IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Aurora Mobile Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27264" target="_blank" data-smartkarma-citation="entities:27264:1">Aurora Mobile Ltd (JG US)</a> operates under the Jiguang brand. It announced its IPO price range of $8.50-10.50 per ADS. At the mid-point of the IPO price range, Jiguang will raise net proceeds of $102.2 million. Existing shareholders such as Fidelity International will subscribe for around 31% of the ADS being offered at the IPO mid-point.</p><p>Jiguang likes to label itself as a leading mobile big data solutions platform in China. Based on that description, you would be forgiven for not having the faintest idea about Jiguang’s business. Jiguang is largely an ad tech company, as 78% of revenue arises from targeted marketing which helps advertisers target the right audience with the right content at the right time. Understandably, Jiguang wants to avoid the ad tech label as ad tech IPOs have mostly proven to be disastrous investments.</p><p>Jiguang’s business model is to collect mobile behavioural data from the developers that use its developer services (10% of 1Q18 revenue), such as push notifications. It then uses this data to improve its data solutions business (90% of revenue) which helps its advertising customers better target users and their behaviour. Jiguang’s financial performance is promising as revenue has grown exponentially, and EBITDA profitability is at hand. However, we struggle to recommend the IPO due to an unappealing risk/reward profile:</p><ol>
<li>The Chinese ad tech space is highly fragmented with most companies claiming to generate the best ROI on ad spend based on competitive advantages such as access to big data sets and proprietary algorithms. Frost &amp; Sullivan claims that iClick Interactive, the closest listed peer, was the leading Chinese independent marketing platform with a market share of just 4% by gross billings in 2017. Based on a similar metric, Jiguang’s share was around 1% in 2017. The lack of a de facto leader reflects the absence of a company with a sustainable competitive advantage to maintain pricing power and gain a dominant share.</li>
<li>Jiguang’s share of customer’s ad spend seems to have hit the ceiling. Revenue per data solutions customer materially increased from RMB91K in 2Q17 to RMB252K in 2Q18 as customers allocated an increasing proportion of their ad spend with Jiguang. However, while revenue per data solutions customer sequentially increased 29% from 1Q17 to 2Q17, it was sequentially flat from 1Q18 to 2Q18. The sequentially flat growth in a seasonally stronger 2Q18 (vs 1Q18) likely reflects Jiguang's lack of a compelling value proposition to capture a greater proportion of a customer’s ad spend.</li>
<li>In the ad tech industry, the take rate is an important metric to judge pricing power. Jiguang’s take rate for data solutions has remained relatively stable at around 15% from 2016 to 1Q18. Notably, in 2017, Jiguang’s take rate was 200 basis points lower than iClick. Consequently, Jiguang’s self-proclaimed competitive advantage of making better predictions using its reams of data does not appear to have translated into meaningful pricing power.</li>
<li>Relative valuation suggests a significant premium. Based on our estimates and at IPO mid-point, Jiguang’s 2020 P/E of 30x is a material premium to the blended median Chinese internet peer group 2020 P/E of 20x. Notably, a recent capital raise suggests that IPO investors are likely getting a raw deal. On 17 April 2018, Jiguang issued $35 million convertible notes which can be converted from the issue date initially at $11.76 per common share. The initial conversion price is at a 17% discount to the IPO mid-point price of $14.25 per common share.</li>
</ol><div class="content-highlight"><p>Our overall view is that we struggle to recommend this IPO as there is insufficient evidence to suggest that Jiguang possesses a sustainable competitive advantage to generate shareholder returns. </p></div>

Aurora Mobile Ltd (JG US) operates under the Jiguang brand. It announced its IPO price range of $8.50-10.50 per ADS. At the mid-point of the IPO price range, Jiguang will raise net proceeds of $102.2 million. Existing shareholders such as Fidelity International will subscribe for around 31% of the ADS being offered at the IPO mid-point.Jiguang likes to label itself as a leading mobile big data solutions platform in China. Based on that description, you would be forgiven for not having the faintest idea about Jiguang’s business. Jiguang is largely an ad tech company, as 78% of revenue arises from targeted marketing which helps advertisers target the right audience with the right content at the right time. Understandably, Jiguang wants to avoid the ad tech label as ad tech IPOs have mostly proven to be disastrous investments.Jiguang’s business model is to collect mobile behavioural data from the developers that use its developer services (10% of 1Q18 revenue), such as push notifications. It then uses this data to improve its data solutions business (90% of revenue) which helps its advertising customers better target users and their behaviour. Jiguang’s financial performance is promising as revenue has grown exponentially, and EBITDA profitability is at hand. However, we struggle to recommend the IPO due to an unappealing risk/reward profile:
The Chinese ad tech space is highly fragmented with most companies claiming to generate the best ROI on ad spend based on competitive advantages such as access to big data sets and proprietary algorithms. Frost &amp; Sullivan claims that iClick Interactive, the closest listed peer, was the leading Chinese independent marketing platform with a market share of just 4% by gross billings in 2017. Based on a similar metric, Jiguang’s share was around 1% in 2017. The lack of a de facto leader reflects the absence of a company with a sustainable competitive advantage to maintain pricing power and gain a dominant share.
Jiguang’s share of customer’s ad spend seems to have hit the ceiling. Revenue per data solutions customer materially increased from RMB91K in 2Q17 to RMB252K in 2Q18 as customers allocated an increasing proportion of their ad spend with Jiguang. However, while revenue per data solutions customer sequentially increased 29% from 1Q17 to 2Q17, it was sequentially flat from 1Q18 to 2Q18. The sequentially flat growth in a seasonally stronger 2Q18 (vs 1Q18) likely reflects Jiguang's lack of a compelling value proposition to capture a greater proportion of a customer’s ad spend.
In the ad tech industry, the take rate is an important metric to judge pricing power. Jiguang’s take rate for data solutions has remained relatively stable at around 15% from 2016 to 1Q18. Notably, in 2017, Jiguang’s take rate was 200 basis points lower than iClick. Consequently, Jiguang’s self-proclaimed competitive advantage of making better predictions using its reams of data does not appear to have translated into meaningful pricing power.
Relative valuation suggests a significant premium. Based on our estimates and at IPO mid-point, Jiguang’s 2020 P/E of 30x is a material premium to the blended median Chinese internet peer group 2020 P/E of 20x. Notably, a recent capital raise suggests that IPO investors are likely getting a raw deal. On 17 April 2018, Jiguang issued $35 million convertible notes which can be converted from the issue date initially at $11.76 per common share. The initial conversion price is at a 17% discount to the IPO mid-point price of $14.25 per common share.
Our overall view is that we struggle to recommend this IPO as there is insufficient evidence to suggest that Jiguang possesses a sustainable competitive advantage to generate shareholder returns. 

China

Aurora Mobile Limited designs and develops software solutions. The Company offers a mobile big data platform that offers push notification, instant messaging, analytics, and short message service and sharing solutions. Aurora Mobile serves clients in China.

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Aurora Mobile Ltd (JG US)

Jiguang IPO Preview: Does It Ad Up?

Aurora Mobile Ltd (JG US) operates under the Jiguang brand. It announced its IPO price range of $8.50-10.50 per ADS. At the mid-point of the IPO...

Arun George

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