Revenues in 2006 were $107 million, in 2007 $152 million and in 2008 $275 million. The swift 2008 growth was nearly all spurred by the US defense and intelligence agencies as commercial revenues only grew by 10% on the year. The launch of WorldView-2 in late 2009 should kick start 2010 revenues similarly. The issue with DGI however is 2009.

DGI became operationally profitable in 2006.

2008 - Revenues were $275 million, a whopping 81% increase from 2007. The reason as noted was the commissioning of the WorldView-2 satellite which brought with it a large increase in US government contractual revenues. Gross margins were 90%. The high gross margins are due to capital expenditures going on the depreciation & amortization line to be expensed down over the life of the satellites. Operational expense ratio was 56%, split evenly between depreciation & amortization and GSA expenses. Operating margins were a strong 35%. Factoring in normalized taxes and interest expense, net margins were 21%. **Note that DGI's taxes were at a higher rate in 2008 than they will be as a public company. It appears this was due in part to DGI taking a large tax credit in 2007. In 2008, DGI was actually a bit more GAAP profitable than the numbers appear. Earnings per share were $1.22 in 2008. On a pricing of $17, DGI would trade 14 X's 2008 earnings.

A couple of comments. First of all, DGI is able to legally hide a chunk of their interest expense annually by capitalizing it into the costs of their satellite launches. Unless the company plans another launch sometime in the 2011-2013 window, beginning in 2011 DGI will get hit with an increase in interest expense on their debt. In fact since much of their interest the past two years has been folded into their satellite costs, come 2011 they will be expensing actual debt servicing as well as the depreciating expense on 2007-2010 debt servicing. This is something that should serve to put a bit of a drag on those strong margins come 2011.

Also as DGI actually spent a far greater amount in 2007-2008 in actual capital expenditures than the depreciation & amortization expense lines, the GAAP earnings numbers look much better than actual cash flows. DGI is GAAP profitable, but due to these two accounting rules, DGI's margins look far stronger than the actual cash flows. This is a hefty capital expenditure business and launching two satellites in two years will have cost DGI over $600 million in actual monies. By spreading out the expenses over the expected life of the satellites, come 2011 DGI will actually have stronger cash flows than their GAAP numbers. Currently however, in their launch phase, the GAAP numbers are better than cash flows.

2009 - 2009 is going to be a small step back for DGI. The economic slowdown has slowed their non-contractual government business. Operating expenses however will grow briskly as DGI prepares for the launch and commissioning of their WorldView-2 satellite. While the first quarter 2009 numbers were not yet ready, DGI expects 1) a sequential decrease in quarterly revenues for the March '09 quarter; 2) A year over year decrease for the March '09 quarter; 3) lower profits for the March '09 quarter. In addition DGI is forecasting no revenue growth in 2009, but forecasting increased operating expenses. Yes, the reason is understandable. 2009 for DGI will be the 'in-between' year not benefiting from the commissioning of a new satellite as 2008 was and 2010 will be. I suspect however that the coming lackluster results for DGI in 2009 may be a surprise to some shareholders expecting continued growth. They just will not be seeing it this year. The good news is, the valuation in range factors this in as DGI is not overly pricey at all in range. A quick forecast for 2009:

Revenues should be stagnant again in the $275 million range. Gross margins should again be strong. DGI will see an increase in GSA and depreciation & amortization knocking operating margins to approximately 31%. Factoring in net interest expense and taxes, net margins should be 18 1/2%. Earnings per share for 2009 should be in the $1.05-$1.10 range. On a pricing of $17, DGI would trade 16 x's 2009 earnings.

A quick look at DGI and competitor GEOY.

GEOY: $492 million market cap with $250 million in debt. In 2009 GEOY expects revenues of $262 million and earnings per share of $0.78. GEOY currently trades at 34 X's 2009 earnings. GEOY recently launched/commissioned a new satellite and expects 2010 to be the year that revenues from said satellite begin to spur EPS growth.

DGI: $799 million market cap with $340 million in debt. DGI should have revenues of approximately $275 million in 2009 and earnings per share of $1.05-$1.10. On a pricing of $17, DGI would trade 16 X's 2009 earnings.

While DGI looks a bit hefty in comparison to GEOY on a price to revenue basis, DGI does sport better overall margins. Part of this may be explained by the difference in accounting as GEOY has opted for more a straight line 'expense as you go' approach while DGI has opted to capitalize and depreciate their direct satellite costs over the expected lifespan of that satellite. Both GEOY and DGI should post strong 2010 eps growth and an argument could be made each should trade at a similar market cap and not the disparity we should see if DGI prices in $16-$18 range.

Conclusion - 2009 should be a rather flat year of performance as the company prepares to launch and commission their new state of the art imagery satellite. Investors expecting continued swift growth in 2009 may be disappointed as DGI will go from 80% revenue growth in 2008 to stagnant revenue growth in 2009. The question here is whether or not that is built into the valuation in range. I believe it is, however be prepared for a potential cool reception to DGI's first few earnings reports in 2009 as they should lag 2008's earnings power. DGI is going to have a difficult 2009, however once the WorldView-2 is commissioned, the revenue and earnings picture in 2010 should resemble 2008's impressive year.

Yes debt is a drag here and I would far prefer DGI pay off debt on ipo than insiders cashing out. That is a significant negative here. The flat 2009 is another negative. However, for the potential payoff in 2010 and beyond, the valuation in range here does not appear out of line. This is an interesting ipo and a recommend in range. Note however, this is not an ipo to pay up for as there very well may be a negative reaction at some point this year to DGI's lackluster 2009 operational performance.

Even with the negatives noted, a unique ipo with hefty barriers to entry and a solid future trading 16 X's current year earnings is a definite recommend in range....shareholders though should definitely expect a choppy ride over the next year.

2009-04-06
RST - Rosetta Stone

RST - Rosetta Stone plans on offering 7.25 million shares (assuming overallotments exercised) at a range of $15-$17. Insiders will be selling 4.125 million shares in the deal. Morgan Stanley and William Blair are leading the deal; Jefferies, Robert Baird, and Piper Jaffray co-managing. Post-ipo RST will have 20.3 million shares outstanding for a market cap of $325 million on a pricing of $16. The bulk of ipo proceeds will be used for general corporate purposes.

ABS Capital will own 25% post-ipo..ABS Capital is also the majority shareholder of 2007 ipo APEI.

From the prospectus:

'We are a leading provider of technology-based language learning solutions. We develop, market and sell language learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand.'

RST's language learning approach does not utilize the traditional second language approach of translation or grammar explanation. Instead RST utilizes audio & video to replicate the natural language learning ability that children use to learn their native language. RST calls their proprietary language learning approach 'Dynamic Inversion'. RST currently offers their self-study language learning programs in 31 languages.

Language Learning - Children learn their native language without using rote memorization or adult analytical abilities for grammatical understanding. They learn at their own pace through their immersion in the language spoken around them and using trial and error. They do not rely on translation. Traditionally the majority of second language learning programs in/out of the classroom have focused instead on translation, grammar and rote memorization. The majority of alternative second language courses have focused on in-country immersion and private study, both expensive alternatives to the traditional memorization approach. RST's solution brings the immersion approach to ones computer.

Rosetta Stone solution - As noted above, RST aims to replicate the process in which children learn their native language. The student learns at their own pace. The RST content library consists of more than 25,000 individual photographic images and more than 400,000 recorded sound files. Each language has 1-3 proficiency levels which can be purchased individually or bundled. Individual proficiency's (such as Spanish I) retail for approximately $250 while the complete language bundle (Spanish I, Spanish II, & Spanish III) retails for approximately $550. Each proficiency level offers approximately 40 hours of instruction. In addition RST offers an online peer-to-peer practice environment called SharedTalk, at www.sharedtalk.com, where registered language learners meet for language exchange to practice their foreign language skills. During 2008, RST had more than 100,000 active SharedTalk users.

Effectiveness - According to a self-commissioned study, after 55 hours of Spanish study using Rosetta Stone, the learning was sufficient to fulfill the requirements for one semester of university study.

Sector - RST generates 95% of revenues in the US. The US language learning industry generated $5 billion in revenues in 2007, of which $2 billion was for self-study. Assuming these numbers are correct, RST has approximately a 10% share of the self-study revenues in the US and is the far and away leader in their niche.

Customers:

Consumer sales accounted for approximately 80% of 2008 revenues. Direct-to-consumer channel sales accounted for 58% of consumer sales. These are sales made via RST's website or or call centers. RST's 145 retail kiosks (located in airports and malls) accounted for 22% of consumer revenues and sales to retailers accounted for 21% of consumer revenues. The bulk of retailer sales were to Apple, Barnes & Noble, and Borders.

Institutional sales accounted for 20% of 2008 revenues. Primary/secondary schools represented 44% on institutional sales, government & armed forces 19%, homes schools 20% and businesses 10% and non-profits 5%.

60% of RST customers earn more than $75,000 annually with 44% earnings more than $100,000. In a self-commissioned study, 92% of respondents expressed satisfaction with RST products and 76% have recommended Rosetta Stone to others.

Growth potential - RST feels their growth prospects going forward lie in the international markets. In 2008, just 5% of RST's revenues were derived outside the US.

Risk - 80% of RST's revenues are derived from US consumers. The big risk here would be a recession negatively impacting consumer discretionary spending coupled with a slowdown in international travel. We've certainly seen the first with consumer discretionary spending falling off a cliff in mid-September 2008. As RST is the first consumer discretionary ipo in quite awhile, this is a definite concern. Lets look at RST's 4th quarter of 2008 and see if revenues were impacted. In the 4th quarter of 2008, RST booked their best quarter in operating history in terms of revenues while maintaining gross margins and dropping sales and marketing expense in terms of percentage of revenues(a positive). Now seasonality plays a factor here as the 4th quarter annually has been RST's strongest due to holiday spending. RST however booked very solid revenue growth in the 4th quarter of 2008, much as they did a year prior in the 4th quarter of 2007. Quarter to quarter revenue growth in the 4th quarter of 2008 was a strong 11%, compared to 4th quarter of 2007 quarter to quarter revenue growth of 24%. Factoring in a near doubling of the revenue base in 2008 coupled with the difficult consumer spending environment in late 2008, the 4th quarter of 2008 for RST looks strong to me.

Returns - RST offers a 6 months 'no questions asked' money back guarantee on their products. In 2008 approximately 6% of all revenues were returned.

Competition - Berlitz International, Simon & Schuster, Inc. (Pimsleur), Random House,(Living Language), Disney Publishing Worldwide and McGraw-Hill Education. There is no pure public comparable to RST.

Risk – As mentioned, 80% of customer base in 2008 were individuals. As a result RST revenues could be affected by any trend changes in discretionary consumer spending and retail shopping patterns. Slowdown in international travel too carries a risk due to sales from airport kiosks forming almost a fifth of consumer driven revenues.

Financials

$2.67 in cash per share post-ipo, no debt.

Growth has been very strong in the past two years. As is often the case with software related ipos, gross margins are also impressive. Revenue growth was 50% in 2007 and actually increased in 2008 by 52% more. Rarely do you see a company deriving significant revenues ($209 million in 200 and accelerating revenue growth year to year. That RST did so in a tough consumer 2008 environment is very impressive. The revenue growth here the past two years with back to back 50%+ growth is easily reason enough to recommend this ipo.

Seasonality - RST's best quarter tends to be the 4th quarter annually as they derive holiday related revenues.

RST's first profitable year was 2007.

2008 - Revenues were $209.3 million, a 52% increase over 2008. Gross margins were fat at 86%. As one would expect, sales and marketing expenses make up the bulk of RST's operating expenses. While in 2008 sales & marketing expense ratio was 45%, it did mark a decrease from 2007's 48% and 2006's 50%. Good sign, all things being equal you want to see sales and marketing expenses growing slower than actual revenues, allowing a company to filter more of those revenues to the bottom line. Operating expense ratio is also decreasing annually, exactly what one wants to see. Fast growing revenues and declining operating expense ratios are the ingredients of a top notch ipo. Operating expense ratio in 2008 was 72%, compared to 79% in 2007 and 80% in 2006. This number is still quite high in 2008, however the trends are improving and if RST can continue at this pace over the next 2-3 years, they will become a very profitable operation.

2008 operating margins were 14%. Plugging in anticipated post-ipo tax rate of 37%, net margins were 9%. Earnings per share were $0.91. On a pricing of $16, RST would trade at 17-18 X's trailing earnings with a 50% trailing revenue growth.

2009 - I just do not feel comfortable forecasting another 50%+ jump in annual revenue for 2009. Having written that, RST is poised to have a very strong 2009. In what was a difficult environment in 2008 with consumer discretionary spending falling precipitously overall, RST shined. Looking at quarter to quarter revenue growth at the end of 2008 and factoring in seasonality with a much slow first half of the year for RST historically....I would project very conservatively that RST can grow revenues 20% in 2009 to approximately $250 million. Gross margins should remain strong and I would project operating expense ratios to continue to decline, increasing operating and net margins. On a $250 million run rate, with 86% gross margins, 16% operating margins and 10% net margins, RST would earn $1.23 in 2009. On a pricing of $16, RST would trade 13 X's 2009 earnings.

Conclusion

How has RST thus far managed to sidestep a massive consumer spending slowdown? 22% of RST buyers responded in a survey they did so based on the personal recommendation of another. That is pretty powerful word of mouth marketing when annual revenue tops $200 million. Digging into this ipo, the one constant appears to be customer satisfaction driving growth. You really could not ask for much more with a consumer based ipo. RST looks poised to grow strongly in 2009 and is trending well in every facet of their business. If RST is able to build on their United States success globally over the next few years, this could be a huge long term winner coming public at just a $325 million market cap (based on a $16 pricing).

RST is a unique, and difficult to value sector leader with fast growing revenues, strong gross margins and improving operating expense ratios. All this equals a top-notch ipo. If RST can continue current trends for even another 2-3 quarters, the range of $15-$17 here is far too low. This is a strong recommend in range and one to pay up for if need be. The CEO describes his company as a 'disruptive value proposition' in language learning. I agree

2009-03-26
CYOU - Changyou.com

CYOU - Changyou.com plans on offering 7.5 million ADS at a range of $14-$16. Note that 1/2 the ADS in this offering will be sold by parent company Sohu.com (SOHU). Credit Suisse and Merrill Lynch are leading the deal, Citi and Susquehanna Financial are co-managing. Post-ipo CYOU will have 51.25 million ADS equivalent shares outstanding for a market cap of $769 million on a pricing of $15. Ipo proceeds will be utilized for general corporate purposes.

SOHU will own 71% of CYOU post-ipo. CYOU's CEO Tao Wang will own 15% of CYOU post-ipo. Note that post-ipo CYOU will be paying SOHU a one-time dividend of $96 million.

SOHU - A Chinese internet portal operating since 1998. Sohu has a current market cap of $1.56 billion and currently has over 250 million registered accounts.

From the prospectus:

"We are a leading online game developer and operator in China as measured by the popularity of our game Tian Long Ba Bu, or TLBB. TLBB, which was launched in May 2007, was ranked by International Data Corporation, or IDC, for 2007 as the third most popular online game overall in China and the second most popular online game in China among locally-developed online games."

On-line multi-player role playing game company, this CYOU ipo is similar in that fashion to this decade’s ipos of SNDA/NCTY/PWRD/GA. Below we'll do a comparison of those four with CYOU.

Tian Long Ba Bu(TLBB) was developed and launched in house at CYOU, then a part of SOHU. In addition to TLBB, CYOO also has licensed and operated Blade Online (BO). For the three months ending 12/31/08, TLBB had 1.8 million active paying accounts and BO had 159,000 active paying accounts.

Tian Long Ba Bu - 2.5D martial arts game was launched in May of 2007. Multi-player means literally over a million players/characters can inhabit the game playing universe at the same time. In 3/09, peak concurrent users exceeded 800,000. CYOU has also licensed this game to third party operators who run the game in Taiwan, Hong Kong, Vietnam, Malaysia and Singapore. Game players may play for free, however they must purchase pre-paid game cards to buy virtual items such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks. As is customary in China, pre-paid game cards are sold through regional third party distributors who then distribute to Internet cafes and various websites, newsstands, software stores, book stores and retail stores.

Pipeline - CYOU has three games in various stages of development: Duke of Mount Deer, or DMD, Immortal Faith, or IF, and the Legend of the Ancient World, or LAW. Duke of Mount Deer is another martial arts game and is being developed in-house. The other two will be licensed properties. Rollout of DMD will be 4th quarter of 2009 with the other two coming in 2009 and 2010 respectively. It would appear CYOU is banking on Duke of Mount Deer to be their next hit and hoping that this release will pick up the slack from the eventual player slowdown in TLBB.

Market segment - China's online game players numbered an estimated 40 million in 2007 with revenues of $1.4 billion. Online game revenues are expected to continue to grow to $3.4 billion in 2012 at a compound annual growth rate, or CAGR, of 19.9%.

Growth - 94% of CYOU's revenues in 2008 were from the game Tian Long Ba Bu(TLBB). Launched less than two years ago, TLBB has been a huge success generating over $180 million in revenues in 2008 alone. This ipo is based completely on the success of this one game. While TLBB has generated massive revenues and profitability, online video games tend to have a distinct lifespan and popularity curve. TLBB's popularity seems to have peaked in late 2008, so future growth is going to depend on CYOU's pipeline of coming games. TLBB in the 12/08 quarter had 1,822 paying accounts which was down slightly from the 9/08 quarter. Quarterly revenue growth from TLBB has gone from stratospheric to somewhat flat. Beginning with the 12/07 quarter, following is the quarter to quarter revenue growth of TLBB: 12/07 +102%; 3/08 +76%; 6/08 +13%; 9/08 +11%; 12/08 +6%. Looking at the slowing growth from TLBB, we can clearly see that CYOU will have difficulty growing going forward without their 4th quarter 2009 launch of Duke of Mount Deer becoming a big hit. In fact I would expect TLBB to book negative revenue growth quarter to quarter by the end of 2009 just as their next in-house game is launched.

Risk - the obvious risk here is a significant market cap on ipo of $769 million (assuming a $15 pricing) is based on one on-line game. Looking at the above slowing quarter to quarter growth trends of this one game and the risk here is that unless CYOU's next in-house game (due to hit in late 2009) is a big hit, revenues and earnings power will decline significantly as TLBB sees its popularity wane. This is a significant risk, especially as their new in-house game has yet to have a track record. For me, this large a market cap based on one game carries enough risk that I can only be, at best, neutral on this deal in range as the popularity of TLBB is already baked into the market cap in range.

Financials

After paying SOHU a $96 million dividend, CYOU will have slightly under $2 per share in cash post-ipo with no debt.

Revenue growth has been swift since the release of the Tian Long Ba Bu game. Revenues in 2006 were $8.5 million, in 2007 $42 million and in 2008 $201.8 million.

2008 - Revenues were $201.8 million, a massive increase over 2007. Tian Long Ba Bu accounted for 94% of those revenues. Gross margins were an impressive 93%. Operating expense ratio was 36%. Operating profits were 57%. In 2008 Tian Long Ba Bu was a money making machine. Normalizing CYOU's tax rate as it will appear post-ipo, net margins were 50%. Earnings per share were $1.97. On a pricing of $15, CYOU would trade 7-8 X's trailing earnings.

2009 - As noted above, quarter to quarter growth will slow dramatically from 2007 and 2008. CYOU's money making game TLBB appears as if it has peaked in popularity, or at least should see much more constrained revenue growth. As CYOU's next in-house developed game will not hit until late 2009, CYOU's revenues should be rather stagnant on a quarter to quarter basis throughout 2009. Projected revenues for 2009 should be in the $230 million ballpark, an increase of 15% over 2008. Much of this growth will be due to favorable comparables in the 3/09 quarter compared to 3/08 period. Gross margins look to continue to be 90%+. Operating expense ratios should be slightly higher as CYOU ramps up product development and sales/marketing efforts to promote new games. Lets plug in a 37% operating expense ratio. Operating margins should be 55%. It appears that for 2009-2011, CYOU will have an approximate tax rate of 12.5%. Net margins then should be approximately 42.5%. Earnings per share should be approximately $2 per share. On a pricing of $15, CYOU would trade 7 1/2 X's 2009 earnings.

Lets take a glance at CYOU's public competitors.

SNDA - $2.6 billion market cap. Currently trading 13 X's '09 estimates with an anticipated revenue growth of 25%.

NCTY - $370 million market cap. Currently trading 9 X's '09 estimates with an anticipated revenue growth of 9%.

PWRD - $789 million market cap. Currently trading 7 X's '09 estimates with an anticipated revenue growth of 22%.

GA - $1.6 billion market cap. Currently trading 12 X's '09 estimates with an anticipated revenue growth of 5%

Stacking CYOU up with these four, it does appear to be priced within the valuations of the above. A positive for CYOU is that they do have an extremely popular game. The downside is that nearly all revenues are derived from this one game and, at this point, we do not know whether CYOU will be successful in diversifying their game base and revenue stream.

Conclusion

On a trailing basis the CYOU ipo looks dirt cheap. The problem however is the ipo and market cap are based on the huge success of their game TLBB. It appears to me that TLBB has, at the very least, come close to peaking by late 2008. With their next in house game not launching until late 2009, I would project CYOU to see pretty flat revenues for '09 actually. Looking forward this is a pretty hefty market cap for reliance on one single game which saw its best year in 2008 and should decline somewhat in popularity going forward. The valuation is not out of line however and if CYOU's next in house game is another big it, there is potential for share price appreciation. Problem however is currently we have no idea how CYOU's future games will be received. We do know that the current success of TLBB is most definitely in the market cap on ipo. Neutral here in range. Swift growth in '08 and reasonable PE ratio is appealing, the lack of revenue diversification however is a pretty big sticking point for me.

disclosure - at date of posting for non-subscribers(11/26) tradingipos.com does have a position in LOPE from an average price of $10.60.


2008-11-15
LOPE - Grand Canyon Education

LOPE - Grand Canyon Education plans on offering 10.5 million shares at a range of $14-$16. Credit Suisse and Merrill Lynch are leading the deal, BMO, William Blair and Piper Jaffray are co-managing. Post-ipo LOPE will have 43.1 million shares outstanding for a market cap of $646 million on a pricing of $15. The bulk of ipo proceeds will go towards paying a special distribution to corporate directors and pre-ipo shareholders. Very little of the ipo proceeds will find their way to LOPE's balance sheet post-ipo.

Endeavour Capital Fund will own 22% of LOPE post-ipo. Four venture capital firms combined will own approximately 50% of LOPE post-ipo.

From the prospectus:

'We are a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, and healthcare. In addition to our online programs, we offer ground programs at our traditional campus in Phoenix, Arizona and onsite at the facilities of employers.'

Online university focusing on post-graduate degrees education, business, and healthcare for working professionals. LOPE has increased enrollment from 3,000 students at the end of 2003 to approximately 22,000 students on 9/30/08. 62% of students enrolled were seeking masters degrees with 92% of students 25 or older.

LOPE began as a campus based college approximately 60 years ago. In February of 2004, investors turned LOPE into a for-profit university and focused on growing the online program. Currently 87% of enrolled students were in the on-line program with just 13% traditional on-campus students.

Tuition - Tuition for a full program would equate to approximately $15,000 for an online master’s program (non-MBA), approximately $47,000 for a full four-year online bachelor’s program, and approximately $62,000 for a full four-year bachelor’s program taken on campus. The eMBA program tuition is $44,000. LOPE raised tuition an average of 5% for the 2008/2009 academic year.

Sector - Approximately 18 million people are enrolled in postsecondary institutions generating approximately $385 billion in revenues. In the past decade online post-secondary education has been a nicely growing area as many working adults prefer the flexible schedules of an online accredited degree granting institution.

Approximately 70% of LOPE's revenues are derived from tuition financed under federal student financial aid programs. These programs include a myriad of federally funded and/or backed grants and loans.

Recession/Credit issues - We've two competing drivers here. During previous economic slowdowns we've seen post-secondary enrollments from adults (25+) rise as people go back to school to retrain and/or work towards a degree to compete in a slowing competitive economy. This current slowdown however is coupled with a freeze in available credit, including private student loans. 40% of full-time postsecondary students receive student loans. With LOPE's eMBA program costing $44,000, student loans are an important component in LOPE's revenues. While a portion of the student loan market is backed by low-interest government backed loans, as tuition costs have risen the private loan market has been an increasingly relied on method of paying for post-secondary education. In 2007, private student loans accounted for over 5% of LOPE's revenue. Also as credit conditions have tightened, fewer banks are participating in the Federal student loan program itself, making obtaining even these loans potentially more difficult. We've two competing trends here - 1) economic slowdown is generally good for postsecondary education with 2) tight credit making student loans more difficult to obtain. While the education group tends to be a nice counter cyclical play, the current credit issues mitigate somewhat the usual counter-economy trend.

Investigation - The Department of Education has issued subpoenas (8/0 to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers.

Competitors - As more brick and mortar universities offer online programs, LOPE's competition includes thousands of on-line programs across the United States. There are however a few publicly traded on-line for-profit universities. These include CPLA, APOL, CECO, COCO, DV and ESI. Recent successful ipos LRN and APEI are also on-line education related, although neither is a direct comparable to LOPE. Below we look at how LOPE stacks up financially with those in this group.

Financials

$1 in cash, no appreciable debt.

Revenues have grown strongly while margins remain slim and net profits constrained. LOPE has been very aggressive in student recruiting the past two years and it has been reflected in overall enrollment and revenues. LOPE quadrupled enrollment counselor staff over the past two years.

Revenues in 2005 were $52 million, in 2006 $72 million, in 2007 $99 million and through 3 quarters on pace for $154 million in 2008.

Selling expenses have grown as a percentage of revenue, each of the past 3 years. This can indicate competition for new students has consistently grown as annually LOPE is paying more as a percentage of revenue to recruit a student, this even with the annual tuition increases. Even so, LOPE's revenue increase is impressive and a direct reflection of their success in expanding degree programs and recruiting students to fill these newer programs.

LOPE has been profitable since 2006.

Seasonality - LOPE's strongest quarters are the 3rd and 4th quarter annually. The 3rd quarter markets the beginning of their campus semester while online programs generally begin their academic year in both the 3rd and 4th quarter. 4th quarter annually has had the strongest revenues and margins.

2008 - Note that LOPE will be taking a nearly $9 million charge in the 4th quarter due to ipo related compensation charges. I have folded this out of projections as well as other post-ipo non-recurring charges and dividends. Revenues should be in the $154 million ballpark assuming LOPE has a strong 4th quarter as anticipated. Operational costs are high as instructional costs eat up approximately 32% of revenues and selling (student recruitment) eats up approximately 40% of revenues. Total operating expenses account for 89% of revenues, leaving operating margins for 2008 at a slim 11%. This is actually an improvement over 2007's 8%-9% as LOPE has kept their other non-selling costs in check. Factoring in short term debt/interest income as well as taxes, net margins should be in the 6% ballpark. Earnings per share for 2008 should be in the $0.20-$0.25 range. On a pricing of $15, LOPE would trade 66 X's 2008 earnings.

2009 - LOPE will increase revenues 55% in 2008. The big question here is this: Can LOPE continue their massive 2008 revenues growth? I suspect LOPE will not be able to approach 2008 revenue gains as this period coincided with regulatory approval that allowed LOPE to increase enrollments. Lets assume a more muted growth in the 25% range, which may be conservative. However two things should constrain rapid 2009 revenue growth- 1) the slowing economy should constrain tuition increases in 2009 from 2008's record 5% increase; 2) the ongoing credit issues may mute enrollment growth for the foreseeable future. A 25% revenue increase in 2009, would still put LOPE above the sector average. LOPE will never have strong operating margins due to operating expenses. They should be able to increase net margins slightly around the edges however. If we assume a $190-$200 million revenues run rate with slight margin expansion, LOPE should earn approximately $0.35 in 2009. This is a ballpark number and I would not be surprised be a number 10 cents to either side. The problem here is the very high sales expense that is preventing strong bottom line growth. That isn't going to change, so LOPE will most likely filter down revenue growth on a 1:1 level going forward, don't expect an economy of scale here on revenue growth. On a pricing of $15, LOPE would trade 42 X's 2009 earnings.

The online education sector has been a safe port in the 2008 market storm. comparable companies are performing relatively well with DV upon the year, APOL flat, CPLA down 23%, LRN down 10%, APEI flat, and COCO flat. Only CECO has underperformed the overall market. Even with the potential credit issues hampering growth, this sector has indeed been a counter-cyclical play in 2008 with online education stocks outperforming the market as a whole. **Just as important, forward earnings estimates for this group have remained stable throughout 2008, one of the few groups to do so.

Comparisons:

LOPE - $646 million market cap on a $15 pricing. Growing revenues a very strong 55% in 2008 and coming public 66 X's 2008 earnings.

CPLA - $842 million market cap. Growing revenues 22% in 2008 and trading at 31 X's 2008 earnings.

APOL (which includes the largest US online university, University of Phoenix) - $10.8 billion market cap with 16% revenues growth in 2008 and trading 19 X's 2008 earnings.

APEI (not directly comparable due to focus on military veterans) - $690 million market cap with 53% revenues growth in 2008 and trading 48 X's 2008 earnings.

Conclusion - LOPE is a good candidate to break the ipo drought. Post-secondary education has traditionally been counter-cyclical, enjoying enrollment growth during difficult economic times. We certainly have difficult economic times. Looking at stock performance in 2008 for the on-line education group, they've most certainly heavily outperformed the market as a whole. In addition LOPE's revenue growth is impressive and, while growth should slow going forward, LOPE looks to outgrow the sector as a whole in 2009. Caution here for the following however: 1) IPOs in 2009 have performed abysmally and in this climate you do not want to pay up for anything; 2) Margins are slim here. They are on par with CPLA, but behind the rest of the group. With strong growth and lower margins, it appears LOPE is 'buying' some of their revenue growth. 3) PE ratio for this current climate appears high. With the revenue growth, a high pe is not a major concern. What is a concern is the market not willing to pay high multiples currently.

Slight recommend here in range. I like the sector here and I like LOPE's growth and prospects. There is enough for caution here and the lower LOPE prices, the more I am interested. Ideally I would like to see a pricing below range or at the low end of the pricing range. Two online education ipos in the past year have each not only held pricing, but are up nearly 100% (APEI) and 15% (LRN). In this ipo market, that is unusual and makes LOPE a good candidate to break the ipo drought and also hold a reasonable pricing.

Following piece was available to subscribers on 6/28/08 at http://www.tradingipos.com


2008-06-28
ERII - Energy Recovery Devices

ERII - Energy Recovery Devices plans on offering 14 million shares at a range of $7-$9. Insiders are selling 6 million shares in the deal. Citi and Credit Suisse are lead managing the deal, HSBC, Janney Montgomery and SEB Enskilda are co-managing. Post-ipo ERII will have 49.9 million shares outstanding for a market cap of $399 million on a pricing of $8. IPO proceeds will be used for working capital and general corporate purposes.

Arvarius will own 20% of ERII post-ipo. Arvarius (a Norwegian company) is selling 2 million shares on ipo.

From the prospectus:

'We are a leading global developer and manufacturer of highly efficient energy recovery devices utilized in the rapidly growing water desalination industry.'

Water desalination definition: 'The removal of salt, esp. from sea water to make it drinkable.'

ERII operates in the sea water reverse osmosis (SWRO) segment. With SWRO, high pressure is used to drive sea water through filtering membranes to produce fresh water. Historically this has been a very expensive endeavor, however technology is improving to make desalination more cost competitive. Companies such as ERII are driving the technology that recovers the energy used in the desalination process. After initial capital expenditures, energy consumption is the primary cost factor in the the SWRO process. ERII's main products do not actually filter the water. ERII's primary product, the PX Pressure Exchanger helps optimize the energy intensive SWRO process by recapturing and recycling up to 98% of the energy in the high pressure reject stream. ERII's PX devices reduce overall energy consumption in the SWRO process by 60%. ERII's products make SWRO more efficient, which in turn helps make the process more cost effective. The more cost effective desalination becomes, the greater the growth possibilities.

**Think of ERII as a company that makes a product that allows the formerly cost prohibitive water desalination process become much more cost effective. This ipo fits into exactly what has been working in the stock market lately. Energy efficiency focused on a sector whose growth going forward should be strong due to continued worldwide population growth.** Energy efficiency and built in sector demand growth, a very nice combination here. If the financials are at least decent, ERII is a definite recommend in range.

As of 3/31/08, ERII had shipped over 4,000 PX devices to desalination plants worldwide. ERII estimates they have reduced energy consumption at desalination plants by 300 megawatts annually relative to comparable plants with no energy recovery devices. In dollar terms ERII believes this represents an annual electricity cost savings of approximately $210 million. ERII's devices are in use in plants located in China, Algeria, Australia and India.

Industry

The world's population continues to grow, with much of that growth being in locations lacking in abundant fresh water sources. The United Nations expects the global consumption of water to double every 20 years. That is a pretty remarkable statistic and it means there is most likely not enough current freshwater sources in many locations worldwide to handle this expected demand growth.

There are an estimated 13,080 desalination plants worldwide. Desalination capacity is approximately 39.9 million cubic meters per day as of 12/05. Installed capacity is estimated to grow 13% annually over the next decade.

The SWRO market has been focused in geographic areas with a lack of freshwater sources, but extensive salt water nearby. The Middle East has been, by far, the market leader in desalination. Saudi Arabia's desalination plants account for about 24% of total world capacity. The world's largest desalination plant is in the United Arab Emirates. World-wide, 13,080 desalination plants produce more than 12 billion gallons of water a day. Saudi Arabia recently announced more than $12 billion worth of planned water and power projects that will supply an additional 2.24 million cubic metres of water per day and 2,750 mega-watts of power in the next few years.

US market - ERII's PX device is currently in use in the pilot program for a proposed desalination plant in Carlsbad, CA. If approved, this desalination plant would be the largest in the US.

By 2015, the five largest countries in water desalination based on planned capacity will be Saudi Arabia, United Arab Emirates, The United States, China, and Spain. ERII believes they've a foothold into the growth in China.

ERII strengths - ****Unique and efficient*** - From the prospectus: 'we manufacture the only commercially available rotary isobaric energy recovery device, which we believe is more effective at recovering and recycling energy than any other commercially available energy recovery device. The PX device incorporates highly-engineered corrosion resistant ceramic parts that require minimal maintenance, and a modular design that allows for system redundancy resulting in minimal plant shutdowns. Our rotary device has only one moving part and a continuous flow design, which complements the continuous flow of the SWRO process. We believe these unique benefits lead to lower life cycle costs than competing products.'

Geida accounted for approximately 25% of revenues the 15 months ending 3/31/08. Geida is a Spanish construction consortium involved in water desalination plants primarily in Algeria and Spain.

ERII has 5 current US patents and 9 international patents. In addition, ERII has applied for 2 new US patents and 14 new International patents.

Risks:

1 - ERII currently does not receive residual revenues from their energy recovery devices. Eventually ERII will receive revenues from replacement devices, however as their installed base is fairly new that is still a ways off. To grow revenues, ERII needs water desalination capacity to continue to grow at a solid clip. Any factors slowing capacity growth would also slow ERII's revenue stream.

2 - Lumpy revenues. ERII has a greater risk than most young companies in missing revenues/earnings in any given quarter due to the structure/timing of their revenues. ERII's revenues are seasonal. Due to the cyclical nature annually of SWRO plant construction, ERII tends to see a seasonal increases in shipments of their PX devices in the fourth quarter annually. Also in any given quarter ERII depends on just 1-3 projects for the bulk of their revenues for said quarter. Backloaded annually depending on a few projects is a recipe for choppy revenues quarter to quarter even if the underlying business remains strong.

Competition - ERII's main competition is a private Swiss company, Calder AG. ERII believes their energy recovery devices have greater efficiency at 98% recovery than Calder's.

Financials

$1.20 per share in cash post-ipo.

ERII does not plan on paying a dividend.

Seasonality - As noted above ERII tends to generate greater revenues in the fourth quarter, expect annual revenues and earnings to be somewhat backloaded.

Revenues have steadily grown annually. In 2005 ERII booked $10.7 million in revenues, in 2006 revenues were $20 million and in 2007 revenues were $35.4 million.

Gross margins annually have been solid at 56% in 2005, 60% in 2006 and 58% in 2007.

ERII has been profitable annually since 2005.

Note that nearly all historical revenues are international and not derived from the US. ERII expects that trend to continue into the near future.

2007 - Revenues were $35.4 million, a strong 77% gain over 2006. Gross margins were 58%. Operating expense ratio was 31% (down from 41% in 2006), quite solid for a young fast growing company. Strong revenues growth coupled with solid gross margins declining operating expense ratios are exactly the trends you want to see. Operating margins were 27%. Net margins after taxes were 17%. Earnings per share were $0.12.

ERII is the type of ipo in which the trends and space are more important than the trailing PE. With an uncertain US economy, ERII is situated in a space that looks to grow worldwide over the next decade. Factoring in the strong revenue growth, solid gross margins and operating margin growth trends make the trailing PE of 67 X's earnings more palatable.

2008 - Again we note ERII's 2008 should be backloaded. Based on the first quarter and our usual somewhat conservative approach, ERII should grow revenues approximately 30% in 2008 to $47 million. ERII looks to continue to grow revenues without losing gross margins. Gross margins for 2008 should be in the 2006-2007 ballpark of 58%-60%. GSA expense increased significantly in the first quarter, for the most part due to increased personnel and legal/accounting expenses in preparation of the ipo. As such I am not plugging in any improvement in the operating expense ratio for full year 2008 and in fact would anticipate a slight slide to 26%. Due to increased cash on hand and added interest gains the second half of 2008, net margins should remain similar to 2007 at 17%. The flat net margins with strong revenue gains here look to be more a matter of added costs in being a public company. If ERII performs strongly the second half of 2008, there is the distinct possibility that my operating and net margin projections could be a little low. I'd rather err on the side of caution however. Earnings per share for 2008 should be $0.17. On a pricing of $8, ERII would be trading 47 X's 2008 earnings.

Conclusion - ERII is positioned well here. Water may very well be a huge story over the next decade or two. The world's population continues to grow and often in areas of the globe lacking sufficient freshwater sources to meet this growth. Desalination is a story we will be hearing much more from in the coming years. ERII has a unique product in a sector which should continue solid worldwide growth over the next decade. In this sector ERII creates greater energy efficiency by allowing energy use to be recovered through the desalination process. This uniqueness has allowed them to outgrow the sector annually while maintaining strong gross margins. Yes on a strict pe and price to sales basis, ERII looks a bit pricey on ipo. Keep in mind two things however: 1) ERII is one major project away from rapidly increasing revenues, and 2) ERII should regain operating margin growth momentum in 2009. As with any small and young company many things can occur to derail the story. However the potential positives going forward here outweigh the risks involved. This is a sector which should continue to see increased investor attention going forward and ERII in their short history has grown revenue rapidly with solid gross margins and impressive operating expense control. Definite recommend in range, even with the 'apparent' pricey initial valuation. ERII has the potential to be a 'story stock' down the line if all breaks right for the company and has all the makings of a strong ipo

following ipo piece was available to tradingipos.com subscribers prior to FSC pricing their ipo at $14. FSC is currently trading at approximately $10 1/4. Sometimes it is as important to save money by passing on ipos as it is on catching a 'hot' one. FSC has been a disaster and was one to avoid.

also we've a complete write-up for subscribers on this week's ipo ERII.

http://www.tradingipos.com


2008-06-11
FSC - Fifth Street Capital

FSC - Fifth Street Capital plans on offering 10 million shares at a range of $14.12 - $15.12. Goldman Sachs and UBS are lead managing the deal, Wachovia, BMO and Stifel are co-managing. Post-ipo FSC will have 22.5 million shares outstanding for a market cap of $329 million on a pricing of $14.62. FSC will use the bulk of ipo proceeds to invest in small and medium size pre-ipo stage companies.

Toll Brothers(TOL) founder and former President Bruce E. Toll will own 9% of FSC post-ipo. Mr. Toll is the father in law of FSC CEO and President Leonard M. Tannenbaum. In addition Genworth Life and Greenlight Capital will each own 5% of FSC post-ipo.

From the prospectus:

'We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million.'

FSC commenced operations in 2/07. FSC is a private investment operation that makes 'piggyback' investments in pre-ipo stage companies. We've seen a number of private equity 'quick flip' ipos this decade. Nearly all of them come saddled with hefty debt. Debt that was placed onto the back of the underlying entity to fund the purchase by the private equity operation. FSC helps fund these acquisitions by lending money to the underlying entity. That money usually ends up in the hands of the private equity firm to help fund the takeover.

FSC is managed by Fifth Street Management headed by 36 year old Leonard Tannenbaum. Mr. Tannenbaum has led the investment of approximately $450 million since 1998.

As of 3/08, FSC's portfolio totaled $192 million and comprised investment in 19 companies. The bulk of FSC's investment is debt based, usually straight first or second tier loans coupled with a samll($200k or so) equity investment. Average investment size is $5-$40 million. Their average annual yield on their debt investments is a substantial at 16.7%. The high yield on investments would appear to indicate that FSC's investments are placed with many companies unable to leverage themselves via normal credit routes. This fits with FSC's profile of doing deals in conjunction with private equity sponsored investments.

Note that if FSC prices in range it will increase FSC's assets under management by approximately 70%.

FSC's management fee structure mirrors that of a hedge fund. For the type of investments FSC makes and the return since inception the fee structure looks excessive. FSC is essentially a lender working with private equity operations. Yet they want public shareholders to pay them as if they're running a top tier high return and in demand hedge fund. FSC's management fee structure post-ipo will be 2% of gross assets annually as well as 20% of net investment income/capital gains. In other words, 2% of assets under management and 20% of any/all returns.

**FSC is essentially a 'high risk' lender, yet they want public investors to pay management fees akin to successful hedge and investment funds. In the prospectus FSC estimates that if they are able to generate a 5% annual return their first five years public investor fees/expenses would total $300 on a $1000 investment.

Portfolio companies - FSC's current portfolio companies can be found here: http://www.fifthstreetfinance.com/portfolio.html

Risk - All of FSC's originations have been first or second lien on the investment company's assets. However the bulk of FSC's investment portfolio are small to mid-size consumer discretionary operations, with the remainder all relying on US economic health in one form or another. That in and of itself is not really a negative even with the difficult current economic climate as long as solid due diligence is in place. the issue here is that FSC's investments/loans are in conjunction with private equity leveraged investments, meaning the underlying companies in which FSC invests are taking on significant debt in order to fund the private equity investment. High leverage always increases the odds of default down the line and FSC's business plan pretty much guarantees they will be making these type of investments going forward.

Note that FSC does plan on leveraging their investments. Prior ipo FSC had approximately $35 million in debt at an average interest rate of 4.15%. FSC does plan on borrowing at lower rates to lend at higher rates going forward. Again FSC mirrors a high risk lender more than a private investment fund.

Financials

FSC will have approximately $150 million in cash post ipo. This cash will be utilized to lend to and invest in small businesses in accordance with business plan.

Assuming a pricing of $14.62, book value post-ipo will be $13.80.

FSC does plan on distributing essentially all net income quarterly to shareholders.

Fiscal year ends 9/30 annually. FY '08 will end 9/30/08.

FSC marks their investment to market quarterly. For the six months ending 3/31/08, FSC's unrealized depreciation on their investments lost $2 million.

For the six months ending 3/31/08, FSC had interest and fee income of $12.3 million. Management and incentive fees totaled 22% of revenues. Other operating expenses totaled 13%. Factoring in depreciation on investment loss, net income per share was $0.25.

Going forward we can expect FSC to put the ipo monies to work which should increase FSC's interest income going forward. I would estimate, assuming no massive investment depreciation, net income for FY '08 will total approximately $0.60 per share.

Assuming again no defaults and no massive investment writedowns, I wold expect distributions shareholders to total $0.60-$0.75 FSC's first four quarters public. On a pricing of $14.62, FSC would yield approximately 4%-4 1/2% first year public. Conclusion - I don't see a compelling reason to own this ipo in range. This is essentially a high risk lender cloaked as a closed end investment fund coming public above book value. I'm not a huge fan of the hefty incentive fee structure here as well as the risky nature of FSC's investments assisting the funding of private equity buyouts. In a sluggish US economic climate lending at an average of 16.7% yield to companies loading up on leverage to fund private equity investments does not interest me.

Our pre-ipo piece on CFX available to subscribers 5/1/08. CFX priced at $18 per share on 5/8.

analysis pieces on all ipos available at http://www.tradingipos.com

three year anniversary and still going stong.

2008-05-01
CFX - Colfax

CFX - Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3's will go to insiders in the form of bonuses, dividends and reimbursements.

Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.

From the prospectus:

'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'

CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.

The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly the historical high oil and gas prices have spurred exploration which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.

Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.

CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. **67% of 2007 revenues were derived outside the US** with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.

CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007 25% of revenues were derived from aftermarket sales and service.

Pumps (including pump aftermarket sales/service) account for 85% of revenues.

The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.

A quick look at CFX end markets:

Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling;

Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;

Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;

General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing;

Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'

CFX sees growth coming from the following core markets:

1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;

2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;

3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;

4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;

5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment;

Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement. Currently on the balance sheet CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.

**Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus it is clear CFX feels the same as they essentially come out and write in an SEC filing they fully expect strong growth to continue in 2008.

Financials

$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive acquiring over the past four years, the balance sheet here is in decent shape.

Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.

Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.

2007 - Revenues were $506 million a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. *note* Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.

2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections however based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.

Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.

Following piece was available to subscribers 4/11/08, well ahead of the 4/22/08 pricing date.

http://www.tradingipos.com

2008-04-11
AWK - American Water Works

AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.

Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.

Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.

RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.

This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.

Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.

Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.

All things being equal the above is enough for me to pass on this ipo right here. Let's take a look at AWK the company to see if something might make me change my mind.

From the prospectus:

'Founded in 1886, American Water Works Company, Inc., which we refer to, together with its subsidiaries, as American Water or the Company, is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served.'

AWK provides approximately 15.6 million people with drinking water, wastewater and other water-related services in 32 US states and Ontario, Canada. AWK treats and delivers over 1 billion gallons of water daily. AWK's primary water business is regulated as a utility by the Public Utility Commission (PUC). AWK's regulated business accounts for nearly 90% of overall revenues.

Residential water services account for 61% of revenues. Revenues from Pennsylvania and New Jersey account for approximately 45% of overall revenues.

Sector - In the US water and wastewater utility sector, government owned and operated entities make up the bulk of operators. Government owned systems account for approximately 84% of all United States community water systems and approximately 98% of all United States community wastewater systems. Commercially operated systems such as those run by AWK are in the minority. Overall there are an estimated 53,000 community water systems and approximately 16,000 community wastewater facilities in the United States. A strategy going forward for AWK will be to selectively acquire community based and run water and wastewater systems. For example in 12/07 AWK signed an agreement to purchase the water system assets of Trenton, NJ.

For our purposes, AWK is a water utility regulated in a very similar fashion as other utilities. Their utility business does provide a predictable and stable cash flow, however the prices AWK can charge for their services are highly regulated and controlled by the PUC.

Capital Expenditures - AWK spends a hefty amount on capital expenditures annually as they're required to continue to keep their infrastructure operating on a baseline level. As WK puts it in the prospectus: 'The water and wastewater utility business is capital intensive.' In 2007 AWK spent $759 million on capital expenditures.

Impairment charges - Since being acquired by RWE in 2003, AWK annually has listed hefty impairment charge losses on their earnings statements. This is directly related to the amount of goodwill on AWK's books due to the acquisition. As of 12/31/07 AWK was carrying approximately $2.5 billion of goodwill on the books. Annually AWK re-evaluates their goodwill and any lowered amount gets written down as an impairment charge on the earnings statements. AWK has had impairment charges of $396.3 million in 2005, $227.8 million in 2006 and $509.3 million in 2007. The large impairment charge in 2007 is due to lowered customer demand expectations going forward; their debt being placed on watch for a potential downgrade; the upcoming ipo and RWE's ownership divesture; and the continued high debt levels expected post-ipo. While these impairments are not cash flow losses, they do heavily impact the GAAP bottom line. I would expect continued hefty impairment loss expenses annually going forward.

Competitors include Aqua America (WTR), American States Water (AWR) and California Water Services Group (CWT).

Financials

Debt is the issue here. Utilities tend to be heavily leveraged and AWK is no exception. Debt post ipo will be approximately $5 billion in debt. A huge drag on this deal is that AWK will not be receiving any of the ipo monies. AWK could really use ipo cash to pay off debt and better position themselves for future acquisitions. However this ipo is nothing more than an exit strategy for parent company RWE. RWE will pocket all the ipo cash.

Dividend - AWK does plan on paying a quarterly dividend of $0.20. At an annualized $0.80, AWK would be yielding 3.2% on a $25 pricing.

Revenues have been rather flat the past three years. Utilities are generally not a growth industry, and again, AWK is no exception. Revenues in 2005 were $2.1 billion, in 2006 $2.1 billion and in 2007 $2.2 billion.

Due to the impairment charges noted above AWK booked a significant GAAP loss in 2007.

2007 - Revenues were $2.2 billion. Debt servicing expenses totaled nearly 13% of revenues. For a slim margin utility business, this amount of debt servicing expense will kill margins with or without impairment charges. Operating margins (pre debt servicing and impairment charges) were 24%. When plugging in debt servicing and the $509 million impairment charge, losses after tax were $2.13. To get a clearer picture of operations, we'll fold out that $509 million impairment charge. Folding that out AWK earned a fully taxed $1.00 per share. This latter number of $1 per share in earnings gives us a better picture of AWK's operation and valuation.

2008 - AWK will most likely take another impairment charge in 2008, so we'll see a much lower GAAP number than 'actual' earnings. Until AWK does their own internal assessment in the second half of 2008 we have no way of determining what that impairment charge may be, making GAAP earnings forecasts here next to impossible. We can however forecast AWK's business fairly easily as 2008 should look quite similar operationally as 2007. I would expect revenues to once again be in the $2.1 - $2.3 billion range with earnings per share in that $1.00 - $1.10 ballpark.

On a pricing of $25, AWK will be trading approximately 24- 25 X's 2007 and 2008 earnings and will be yielding 3.2%.

A quick look at '08 estimates and yield for AWK's three public competitors.

WTR - 23 X's '08 earnings, yielding 2.6% with $1.3 billion in debt and $2.6 billion market cap.

AWR - 21 X's '08 estimates, yielding 2.7% with $305 million in debt and a $650 million market cap.

CWT - 23 X's '08 estimates yielding 2.9% with $300 million in debt and a $834 million market cap.

Conclusion - For the amount of leverage and the spin-off nature of this ipo creating substantial share overhang, AWK is a pass for me. Valuation seems a bit aggressive for a water utility with substantial leverage. However we should note that on a PE/yield basis AWK is not coming public out of line with the sector at all. Note though that AWK's balance sheet is a bit more leveraged than the competition. Also we'll be seeing 90-100 million shares coming for sale later in 2008 as RWE completes their divesture. AWK's leverage and high annual capital expenses here will mute future acquisition related growth. Other than acquisitions, AWK will be hard pressed to substantially increase the bottom line. I just don't see much growth here over the next few years, quite similar to the past 3-4 years actually. 25 X's earnings for 2008 looks to be a bit steep. Not interested in range.

A 'massive' amount of ipos on the schedule for the week of 4/21, four! We've analysis pieces in subscriber section currently for American Water Works, Whiting Trust and Intrepid Potash and will have Digital Domain published for subscribers by Thursday evening.

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A few new filings as well so we should see the ipo pace pick up a bit for May. Tradingipos.com is still here analyzing ipos, the market and actively trading and posting in our site forum....and we'll be here through every tough market too.

Yes we're still here. The ipo market has been quite quiet in 2008 with the market turmoil, economic slowdown and credit crisis. For first time since tradingipos.com went live three years back we've had very few ipos to analyze over the past few months. Here is our piece on Visa that was published for subscribers on 3/1. Off pricing this is a good deal and one of few in '08 to grab all allocations possible. Aftermarket this morning I felt it opened a bit too 'hot' at $60+ in this climate and would look at a print near $50 to enter for those not allocated.

Tradingipos.com pre-ipo piece:

2008-03-01
V - Visa

V - Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.

If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '0; and the remaining $1.7 billion for general corporate purposes.

*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08 assuming they fulfill their share redemption plans.

Post-ipo, JP Morgan Chase will own 8% of V and Bank of America will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.

Until 10/07 Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa (V). Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.

From the prospectus:

'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'

Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.

The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.

Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.

Visa has three core aspects to their business: transaction processing services, product platforms and payments network management.

Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.

Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.

Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms....in other words to promote the Visa brand name.

In 2006 Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.

In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.

Thus far in FY '08 Credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial(and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.

Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.

Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.

Legal

Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.

Also American Express and Discover filed suit against both Mastercard and Visa claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.

Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.

Financials

$5 per share in cash.

V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.

Historically V's fiscal year has ended 6/30 annually. With the reorganization it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.

Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.

As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus V does breakdown FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.

V had a fantastic FY '07(ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.

FY '07(ending 9/30/07) - V has a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.

FY '08(ending 9/30/0

V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.

The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.

Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.

Operating margins look to increase driven by the increased non-US fees. Also Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50 V would trade 25 X's FY '08 earnings.

A quick comparison with V and MA

MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.

The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments, make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.

Blue chip ipo, strong recommend in range.

RiskMetrics ipo'd this morning. following is our full pre-ipo analysis piece. This was available to http://www.tradingipos.com subscribers on January 15th.

Disclosure: Tradingipos.com does have a position in RMG.

2008-01-15
RMG - RiskMetrics

RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.

General Atlantic Partners will own 22% of RMG post-ipo.

From the prospectus:

'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'

RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.

RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.

RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.

RMG's risk management products allow customers to:

1) measure their trading, credit and counterparty risk;

2) monitor and comply with internal or external exposure and risk limits;

3) deploy and optimize their use of capital;

4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;

ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.

Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.

Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.

63% of revenues is US, 37% international.

Financials

In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.

RMG does not plan on paying dividends.

Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.

As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.

2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.

2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.

Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.

The 2008 ipo calendar kicks off this week with three new deals. As we've been doing annually, tradingipos.com will have full analysis pieces on every deal available to subscribers pre-ipo again in 2008. Wish everyone a profitable '08.

this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.

http://www.tradingipos.com



2007-11-08
VRAD - Virtual Radiologic

VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.

President and CEO Sean Casey will own 25% of VRAD post ipo.

From the prospectus:

'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'

The leader in this space is 2006 ipo NHWK, Nighthawk.

VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.

Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.

VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.

Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.

Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.

Financials

$2 per share in cash post-ipo, no debt.

Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.

Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.

2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.

2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.

A quick look at NHWK and VRAD

NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.

VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.

VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.

Analysis on every deal every year at: http://www.tradingipos.com


2007-12-07
XIN - Xinyuan Real Estate

XIN - Xinyuan Real Estate plans on offering 20.1 ADS (assuming overallotments) at a range of $13-$15. Merrill Lynch is leading the deal, JP Morgan and Allen & Company co-managing. Post-ipo, XIN will have 74.5 ADS equivalent shares outstanding for a market cap of $1.043 billion on a pricing of $14. Nearly all ipo proceeds will be used to acquire land use rights for future property development projects.

Chairman and CEO Yong Zhang and Director Yuyan Zang will jointly own a combined 42% stake in XIN post-ipo.

From the prospectus:

'We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates.'

We've had one successful Chinese real estate ipo in 2007, EJ. Where EJ is a real estate services company, XIN is a real estate developer. Simplified, XIN builds housing developments, EJ markets and sells housing developments.

Unlike many China ipos, XIN has actually been around for awhile commencing operations in 1997. From '97-'05, XIN focused operations in Zhengzhou, the provincial capital of Henan Province. Since they've focused on expanding to other cities. In addition to Zhengzhou, XIN currently has operations in four other 'Tier II' China cities Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, and Suzhou in Jiangsu Province.

Approximately 40% of 2007 revenues have been derived in Zhengzhou.

XIN focuses on large scale residential projects typically multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Target buyers of their development come from the growing Chinese middle class. From the prospectus, 'We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles.'

Land is generally acquired through public auctions. XIN focuses on unencumbered land auctions which allow them to commence construction quite soon after land acquisition. As of 9/30/07, XIN had seven active residential housing construction projects with a total gross floor area (GFA) of 770,781 square meters. In addition as of 9/30/07, XIN had in the planning stages an additional seven projects with a total GFA of 1,282,498 meters. This total does not include 12/4/07 governmental auction win for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters.

To date XIN has completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. Impressive sell rate, it would appear XIN is able to sell their projects out quite soon after completion.

The draw here is similar to many other Chinese ipos of the past few years targeting the growing middle classes. As XIN states, 'Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China.'

XIN plans to continue to expand operations to additional 'Tier II' Chinese cities they feel have an underdeveloped residential real estate market for the middle classes.

PRC - Recently the PRC has put in place initiatives to slow the booming Chinese real estate market. While most of these are directed at high end residential real estate, the PRC has also removed middle class residential construction from the 'encouraged' category. The latter will continue to be a 'permitted' type of investment. In addition for residences over 90 square meters total GFA, the down payment must equal 30% of the purchase price. XIN's residences tend to be smaller however, it should be noted that the PRC appears intent on cooling the hot China real estate market at least somewhat. XIN states in the prospectus: 'We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies'.

Financials

XIN funds a portion of their land purchases through debt. Post-ipo XIN will have approximately $233 million in debt. Compared to US homebuilders, the leverage here is fairly low. Going forward though keep an eye on XIN's debt situation. If their business slows, the debt levels will tend to rise.

XIN does not anticipate paying dividends.

On a pricing of $14, XIN will trade 3 X's book value.

Historically the cost of revenues for XIN has broken down to 1/3 land use rights and 2/3 construction costs.

Unlike many Chinese ipos we've seen, XIN is heavily taxed all along their various phases from land acquisitions through construction to sales. XIN annually pays a Corporate Income Tax, a Land Appreciation Tax, a Deferred Tax expense and an Uncertainty Tax expense. Reads a bit like a cable bill. Note that the 'Uncertainty Tax' expense is an accounting maneuver to attempt to better capture deferred taxes owed.

Revenues have grown briskly. Revenues in 2005 were $62 million, in 2006 $142 million and through 9 months on pace in 2007 for $310 million. XIN had a monster 9/30/07 quarter.

XIN has been profitable since at least 2004.

*Note* - Due to the nature of the business quarterly results have historically been quite choppy. This will definitely continue in the future making projections here quite difficult.

2007 - XIN is on pace for $310 million in revenues, a 118% increase over 2006. XIN has $120 million in revenues alone in the 9/30/07 quarter. Note that XIN completed construction on two major projects in the 9/07 quarter. I've factored in a sequential slowdown in Q4 and they still look to double 2006 revenues. Gross margins should be 31%, operating margins 25%. Plugging in debt servicing and taxes, net margins should be 15%. Earnings per share should be $0.65. On a pricing of $14, XIN would trade a fully (and heavily for a China IPO) 22 X's 2007 earnings.

2008 - Due to the choppiness factor, forecasting 2008 is somewhat challenging. However XIN has a significant amount of active construction projects of which they'll be deriving 2008 revenues. They've also substantial land already purchased and planned for construction. Assuming China's real estate market and economy continue to grow nicely, XIN is poised for a strong 2008. I would anticipate XIN's 2008 will more resemble the 9/30/07 quarter of $120 million in revenues than the 3/31/07 quarter of $23 million in revenues. Note that XIN's gross margins have not been nearly as strong in their newer geographic areas so I would not look for a gross margin increase in 2008. I would not be surprised to see XIN book $450 million in 2008 revenues. Note that this is conservative as it breaks down to $110-$115 million in quarterly revenues, below their $120 million in the 9/30/07 quarter. While XIN does pre sell a large percentage of their properties, they are not anticipating completion on any projects until the second half of 2008. Assuming $450 million in revenues, XIN could earn in the $1 per share ballpark. *Note* - this is nothing more than an educated guess because 1) XIN had an 'outside the box' strong quarter just prior to ipo and 2) they operate in a segment that is traditionally quite choppy quarter to quarter.

Conclusion - XIN is trending strongly right into their ipo. They booked a fantastic quarter just prior to this offering fueled by the completion of two major residential projects. China residential real estate has not seen the difficulties of the US real estate market, so it is entirely reasonable to expect XIN to have a solid 2008. Home construction is notoriously cyclical in the western world, there is definite reason to assume it will be at some point in China also. On ipo though, XIN is not all that leveraged and the balance sheet looks quite lean for the sector. XIN is one of the stronger ipos from China in 2007. Recommend in range and a bit above, good looking China real estate ipo.

Pre-ipo analysis on 200+ ipos a year before they price at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in ENSG at an average price of 15 3/4's.


2007-11-04
ENSG - Ensign Group

ENSG - Ensign Group plans on offering 4 million shares at a range of $18-$20. DA Davidson and Stifel are co-lead managing the deal. Post-ipo ENSG will have 20.5 million shares outstanding for a market cap of $390 million on a pricing of $19. Ipo proceeds will be used to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes.

CEO and President Christopher R. Christensen will own 20% of ENSG post-ipo.

From the prospectus:

'We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho.'

ENSG owns or leases 61 facilities. All are skilled nursing facilities while four also are assisted living facilities. ENSG owns 23 facilities and leases 38 others. They've options to purchase on 16 of those 38. Current bed count is 7,400. ENSG has aggressively grown via acquisitions adding 15 new facilities since 1/1/06. 31 of 61 facilities are in California, 13 in Arizona and 10 in Texas. Total occupancy rates for 2007 has been 78%.

Sector - The senior living and long-term care industries consist of three primary living arrangement alternatives, independent living facilities, assisted living facilities and skilled nursing facilities. ENSG operates primarily skilled nursing facilities, those that require the most resident care. Skilled nursing facilities provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. ENSG estimates the skilled nursing facility market in the US is a $100 billion segment annually. ENSG believes the skilled nursing facility segment stands to grow going forward due to increasing life expectancies and the aging population.

Medicare is a federal health age based program, Medicaid is a federal health needs based program. ENSG relies extensively on Medicaid/Medicare reimbursements.

Approximately 44% of all revenues are derived from Medicaid, 33% from Medicare. Simplified Medicare will generally cover skilled nursing facility stays up to 100 days annually. After day 100, patients’ payment is received from either the patient, private health insurance or Medicaid. With 44% of all revenues derived from Medicaid, it is fairly safe to state a large portion of ENSG's residents are shifted from Medicare to Medicaid at some point for the bulk of their annual stay. The Center for Medicare & Medicaid Services (CMS) sets the Medicare rates. Skilled nursing centers have fared relatively favorably with the CMS this decade, however payments rates have been frozen for FY '08 due to budgetary attempts to cut overall Medicare/Medicaid costs. Medicaid is a bit different animal. Medicaid funding across the board has seen freezes and/or decreases due to federal and state budget issues. Medicaid is primarily funded by the Federal government, but disbursed by the states. Keep in mind that ENSG will annually be at the whim of federal Medicare rates set for skilled nursing centers and Medicaid disbursement rates set by the states. With runaway health care costs, trends for annual increases in Medicare/Medicaid reimbursement rates are not favorable going forward.

Financials

*ENSG will have approximately $1 per share in cash (minus debt) post-ipo. This is a good sign. Usually roll-up type operations such as nursing facilities come public pretty significantly leveraged. ENSG's solid balance sheet on ipo will allow them to aggressively grow over the next 2-3 years. Expect ENSG to grow revenues much faster than the industry growth rate the next 1-2 years due to acquisitions. When looking at this type of ipo, balance sheet health is as important (if not more) than any other factor. Nursing facilities are both a slim margin and consolidating sector. A solid balance sheet post-ipo allows a company such as ENSG to not only flow more operating margin to the bottom line, but grow top/bottom line strongly first few years public. I like the balance sheet here post-ipo quite a bit.

ENSG does plan on paying a dividend. Based on the past 12 months, it appears the dividend will be approximately $0.04 quarterly. At $0.16 annually, ENSG would yield 0.8% annually on a $19 pricing.

3 X's book value on a pricing of $19.

Growth going forward will be driven by acquisitions as the current Medicaid/Medicare reimbursement environment is not favorable for significant rate increases. ENSG's operating margins are not going to increase in this reimbursement environment, in fact they've dipped slightly in 2007. This is an industry wide trend, not specific to ENSG. This environment makes it even more important for a strong balance sheet and lack of debt.

Revenues in 2005 were $301 million, 2006 $359 million and through the first three quarters of 2007 on pace for $409 million.

ENSG has had a net profit annually since at least 2002.

2007 - Revenues on pace for $409 million, a 14% increase over 2006. Gross margins 19%. Operating margins of approximately 8 1/2%. Net margins 5%. Earnings per share should be in the $0.90 - $0.95 range. On a pricing of $19, ENSG would trade 21 X's 2007 earnings.

2008 - I fully expect ENSG to utilize their solid balance sheet to acquire revenue growth. Based on third quarter revenues, a full year operating current facilities should increase revenues by 10%. I think acquisitions could add another 5%, for a 15% top-line revenue growth. Gross margins will remain 19%, operating margins may increase slightly filtering down to a small net margin increase. With this sector it is extremely difficult to grow margins so you're just never going to see operating margins expand too much here no matter the revenue growth. With a 15% top-line growth rate, ENSG should earn $1.20 per share. On a pricing of $19, ENSG would trade 16 X's 2008 earnings.

Recent IPO SKH operates in the same sector as ENSG. The big difference between the two is SKH is heavily leveraged while ENSG post-ipo will have more cash on hand than debt.

SKH - $588 million market cap, operates approximately 80 skilled nursing facilities. Currently trading less than 1 X's 2008 revenues and 17 X's 2008 earnings. SKH has approximately 450 million in net debt on the books, much of it high interest debt. SKH has net margins of 3 1/2%.

ENSG - $390 million market cap on a $19 pricing. SKH operates 61 skilled nursing facilities. At $19 would trade less than 1 X's 2008 revenues and 16 X's 2008 earnings. ENSG has $1 per share net CASH on hand post ipo. ENSG has 5% net margins.

Conclusion - ENSG operates in a highly regulated sector experiencing rate freezes or lowered increases going forward. These factors make it nearly impossible for an operation such as ENSG to expand their margins. Top and bottom line growth therefore will come from acquisitions. With this type of business and in this sector you really want to look at operations that have low debt levels which will allow them A) filter more of their slim operating margins to the bottom line and B) allow them plenty of room to grow through acquisitions. I like the balance sheet here and I like the valuation at 16 X's 2008 revenues. Due to the constraints on the sector mentioned above, you don't want to pay too hefty an initial multiple here, but ENSG looks good to me in range. I would especially be interested here on a low pricing/open. Recommend.

pre-ipo analysis for 200+ ipos a year at http://www.tradingipos.com


2007-11-07
OZM - Och-Ziff Capital Management

OZM - Och-Ziff Capital Management plans on offering 41.4 million shares at a range of $30-$33. In addition OZM is also making a private offering to Dubai International Capital(DIC). the private offering will constitute an overall 9.9% stake in OZM and the price will be the equivalent of the underwriters discount pricing of OZM's public offering. Based on all ownership stakes post ipo, DIC will purchase approximately 38.2 million shares at a price of $1.50 below ipo price. Goldman Sachs and Lehman are leading the deal, thirteen other firms co-managing. Post-ipo, OZM will have a total of 390.4 shares outstanding for a market cap of $12.4 billion on a pricing of $31.50. All ipo proceeds from both offerings will go to insiders. The insiders will reinvest those proceeds(in their own name) back into Och-Ziff funds.

Daniel Och will own 49% of OZM post ipo. Mr. Och will retain voting control via a separate share class.

In addition to insiders(OZM principals) receiving all ipo proceeds(approximately $2.2 billion), they also declared a special distribution of $750 million payable to them. This payment was made by laying debt onto the back of the soon to be public OZM. Boy I'm so weary of these 'business as usual' shenanigans. Apparently it is not enough to be wealthy beyond wildest dreams, one also needs to pile debt onto the company just prior to coming public to pay yourselves even more money. At some point the market needs to say 'enough' to these greed grabs. Mr. Och will have an equity stake in the public OZM of approximately $6 billion, not counting the approximately $1 billion in cash he'll receive from this offering. Was the extra $750 million(of which Mr. Och stands to receive $350 million) really needed too???? I'm not touching this ipo simply for this reason. I'm tired of these shenanigans with these things. If they're this greedy pre-ipo how well will they treat their silent partners, those buying their public shares? Also Mr. Och will receive deferred income distributions totaling ans additional $1 billion during a three-year period beginning in 2008.

From the prospectus:

'We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $30.1 billion of assets under management for over 700 fund investors as of September 30, 2007.'

OZM has been in operations 13 years. OZM is a hedge fund and operation focusing on "Risk-adjusted returns". Risk adjusted returns are based on the income generated from primary investment positions while also being hedged to limit risks from market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. OZM goes out of their way to state they look for long term value and to mitigate risk.

OZM derives revenues from management fees and incentive income. Management fees are based on total assets under management and average 1.50% - 2.50% of assets. Incentive income is realized and unrealized gains generated by the funds that managed by OZM. Incentive income is typically equal to 20% of the net realized and unrealized profits earned. Pretty standard hedge fund revenue structure. OZM's partners(managing directors) receive nearly all their income payments from participation in the profits of our entire business.

Assets under management have grown impressively. OAM had $11.4 billion under management end of 2004, $15.6 end of 2005, $22.6 end of 2006 and $30.1 billion on 9/30/07.

OZM's flagship global multi-strategy fund is the OZ Master Fund. **Note** - The OZ Master Fund has lagged the S&P 500 in each of the following periods: one year performance 3% behind S&P 500; three year performance 0.6% lower than S&P 500; five year performance 1.6% behind the S&P 500. The OZ Master fund has averaged a 13.9% return over the past five years compared to a 15.5% average annual return for the S&P 500. An S&P 500 ETF held the past five years would have returned more than the OZ Master Fund which takes a % of assets as well as a % of gains annually as revenue.

The OZ Master fund holds approximately 63% of OZM's assets under management.

OZM had a losing quarter overall in their funds for the quarter of 9/30/07. This was the first quarter for OZM to not experience appreciation of assets since spring of 2003.

Financials

$750 million in debt-post ipo. As noted ipo all this debt was taken on to pay insiders a 'special dividend.'

OZM intends to pay quarterly dividends. They state, 'Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth.' As OZM does not factor in incentive income until the year end, assuming OZM's funds are net positive annually the fourth quarter distribution stands to be larger than the other three quarters.

Note - OZM is heavily invested in their own funds. This greatly increases OZM's profit when their funds appreciate as they've done annually the past five. However this also means losses can hit even harder. OZM derives approximately 2/3's of their operating revenues annually from incentive fees. These incentive fees are based on a percentage of annual gains in OZM's funds. OZM's gains from investing in their own funds has the past 7 quarters equaled 1/2 their operating profit. If OZM had a flat year overall in their funds for 2006 for example, they would have had nearly $1 billion less in inventive fees and funds gains putting them deeply in the red for the year. You do not want to be in OZM if they ever have a bad year. Not only will there be no distributions, the losses per share will be pretty staggering. **Essentially the public OZM is making a significant bet that OZM's funds can continue to perform well year in and year out. Also OZM's managing directors also appear to have much of their net worth tied up into OZM equity and investments in OZM funds. Everyone involved here is making a big bet OZM continues to perform. Keep in mind, if OZM has a flat year in their funds, dividends and earnings will disappear pretty quickly.

As with Fortress and Blackstone, OZM's financials are intricate and difficult to grasp.

2006 - Total revenues were $972 million. 2/3's of this revenue came from incentive fees, 1/3 from management fees. Compensation and benefits were 50% of revenues. Gains from investments in their own funds added $242 million to the bottom line. Pre-tax, OZM earnings $1.50 per share. If we plugged in taxes, earnings would be approximately $1 per share.

2007 - As OZM does not factor in incentive fee revenues until after the fourth quarter closes, net here is negative through nine months. Note that this is a change from the first nine months of 2006 directly due to a pretty significant bump up in compensations expenses. If we're to factor in incentive fees for the full year 2007, I would imagine revenues will be closer to $1.2 billion. Earnings per share should be in the ballpark of 2006, again due to a sharp increase in compensation expenses. OZM looks as if they'll earn again in the $1-$1.50 ballpark. Note that these numbers are highly fluid and much depends on the amount in incentive fees, OZM books on the close of 12/31/07.

Due to all the accounting changes as well as equity distributions and compensation and benefits, OZM's pre-ipo financials are dense and tricky. going forward keep in mind OZM is heavily leveraged in their own funds in the form of actual investments in their funds and the heavy reliance on incentive fees. As long as OZM's funds post solid annual gains, OZM will put on a solid bottom line. If OZM's funds have a hiccup in a given year, OZM can easily slip into the red on the bottom line.

Conclusion - complex dense financial statements in a deal in which insiders are making out extraordinarily well. What strikes me is that in the one, three and five year periods, OZM's flagship fund has underperformed the S&P 500. Why? Well because OZM takes not just 2% of assets under management for fees, but they also grab 20% of the profits annually. Why pay someone this much when your return is lagging the S&P 500? OZM has done well growing assets under management in the hedge fund boom this decade. At $12 billion+ market cap though, there are enough question marks and negative to keep me away in range.

all ipo pieces completed and available to subscribers before pricing and open. http://www.tradingipos.com



2007-10-29
GRO - Agria Corporation

GRO - Agria Corporation plans to offer 19.7 ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 5.5 million ADS in the ipo. Credit Suisse is lead managing the deal, HSBC, Piper Jaffray and CIBC are co-managing. Post-ipo GFO will have 65.5 million ADS equivalent shares outstanding for a market cap of $1.02 billion on a $15.50 pricing. IPO proceeds will be used to fund capital expenditures, for R&D and for general corporate purposes.

An entity co-controlled by Chairman of the Board and CEO Guanglin Lai and Director Zhaohua Qian will own 60% of GRO post-ipo.

From the prospectus:

'We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products.'

Yes yet another China ipo. GRO sells corn seeds, sheep breeding products, and seedling products. corn seeds account for 48% of revenues, sheep breeding products 40% and seedling products 12%. Gross margins for each segments are: corn seeds 41%, sheep breeding products 73% and seedling products 79%.

GRO has access to 27,000 acres of farmland in seven provinces of China, of which approximately 23,000 acres are used for production of corn seeds, approximately 3,700 acres are used for sheep farming and breeding activities and the remainder are used for seedling production and research and development activities. Note that GRO does not own their own farmland, as apparently they are legally prohibited to own farmland. Instead they rely for the most part on contractual agreements with village collectives. GRO owns 17,000 sheep and sells frozen sheep semen, sheep embryos and breeder sheep. Through the first six months of 2007 GRO sold approximately 14,400 tonnes of corn seeds, 10.6 million straws of frozen sheep semen, 4,980 sheep embryos, 1,760 breeder sheep, 14,400 Primalights III hybrid sheep and a total of 11.6 million seedlings. Seedling products predominantly include blackberry, raspberry, date and pine bark seedlings.

Sector - China's agricultural sector is growing, note however the growth has lagged China GDP growth in recent years. The agricultural sector accounts for 10% of China's GDP and has grown 8% average annually the past five years. China is the world's second largest corn producer accounting for 19% of worldwide-corn production. China has the largest sheep flock in the world at an estimated 171 million sheep.

Financials

$2 per share in cash post-ipo, no debt.

3 X's book value on a pricing of $15.50.

While corn seed still accounts for 45%-50% of revenues, corn seed revenues have been stagnant for 2 1/2 years now. Revenue growth has been driven by sheep breeding revenues and seedling products.

Annual revenues have been: 2004 - $20 million; 2005 - $50 million; 2006 - $60 million; 2007 - on pace for $65 million.

GRO has been profitable since 2002.

Note that revenues are seasonal with the June and December quarters annually being the strongest. As GRO sells barely any corn feed in the September quarter, that Q is by far the weakest. Expect a seasonally weak report when GRO releases their 9/30/07 quarterly earnings report.

2007 - Revenues appear on pace for $65 million, a 5%-10% increase over 2006. Gross margins should be 57%. GRO has very little operational expense as they contract with village collectives for most of the work, which is factored into gross margins. Actually looking at the strong gross margins here for GRO, I'd think these village collectives might want to consider adjusting their contracts! Operating expense ratio is just 6%. Operating margins should be 51%. Tax rate thus far has been 0%. However it appears going forward GRO's tax rate on earnings will be in the 10% range, so we'll plug that percentage into 2007 earnings. 46% net margins, earnings per share of $0.45-$0.50. On a pricing of $15.50 GRO would trade 33 X's 2007 earnings.

Conclusion - $1+ billion market cap for a farmings operation that will book $65 million in 2007 revenues, just 10% higher than 2006? The net margins here are strong, but just 10% top line growth and nearly 14 X's revenues for an agricultural operation that has village collectives producing corn seed, sheep and seedlings for them seems awfully excessive. China ipos have been pretty hot in 2007 and we've seen a number of good ones. GRO looks fine as a company, the valuation here seems way off however. Most of the high multiple, highly successful China appears have been sector leaders benefiting directly from the urbanization and growing affluence of the middle class in China. While one could make a tangential case that GRO benefits from the growing China individuals affluence, it is still not a direct link. This is a pass for me, as I've no interest in paying for a $1+ billion cap agricultural operation with $65 million in revenues. In range, this seems like a very lofty price to pay for an operation responsible for producing corn seed, various sheep breeding products and seedlings. Pass in range for me.

pre-ipo analysis on every deal at http://www.tradingipos.com

disclosure: tradingipos.com does have a position in GXDX at anaverage of 24 1/4.

2007-10-27
GXDX - Genoptix

GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.

Enterprise Partners will own 20% of GXDX post-ipo.

From the prospectus:

'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'

Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.

In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.

Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:

'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'

The key differences appear to be:

1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.

2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.

GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.

Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.

GXDX estimates their current bone marrow testing market share is 3%.

54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.

Financials

$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.

Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.

Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*

It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.

The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.

Provisions for doubtful accounts has run around 4% in 2007.

GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.

2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.

Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.

We're looking at a very busy ipo calendar with 25 on the schedule the first two weeks alone. We're the best spot on the web to get a complete analysis write up on every deal pre-ipo. We've also an active forum focused on entries/exits as ipos trade throughout their first year public. We also provide pre-open indications for all nasdaq ipos, giving subscribers up to the minute open indications the day ipos debut.

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2007-10-21
PZN - Pzena Investment Management

PZN - Pzena Investment Management plans on offering 7 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs and UBS are lead managing the deal, BofA, Fox-Pitt Kelton, JP Morgan an KBW are co-managing. Post-ipo PZN will have 65 million shares outstanding for a market cap of $1.105 billion on a pricing of $17. IPO proceeds will be used to redeem shares from non-employee insiders. Essentially think of the shares offered in this deal as being offered by insiders as PZN will retain no ipo monies.

CEO Richard S. Pzena will own 40% of PZN post-ipo and will retain full voting control post-ipo due to a separate share class.

From the prospectus:

'Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service.'

We've seen a few investment management firms ipo this decade(notably Calamos), however I believe this is the first value-oriented firm coming public in a longtime. Most of the management firms that have accessed the public markets via ipo over the years have concentrated more on growth investing.

As of 6/30/07, PZN managed $30.6 billion in assets. Revenues are generated on advisory fees earned on assets under management. For these type firms, the level of profits and growth are directly tied to the size and growth of assets under management. PZN earns about 1/2 of 1% annually on assets under management. The goal of PZN and those of their ilk is to invest those assets in a way that will generate strong annual gains as well as attract new money inflows to their funds.

PZN invests strictly on a value oriented approach, eschewing growth metrics. They've ten distinct value oriented strategies that differ by market cap and geographic focus. As of 6/30/07 PZN managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and ten offshore funds. PZN has seen net-inflows annually each of the past five years.

PZN's value investment philosophy can be summed up as follows:

'we seek to make investments in good businesses at low prices...we are focused on generating excess returns over the long term.'

Asset growth has been impressive. On 12/31/03, PZN managed $5.8 billion in assets. They grew to $10.7 in 2004, $16.8 in 2005, $27.3 in 2006 and $30.6 as of 6/30/07. It should be noted that the first half of 2007 saw lowest dollar amount of net inflows since 2004. Net inflows the first half of 2007 were $1.3 billion, well below the first half of 2005 and 2006.

PZN's four main investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their benchmarks by 3%-5% since inception. Note that while PZN underperformed during the bull run of the late '90's, they outperformed massively in the difficult markets of 2000-2002. Since 12/31/95, PZN has easily outperformed both the S&P 500 and the Russell 1000 value index.

John Hancock Advisers - Part of PZN's rapid growth the past three years has been due to a strategy of forming strategic relationships with 'sub-advisers', essentially managing the assets of investment funds. PZN has a close relationship with John Hancock Advisers managing mutual funds for Hancock. PZN acts as the investment 'sub-adviser'(read: asset manager) for the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund. these four funds combine for approximately 1/3 of all of PZN's assets under management. For In the past 18 months 20%-25% of all PZN revenues have been directly from assets managed for John Hancock.

Note - The third quarter of 2007 was characterized by a period in which value stocks underperformed heavily, as evidenced by the huge losses sustained by quant funds heavily long value and short speculative stocks. The rough quarter for value stocks did not leave PZN unscathed. PZN's assets under management as of 9/30/07 declined $1.7 billion to $28.9 billion. PZN saw net inflows for the quarter of $0.4 billion, meaning markets losses were $2.1 billion for the quarter alone. In other words PZN lost 6.8% across the board on their investments in the third quarter of 2007 alone. Third quarter was a rough quarter for the value approach indeed.

PZN's value strategy - PZN generally invests in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. PZN's approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. Obviously the risk here is that the trouble company is unable to manage a turnaround. PZN's portfolios are concentrated, generally with 30 to 60 holdings of companies underperforming their historical earnings. When PZN enters a troubled company, they usually enter in pretty good size due to the relatively concentrated approach. Top holdings as of 9/30/07 included Citigroup, Allstate, Freddie Mac, Wal-Mart, Alcatel-Lucent and on the international side ING and Mitsubishi.

Financials

PZN will have about $50 million in debt(minus cash on hand) on the books post-ipo. Not enough to make much of a difference with $29 billion in assets under management. Should be noted however that the debt was taken on to fund a dividend payout to insiders pre-ipo.

PZN does plan on paying dividends of $0.11 quarterly. At an annualized $0.44, PZN would be yielding 2.6% annually on a pricing of $17.

2006 - PZN had total revenues of $115 million. Again revenues are generated from advisory fees based on assets under management. Unlike the hedge fund/private equity ipos we've seen in 2007, PZN does not generate revenues based on a percentage of portfolio gains quarterly of annually. Compensation and benefits expenses were a fairly low 30%. This is well below investment banking/private equity/M&A ipos of the past few years, all with compensation expense & benefit ratios in the 50%-60% ballpark. General and administrative expenses are minimal here, just 7% of revenues. Operating margins were 62%. Plugging in full taxes, net margins were 40%. Earnings per share were $0.71. On a pricing of $17, PZN would trade 24 x's 2006 earnings.

2007 - As PZN derives revenues from total assets under management and not gains on those assets, the bad third quarter won't kill their year. That is, assuming the 3rd quarter of 2007 was an anomaly and not the beginning of a trend. PZN actually had a very solid third quarter operationally as assets under management for the quarter, while they slipped, were still near all time highs for PZN. Through 3 quarters, revenues for 2007 are on pace to be $148 million, a 29% increase over 2006. With the ipo, the compensation expense and benefits ratio will actually decrease as a chunk this expense line will be shifted to equity compensation and ipo shares. Expect this expense line to dip to 23% or so, which will boost operating margins. 2007 operating margins should increase to 70%, with 43% net margins. Earnings per share should be in the $1.00 ballpark. On a pricing of $17, PZN would trade 17 X's 2007 earnings.

Looking across the publicly traded asset managers, nearly all trade 20-25 2007 earnings, indicating a bit of a discount here with the PZN pricing range. I suspect this in part to the rough third quarter for PZN's investments. If you look at PZN's track record over the past twelve years, the odds appear in favor of the third quarter of 2007 being an anomaly and not the beginning of a trend. As long as that is the case, PZN is an easy recommend in range. One thing you do not want to see here however, is another quarter of a drop in assets under management. I applaud PZN for having the fortitude to come public in a quarter in which their investments got knocked around pretty good. If PZN is able to return to their historic levels of gains on assets under management, the pricing range here offers good value mid-term plus

as always all ipo pieces on every ipo available to subscribers pre-ipo at http://www.tradingipos.com


2007-10-06
CML - Compellent Technologies

CML - Compellent Technologies plans on offering 6.9 million shares at a range of $10-$12. Morgan Stanley is leading the deal, Needham, Piper Jaffray, RBC and Weisel co-managing. Post-ipo, CML will have 30.5 million shares outstanding for a market cap of $336 million on a pricing of $11. IPO proceeds will be used for working capital (to fund losses) and general corporate purposes.

El Dorado and Crescendo Ventures will each own 17% of CML post-ipo. El Dorado and Crescendo each made a mint back in the 1990's, being very early stage tech centric venture funds. It has been quite awhile since one of their companies has gone public I believe.

From the prospectus:

'We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective.'

Storage Area Network (SAN) operation; CML has sold their SAN's to 600 enterprises worldwide. They call their SAN, 'Storage Center.' CML describes their Storage Center product as follows:

'Provides storage virtualization and speeds both common and complex storage tasks by reducing the time and effort required for many complex functions into a few simple point-and-click steps.'

Performance: CML is still losing money on the bottom line. Two things however make this an interesting little tech ipo: Recent swift revenue growth and industry acknowledgment of CML's high quality storage solutions. Rarely in the prospectus do you see a company make the sort of claim CML makes. To quote, 'We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.'

Awards: In 2006, InfoWorld selected CML's Storage Center as "Best SAN" and Computer Reseller News selected CML as a top Storage Standout. Gartner, a third-party industry analyst, recently reported Compellent to be the fastest growing disk storage company in the world in 2006.

CML does not sell through a direct sales force, instead relying 100% on channel partners. CML also employs something they call a 'virtual manufacturing strategy' in which their hardware component suppliers ship directly to customers, merging in transit with CML's storage solutions. This helps CML cut down on inventory as supplier components are pretty much drop shipped to CML's customers at the same time as CML's storage products. CML believes relying on channel partners as well as 'virtual manufacturing' lowers their operating cost structure.

Sector - Data storage as been a growing need this entire decade as enterprises are creating vast amounts of data in need of storing. Traditional storage solutions were not developed for the continued need for updated storage. These storage systems were designed to take storage snapshots, storing all data at regular intervals. This has led to massive stored data duplication.

CML's solution: Similar to 'node storage' CML's solution is based on module 'Dynamic Block' storage architecture. A block is the lowest level of data granularity within any storage system. Dynamic Block Architecture allows CML to record and track specific information about each block of data and provides intelligence on how that block is being used. With the use of modules, CML's customers can easily add storage capacity as they go. CML's block system also allows for automatic movement of blocks of data between tiers of high cost, high performance storage and tiers of lower cost inactive storage. CML believes up to 80% of stored data falls into the 'inactive' area, allowing CML's customers to save money in storing this inactive data in a low cost way.

Virtualization: Dynamic Block Architecture enables end users to create a shared storage pool. Storage Center distributes workloads across the entire pool, automatically improving utilization of storage resources for all applications. CML believes their Storage Center product meshes well with the growing adoption of server virtualization. CML and VMware have a technology partnership. From CML's website: 'Compellent's innovative storage virtualization technology integrates with VMware to create an efficient virtualized data center. Using Compellent and VMware in unison enables customers to improve utilization and lower overall costs with flexible server.'

CML currently has eight pending patent applications in the United States, two patent applications filed pursuant to the Patent Cooperation Treaty and four pending foreign patent applications. The bulk of the pending patents relate to their Dynamic Block Architecture.

Historically CML has focused on small and medium sized business. One of their growth goals going forward is to expand their business into larger enterprises. One reason that CML has focused on smaller operations is that the SAN space is dominated by large, well established tech companies. CML's direct competition includes Dell, EMC, Hewlett-Packard, Hitachi, IBM and Network Appliance.

CML has also focused primarily on the US market. 89% of revenues through the first 6 months of 2007 were from enterprises based in the US.

Financials

$2 per share in cash, no debt.

CML began shipping product in February 2004. Since revenues have grown briskly. In 2004, CML booked a shade under $4 million in revenues, $10 million in 2005 and $23.3 million in 2006. Through the first 6 months of 2007, CML appears on pace to book $48-$50 million in full year revenues a 100%+ increase over 2006. Hefty losses have come with the swift revenue growth. CML lost $0.43 in 2006.

2007 - Revenues are on pace to hit $48-$50 million in 2007, a strong 110% improvement over 2006. Gross margins are in the 45%-50% range. CML is such a young company it is not at all surprising that operating expenses here have been hefty in relation to revenues. Operating expense ratio in 2005 was 133%, 76% in 2006 and 68% through the first 6 months of 2007. The good news is that operating expenses are moving in the right direction, growing at a slower pace than revenues. They're still quite robust however, meaning CML is not closing in on break-even just yet. It should be noted that in the 6/07 quarter, CML did have by far both their strongest revenue quarter in operating history and lowest operating expense ratio. Assuming each trend continues the back half of the year, I'd expect CML to hit 62% operating expense ratio for the full year 2007. Losses for 2007 on $49-$50 million in revenues should be approximately $0.20 - $0.25.

2008 - With a company this young growing revenues this swiftly, we'll need to see the last two quarters of 2007 before predicting 2007. Assuming strong growth continues, CML should be shifting towards operational break-even sometime the back half of 2008.

Positives here are pretty clear: Swift 'hockey stick' type revenue growth from recent start up stage, industry awards, and a technology partnership with hyperbolic tech growth company VMware. Really that is enough to recommend CML in range. There are numerous risks here going forward that need to be mentioned. CML is coming public a bit too prematurely in their revenue and profit curve. This greatly heightens the risks going forward. As CML relies on one product (Storage Center) for the bulk of their revenues, any end market hiccup in quarterly demand/revenues would lead to a rather significant drop in share price. This is a very difficult and competitive sector filled with large players more than willing to cut margins to increase their market share and drive smaller companies such as CML out of the game. One need only to look at recent storage ipo ISLN for an example of what can go wrong with these type of young fast growing ipos; it is the pace of that growth stalls. In addition CML has never booked a quarterly profit and losses should continue annually for full year 2008. All this means one does not pay up heavily for this ipo. However, with an initial market cap in range of $350m or so, CML is worth the risk here. Personally I'd be far more comfortable if CML had one more year of revenue growth while shifting closer to break-even before accessing the public markets.

Recommend in range due to swift growth from recent start-up stage, industry awards/recognition and the technology partnership with VMware.

disclosure - as of date of blog post(10/05/07), tradingipos.com does have a position in DUF.

going on 2 1/2 years now, as always all ipo analysis pieces are available to subscribers pre-ipo.

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2007-09-23
DUF - Duff & Phelps

DUF - Duff & Phelps plans on offering 9.5 million shares (assuming over-allotments) at a range of $16.50-$18.50. Goldman Sachs and UBS are lead managing the deal. Lehman, William Blair, KBW, and fox-Pitt Kelton will be co-managing. Post-ipo DUF will have 33.8 million shares outstanding for a market cap of $592 million on a $17.50 pricing. Approximately 20% of the ipo proceeds will be used to repay debt, the remainder will go to insiders.

Vestar Capital will own 20% of DUF post-ipo, Lovell Minnick 16%. Both are private equity entities that came on board DUF to help fund the 2005 purchase of Corporate Value Consulting from Standard & Poors. In addition on 9/1/07, Shinsei Bank (Japanese) purchased a 10% post-ipo stake in DUF at $16.07 per share.

From the prospectus:

'We are a leading provider of independent financial advisory and investment banking services. Our mission is to help our clients protect, maximize and recover value. The foundation of our services is our ability to provide independent advice on issues involving highly technical and complex assessments of value.'

DUF's valuation advisory services are focused on four core areas: 1)financial and tax valuation; 2)mergers & acquisitions; 3)restructuring; and 4) litigation & dispute.

We've seen a number of financial advisory and/or investment banks come public the past few years. DUF is a bit of a different animal than the rest as they focus on the unique niche of valuation advisory services specializing in complex financial, accounting, tax, regulatory and legal issues.

DUF breaks down their business into Financial Advisory and Investment Banking segments. Financial Advisory segment provides valuation advisory, corporate finance consulting, specialty tax and dispute and legal management consulting services. Investment Banking Segment provides M&A advisory services, transaction opinions and restructuring advisory services.

This is a good spot to make an important point. With the slowdown in M&A activities over the past two months, this might not be an ideal time for a financial operation with an Investment Banking M&A component to come public. DUF however derives 75%-80% of annual revenues from their Financial Advisory segment (valuation advice) and 20%-25% from their Investment Banking segment. It should be noted that a chunk of those Financial Advisory segment revenues have come from valuation advisory services for newly acquired/merged operations. DUF believes the past 18 months that 45%-50% of their overall revenues were in some aspect related to M&A. This alone should be enough to proceed with a bit of caution on this DUF ipo.

DUF does not fall neatly into either of the financial advisory/IB ipos of the past two years in that they do not rely primarily on either direct M&A advisory services nor capital raising (IPO/secondary) activities.

DUF (with 21 offices, 6 being international) had approximately 400 clients in 2006. 36% of the S&P were a client sometime over the past 18 months and during that period 60%+ of revenues were derived from repeat customers. DUF is the industry's leading independent practice providing purchase price allocation services. Additionally, DUF is the number two independent provider of fairness opinions and a top ten global provider of restructuring services based on number of assignments.

Growth Drivers:

Sarbanes Oxley - In 2002 the Sarbanes-Oxley Act, among other things, has conflict of interest restraints preventing accounting firms from providing other non-audit advice. The Enron scandal was the primary driver behind this aspect of Sarbanes-Oxley. This has led to an increase in demand for independent non-audit accounting related services. DUF believes that Sarbanes-Oxley gives them a competitive advantage over the auditing focused accounting firms in securing valuation advisory clients as DUF has no audit related segment and thus no potential conflicts of interest that would run up against the constraints of Sarbanes-Oxley.

Fair Value Accounting - DUF believes they benefit from the shift towards Fair Value Accounting (FVA). FVA seeks to measure the current market value of a company's assets and liabilities as an alternative to the traditional historical cost method of accounting. Simplified for our purposes, FVA is an accounting snapshot of a company as it looks on current assessment of value, not historical. As DUF specializes in valuation, this shift to FVA standards and away from historical accounting standards plays into their favor.

Global M&A boom - This is the big question mark with this ipo. While DUF's direct M&A advisory arm is small when compared to their Financial Advisory segment, a huge chunk of their organic growth the past few years has been from giving financial advisory valuation services to newly acquired and merged companies. As M&A activity, particularly levered buyout M&A activity has slowed significantly the past few months, it remains to be seen what sort of impact this slowdown will have on DUF's advisory services. I would think the third quarter of 2007 will see a rather significant slowdown in DUF's direct and indirect M&A related revenues. Whether M&A activity resumes strength over the next twelve months will go a long way in determining the success of this DUF ipo.

Restructuring - On the flip side, if the economy slows DUF hopes that their restructuring and financial distress advisory services will grow in demand. I do like that DUF is playing both sides of the fence here with merger financial valuation advisory services as well as bankruptcy valuation services. On some level, valuation experts will be in demand no matter the economic climate.

Note - In the prospectus DUF stresses quite a bit on their non M&A related strengths. They do have that, however the transaction boom the past few years has been very good to DUF. It stands to reason that if the number of transactions in the global marketplace slow from 2006 and first half 2007 levels, DUF's revenue stream would be impacted on some level.

Financials

DUF will have approximately $1 per share in cash and debt each on the books post-ipo.

Compensation expense ratio - DUF is a people expertise operation, quite similar in this fashion to investment banking/M&A ipos such as EVR/GHL/TWPG etc...As such, compensation expenses are by far the highest expense line item. DUF's historical compensation expenses are a bit more difficult to decipher than most as they've made a few acquisitions over the past few years, most significantly being the private equity backed Corporate Value Consulting acquisition in 2005. These acquisitions have led to significantly deferred equity compensation expenses which have shown up in 2006 and 2007 (and will again for the final time in 200. Folding out these acquisition related awards, DUF's compensation expense ratio is in line with other 'people expertise' operations at 50%.

*Note* - DUF does not fold out these acquisition related expenses in the prospectus, so the numbers below will look different than those in the prospectus. I feel the numbers below are more representative of the overall operation in 2006 and first half of 2007.

Much of DUF's revenue growth has been fueled by their own acquisitions and related M&A advisory services.

2006 - Revenues were $278 million. Compensation expense ratio was 50%. Operating margins were 11%, net margins 6%. Earnings per share were $0.50.

2007 - without seeing the impact of 3rd quarter M&A slowdown on results, I'm not going to try and forecast the full year here. This is one of those ipos that is coming right in the middle of a whole lot of confusion in their core growth driver niche and frankly I don't know how significant the M&A slowdown in the third quarter of 2007 will be on DUF. Instead let us take a look at the first half of 2007 and go from there. Revenues for the first half of 2007 were a very strong $171 million. DUF at the halfway point was on pace to blow away 2006 revenue numbers. Compensation expense ratio was 52%. Operating margins were 14%, net margins 8%. Earnings per share for the first half of 2007 were $0.42.

One would have to surmise that DUF's third quarter of 2007 will be stagnant at best, most likely a bit weaker than the first half of 2007. If we are a bit conservative on the back half of 2007, DUF earnings per share range should be $0.70 - $0.75 for the full year. On a pricing of $18.50, DUF would be trading 25 X's 2007 earnings. Again keep in mind due to the acquisition related deferred compensation expenses, GAAP earnings will be much smaller than this number. This number however is a truer indication of their current business.

Conclusion - This is a tough one. DUF had a very solid first half of 2007 fueled by prior acquisitions and a strong M&A environment. DUF is a niche leader in valuation advisory, a nice growing segment whose growth is not entirely fueled by M&A. I really would like to see DUF's third quarter earnings report. I think the abrupt global M&A slowdown in July had to have impacted DUF in some fashion. I like expertise related niche leaders however I would be very careful adding DUF on an aggressive open pending the third quarter earnings release. . M&A activity in the first half of 2007 was about as strong as it has ever been. That pace has slowed considerable thus far in the 2nd half of 2007. DUF's niche leadership is enough to recommend in range, however I'm not interested here on an aggressive opening until I see the third quarter earnings report.

disclosure: Tradingipos.com does hold a position currently in PRGN. Full analysis pieces on every ipo for subscribers at http://www.tradingipos.com


2007-08-09
PRGN - Paragon Shipping

PRGN - Paragon Shipping plans on offering 10.3 million shares at a range of $16-$18. UBS and Morgan Stanley are lead managing the deal, Cantor Fitzgerald and Dahlman Rose are co-managing. Post ipo PRGN will have 26 million shares outstanding for a market cap of $442 million on a pricing of $17. IPO proceeds will be used to assist in purchasing PRGN's fleet.

Chairman and CEO Michael Bodouroglou will own 20% of PRGN post-ipo.

From the prospectus:

'We are a recently formed company incorporated in the Republic of the Marshall Islands in April 2006 to provide drybulk shipping services worldwide. We acquired our current fleet of three Handymax and three Panamax drybulk carriers, which we refer to as our initial fleet, in the fourth quarter of 2006 and the beginning of 2007.'

PRGN's initial fleet of six drybulk vessels achieved daily time charter equivalent rates of $24,080 the first quarter of 2007. All six are currently employed under fixed rate time charters with an average remaining term of 19.6 months as of June 30, 2007. In addition to the initial fleet, PRGN has agreed to purchase an additional three drybulk vessels. These three have existing charters with an average remaining term of 28.1 months as of June 30, 2007.

PRGN plans to distribute cash flows quarterly to shareholders. Based on projections, the initial dividend is expected to be $0.4744 quarterly. Annualized that will be $1.90. On pricing of $17, PRGN would yield a very strong 11.2%.

A quick glance at annual yields of similar public companies based on most recent quarterly payout:

OCNF 9.7%; DSX 8%; DRYS 1.5%; EXM 2.7%; EGLE 7.3%; GNK 4.8%; QMAR 7%.

Some of the public dry bulk shippers distribute bulk of cash flows to shareholders, some utilize cash flows to grow. PRGN on a mid-range pricing would be the strongest yielding public drybulk shipper it would appear. This strong dividend makes the deal work.

Note - PRGN has three time charters expiring over the next few months. They've already rechartered each at substantially higher rates then the previous charters.

CEO and Chairman Michael Bodouroglou will also act as Fleet Manager through another company he owns and operates. Fleet management fees appear as if they'll be approximately $2.2 million annually.

Average age of the combined fleet is 7.8 years.

Sector

Dry Bulk cargo consists of of iron ore, coal and grains as well as fertilizers, forest products and essentially any non-liquid, non-container cargo. Dry bulk cargo accounts for 33% of world seaborne trade with coal and ion ore combining for 51% of all dry bulk cargo. The dry bulk cargo sector has grown an average of 5% annually this decade.

Dry bulk rates exploded in late 2003 and hit all-time highs the second half of 2004. New shipbuilds had slowed to a crawl during the worldwide economic slowdown in 2001-2002 and there just were not enough vessels in use in 2003/2004 to handle the demand boom from China/India coupled with a worldwide economic activity pick-up. Since, the sector has seen a sharp rise in new vessel construction much of which has begun to come on-line the past 2 years. The result has been a move off the highs for the dry bulk spot rate market. Worldwide demand however has continued to remain strong and while dry bulk rates are not at their record levels, they have been in a fairly tight range the past two years at historically strong levels. The big risk in the shipping sector is a worldwide economic slowdown just as heavy supply of new shipbuilds come on-line.

The big risk here is that there is a global economic slowdown at just about the time PRGN's charters expire. If that is the case, PRGN may struggle to replace their vessels at a price near current charter rates. Also as this sector is notoriously cyclical, new shipbuilds tend to increase dramatically during periods of strong rates. That is occurring currently. As of 4/30/07 drybulk newbuilding orders had been placed for an aggregate of more than 20.0% of the existing global drybulk fleet, with deliveries expected during the next 36 months. This is a classic boom/bust sector with a few of the public companies in the sector managed by those that went bankrupt during the last cycle trough.

Financials

PRGN will have a bit of debt on the books post ipo, $126 million worth.

1 1/2 X's book value.

Forecast - As PRGN plans on distributing nearly all quarterly cash flows to shareholders, cash flow here is what to look at not earnings. PRGN forecasts approximately $85 million in revenues their first year public. Based on current charter rates, PRGN anticipates $45-$50 million in distributable cash flows.

conclusion - The initial yield makes this deal work. Keep in mind while the yield is strong, this a classic boom/bust sector currently enjoying a boom time. Recommend due to the 11.1% initial yield on a pricing of $16.

Well it appears the ipo schedule will commence next week after a 3 week or so lull. We should see quite a few the back half of September so we'll resume the one free weekly blog piece.

This weeks is an interesting China ipo from August, EJ. Note as always analysis pieces are available for subscribers before debut. The free blog pieces are all done pre-ipo and posted here after debut. We've analyzed pretty much every ipo here before debut for 2 1/2 years now. Subscriptions to the site are available at:

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2007-08-04
EJ - E-House(China) Holdings

EJ - E-House (China) Holdings plans on offering 16.8 million ADS at a range of $11.50 - $13.50. 4 million ADS will be sold by insiders. Credit Suisse and Merrill Lynch will be lead managing the deal, CIBC and Lazard co-managing. Post-ipo EJ will have 76 million ADS equivalent shares outstanding for a market cap of $950 million on a $12.50 pricing. Bulk of ipo proceeds will be used to fund capital expenditures.

Chairman and CEO Xin Zhou will own 30% of EJ post-ipo.

From the prospectus:

'We are a leading real estate services company in China based on scope of services, brand recognition and geographic presence. We provide primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services.'

EJ has been the largest real estate agency and consulting services company in China for three years now (2004-2006). EJ has 2,100 real estate professionals in twenty cities throughout China. In the past five years they've sold 5 million square feet of properties worth a $5.4 billion US. EJ also operates the only information system that provides up-to-date, comprehensive and in-depth information covering residential and commercial real estate properties in all major regions in China.

Chinese sector leaders in fast growing sectors have done very well in the US market the past few years, usually garnering aggressive multiples. The US market has not been a 'one size fits all' for Chinese offerings, the differentiators would appear to be that sector leadership. Sector leaders tend to outperform non-sector leader Chinese ipos. Financials and valuation aside, EJ would appear to fit in the 'sector leadership outperformer' category.

Awards - EJ has been named "China’s Best Company" from the National Association of Real Estate Brokerage and Appraisal Companies in 2006, and the "Leading Brand Name in China’s Real Estate Services Industry" from the China Real Estate Top 10 Committee in 2006.

Sector - The real estate sector in China has experienced rapid growth with primary property sales revenue growing 38% over the past five years. Primary property refers to the sale of new properties, which is EJ's focus. As such, EJ's clients tend to be real estate developers who utilize EJ's middle-man services to consult on development and to sell their properties. 82% of revenues in 2006 were from services relating to 'primary' (newly developed) properties.

Approximately 45% of 2006 revenues were derived in the populous Shanghai, Jiangsu Province and Zhejiang Province.

Governmental Control - Since 2006, the PRC has instituted a number of initiatives to slow the swift property growth rates. These include: requiring that at least 70% of the land approved by a local government for residential property development for any given year be used for developing low- to-medium cost and small-to-medium size units and low-cost rental properties; 70% of construction be for 'small unit space' properties. Increasing the down payment required for larger properties; imposing a resale tax on properties held less than five years.

Note- EJ has very high 'receivables' for their revenues stream. The June 2007 quarter saw approximately $23.5 million in revenues, while receivables on the book totaled $48.5 million. This appears due to EJ receiving payment for services only after a development (or phase of development) has been completely sold. EJ reports revenue upon each sale, however they do not receive the actual monies until the entire development project has been completed and all units sold. I'm not real thrilled with this accounting method. It appears to be a concession EJ has made to garner business, which is fine. However they've substantial receivables on the books that they've already booked as revenues but have not yet been paid. Cash flows here are not nearly as impressive as revenues/earnings would indicate. If all goes well they would eventually see the cash, however there appears to be serious lag time here from 'booking' revenues and actually receiving monies.

Financials

$2 per share in cash post ipo.

Tax Rate - EJ is taxed a little more heavily than many of the Chinese based ipos we've seen. It appears EJ's current tax rate is in the 25%-30% ballpark.

Historically, EJ has booked an outsized revenue number in the fourth quarter of the year. For example in 2006 quarterly revenue numbers were (in millions) $4, $10, $8 and $34. I would expect a similar trend in 2007.

2006 - Revenues were $56 million, a 44% increase over 2005. Operating margins were a strong 44%. Net margins were 34%. Earnings per share were $0.24.

2007 - As the bulk of revenues will be booked in the fourth quarter, it is a bit difficult to forecast full year. However based on the growth in first and second quarters, I would expect revenues to rise sharply in 2007 to $115 million or so. That would be a very impressive 100%+ revenue growth in 2007. Operating margins should improve to 50%. *Note* - both revenue and operating margin numbers assume a strong fourth quarter of 2007. Net margins should be 38%. Earnings per share should be $0.55 - $0.60. On a pricing of $12.50, EJ would trade 22 x's 2007 earnings.

*Note* - EJ's net margins and earnings per share are not quite comparable to similar sector leader Chinese ipos in that their earnings are taxed at a higher rate than most of those.

Conclusion - Strong recommend in range. In fact, EJ is so attractive in range, I expect the range to be increased here. Sector leader in a fast growing sector, 100% revenue increase expected in 2007, coming at a pretty fully taxed 21 X's 2007 earnings. EJ is coming too cheap in range.

pre-ipo analysis on this week's full calendar at http://www.tradingipos.com

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2007-08-01
DM - Dolan Media

DM - Dolan Media plans on offering 12 million shares(assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.

Executives and Directors will own 20% of DM post-ipo.

From the prospectus:

'We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.'

DM operates under two segments, Business Information and Professional Services.

Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 US markets. Third largest business journal publisher and second largest court and commercial publisher in the US. DM also believes they're one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication web sites also had approximately 315,000 unique users in March 2007.

Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the US.

DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.

In 2006 Business Information segment accounted for 55% of revenues Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues While DM has their hands in a few different pots, their more a classic classified advertising reliant publication company as anything else with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of their public notice business.

Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.

Financials

DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.

Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.

2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.

Conclusion - I like the mortgage default processing segment quite a bit here, I'm not enamored with the publications side of the business. Problem is, DM conducts their mortgage default processing services in just two states, while they own publications in 20 markets and derive 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM. On that basis this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just their higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.

all of this week's deals analyzed pre-ipo at http://www.tradingipos.com

While only 35 or so delayed pieces appear annually on the blog, every ipo is in the subscriber section of the site before ipo debut.


2007-07-11
OWW - Orbitz Worldwide

OWW - Orbitz Worldwide plan on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone(BX). They've structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.

This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz website was originally formed in 1999(and launched in 2001) by a group of major US airlines including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including cheaptickets.com to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.

Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence none the less. In fact since OWW operates in a highly competitive, razor thin margin business the debt on the books is THE difference here between a bottom line profit and a bottom line loss.

From the prospectus:

'We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.'

In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.

Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels they are currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was US based.

Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the US were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the US is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.

OWW has approximately 25 million unique users monthly and is the second largest online US travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the US it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-US focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the US.

Risks here are obviously any occurrence that slows US air travel. Also competition is fierce in this space with a myriad of travel booking sites including the US airlines own websites. A few of the discount carriers such as Southwest do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airlines website to purchase, bypassing the booking fees that Orbits and related sites take.

Direct US competitors include Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express.

Financials

$600 million in debt, negative book value post-ipo.

2006 - As OWW has made a number of acquisitions comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.

2007 - OWW had positive operating margins for the first quarter of '07(just barely), something they did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes a portion of this is due to acquisitions, and fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.

Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears they're getting squeezed a bit on their transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.

Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit themselves and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.