Alpha Technology Group Limited Aims For $8 Million Micro-IPO

A Quick Take On Alpha Technology Group Limited

Alpha Technology Group Limited (ATGL) has filed to raise $7.875 million in an IPO of its ordinary shares, according to an SEC F-1 registration statement.

The firm provides IT software development services for a variety of business use cases.

ATGL is tiny in size, management has not shown an ability to generate meaningful revenue from within its existing region of focus, it has continual operational risks inside the PRC and a stated goal of international expansion through acquisition without any history of success.

In addition, its valuation assumptions are highly excessive, so my outlook on the IPO is to Sell.

Alpha Technology Overview

Hong Kong, PRC-based Alpha Technology Group Limited was founded to develop a suite of IT solution services for businesses of all sizes in the PRC

Management is headed by Tsang 'Anthony' Chun Ho, who has been with the firm since February 2023 and is currently the managing director of Fuchsia Capital Limited and was previously a fund manager of the Emperor Greater China Investment Fund and the Orient Investment Fund.

The company’s primary offerings include the following:

• System development

• Web and mobile app development

• AI-Optical Character Recognition services

• Support and maintenance services

• NFT-related services

As of March 31, 2023, Alpha Technology has booked a fair market value investment of $3.3 million in equity from investors, including Wittelsbach Group Holdings, Hanoverian International Group and Zihua Shengshi Holding Group.

Alpha Technology - Customer Acquisition

The company markets its services to prospects of all sizes in the greater Hong Kong region and elsewhere via its sales, marketing and business development outreach efforts.

Customer industries represented have included real estate, consulting, electronic payments, logistics, retail, investments, architectural design, car park management, textiles, distribution and wholesale.

Selling, G&A expenses as a percentage of total revenue have fluctuated as revenues have increased from a small base, as the figures below indicate:

(Source - SEC)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, rose to 1.6x in the most recent reporting period, as shown in the table below:

(Source - SEC)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ATGL’s most recent calculation was 87% as of March 31, 2023, so the firm has performed well in this regard, although from a tiny revenue base, per the table below:

(Source - SEC)

Alpha Technology’s Market & Competition

According to a 2022 market research report by GlobalData, the market for Chinese IT services was an estimated $355 billion in 2021 and is forecasted to reach $515 billion by 2026.

This represents a forecast CAGR (Compound Annual Growth Rate) of 7.7% from 2022 to 2026.

The main drivers for this expected growth are the continued strong demand for IT upgrades in the very large manufacturing sector.

Also, foreign companies no longer have a disproportionately large market share as domestic firms have built up their capabilities with the service offerings.

The Hong Kong market for IT services is highly fragmented with at least one thousand IT services companies of all sizes providing competitive services that feature high price competition and low barriers to entry.

Alpha Technology's Financial Performance

The company’s recent financial results can be summarized as follows:

• Rising topline revenue from a tiny base

• Variable gross profit and gross margin

• Increasing operating losses

• Fluctuating cash flow from operations

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

(Source - SEC)

As of March 31, 2023, Alpha Technology had $1.45 million in cash and $2.6 million in total liabilities.

Free cash flow during the twelve months ending March 31, 2023, was $108,585.

Alpha Technology Group Limited IPO Details

Alpha Technology intends to raise $7.875 million in gross proceeds from an IPO of its ordinary shares, offering 1.75 million shares at a proposed midpoint price of $4.50 each.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

The company is also registering 2 million shares for potential resale by selling shareholders, including Wittelsbach Group Holdings and Hanoverian International Group.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $61.6 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 11.67%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

As a foreign private issuer, the company can choose to take advantage of reduced, delayed or exempted financial and senior officer disclosure requirements versus those that domestic U.S. firms are required to follow.

Management says the firm qualifies as an ‘emerging growth company’ as defined by the 2012 JOBS Act and may elect to take advantage of reduced public company reporting requirements; prospective shareholders would receive less information for the IPO and, in the future, as a publicly-held company within the requirements of the Act.

Management says it will use the net proceeds from the IPO as follows:

Approximately 70% for increasing operating scale and expanding business in overseas markets including Southeast Asia countries by merger and acquisition and recruiting a new team;

Approximately 20% for enhancing research and development on the AI-OCR technologies; and

The balance, approximately 10%, to fund working capital and for other general corporate purposes.

(Source - SEC)

The firm does not currently have an equity compensation incentive plan.

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

Regarding outstanding legal proceedings, management said it was not aware of any legal proceedings against the firm that would have a material adverse effect on its financial condition operations.

The sole listed bookrunner of the IPO is Prime Number Capital.

Valuation Metrics For Alpha Technology

Below is a table of relevant capitalization and valuation figures for the company:

(Source - SEC)

Commentary About Alpha Technology’s IPO

ATGL is seeking U.S. public capital market investment to fund its international expansion efforts and its working capital requirements.

The company’s financials have generated growing topline revenue from a tiny base, fluctuating gross profit and gross margin, higher operating losses and variable cash flow from operations.

Free cash flow for the twelve months ending March 31, 2023, was $108,585.

Selling, G&A expenses as a percentage of total revenue have fluctuated as revenue has increased; its Selling, G&A efficiency multiple rose to 1.6x in the most recent reporting period.

The firm currently plans to pay no dividends and to retain future earnings for reinvestment back into the firm's growth and working capital requirements.

Domiciled in the British Virgin Islands and with operations in the PRC, the company is subject to various regulations that may limit the issuance of dividends in the future.

The company’s Rule of 40 results have produced positive results, although on a tiny revenue base.

The market opportunity for providing IT services in the PRC is large and growing at a moderate rate of growth in the coming years.

Prime Number Capital is the sole underwriter and the three IPOs led by the firm over the last 12-month period have generated an average return of negative (3.2%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

Business risks to the company’s outlook as a public company include its tiny size and desire to expand internationally through acquisition.

Like other firms with Asian country operations seeking to tap U.S. markets, the proposed listing entity operates as a British Virgin Islands corporation that owns interests in its other country operations.

U.S. investors would only have an interest in an offshore firm with interests in or only agreements with operating subsidiaries (i.e., potentially no equity interests), some of which may be located in or have substantial operations in China or other Asian countries with restrictions or unpredictable regulatory environments regarding those interests.

Additionally, restrictions on the transfer of funds between subsidiaries within China or other Asian countries may exist.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable regulatory rulings that may affect such companies and their U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Asian companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

As for valuation expectations, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 64x.

The firm is tiny in size, management has not shown an ability to generate meaningful revenue from within its existing region of focus, it has continual operational risks inside the PRC and a stated goal of international expansion through acquisition without any history of success.

In addition, its valuation assumptions are highly excessive, so my outlook on the IPO is to Sell.

Expected IPO Pricing Date: To be announced.

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