Quick Take

Intelligent Living Application Group (ILAG) has filed to raise $19 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm sells mechanical locksets in the U.S. and Canada.

ILAG has suffered topline revenue contraction and its financial information is outdated.

I’ll provide an update when we learn more about the IPO from management.

Company & Technology

Hong Kong, China-based Intelligent Living was founded to design, manufacture and sell mechanical locksets for indoors and outdoors as well as smart locks for the connected home market.

Management is headed by Chairman and CEO Mr. Bong Lau, who has more than 20 years experience in the door security hardware industry.

The company sells its products to major retailers as well as property developers and hotel/service apartment developers.

The firm began work on its smart locks initiative several years ago but has since focused its resources on its core business due to the trade conflict between the U.S. and China and more recently the effects of the Covid-19 pandemic.

Currently, 98% of the firm’s revenue is from sales to the U.S. market.

Intelligent Living has received at least $4.2 million from investors including senior management.

Customer Acquisition

The company pursues large customers through a direct sales and marketing force and attendance at trade shows and conferences.

Management believes its focus on producing higher quality products has ‘hurt our profit margin in light of cut-throat price competition.’The firm intends to perform test marketing of its self-branded products in the Southeast Asian region.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have decreased, as the figures below indicate:

Selling and Marketing

Expenses vs. Revenue

Period

Percentage

2019

1.6%

2018

1.9%

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was a strong 18.1x in the most recent reporting period.

Market & Competition

According to a 2020 market research report by Zion Market Research, the global market for mechanical locks is expected to exceed $9 billion in annual turnover by 2026.

This represents a forecast CAGR of 5.1% from 2020 to 2026.

The main drivers for this expected growth are increasing security concerns among consumers and the portable natures of mechanical locks.

Also, the Asia Pacific region is expected to account for the highest market share by 2026 owing to continued residential development at large scale in countries such as China and India.

Major competitive or other industry participants include:

  • Defiant / Home Depot (HD)

  • Schlage / Allegion (ALLE)

  • Kwikset / Spectrum (SPB)

  • Delaney Hardware

  • Assa Abloy

  • DOM Security

  • Codelocks

  • Serrature Meroni SpA

Financial Performance

Intelligent Living’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Increased gross profit and gross margin

  • A swing to operating loss

  • A swing to cash used in operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 11,129,943

-22.8%

2018

$ 14,415,069

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ 1,118,003

14.4%

2018

$ 977,439

Gross Margin

Period

Gross Margin

2019

10.05%

2018

6.78%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ (1,408,476)

-12.7%

2018

$ 1,449,995

10.1%

Net Income (Loss)

Period

Net Income (Loss)

2019

$ (1,278,641)

2018

$ (1,409,306)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ (289,403)

2018

$ 522,629

(Glossary Of Terms)

Source: Company registration statement

As of December 31, 2019, Intelligent Living had $1.1 million in cash and $4.1 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was ($402,158).

IPO Details

Intelligent Living intends to raise $19 million in gross proceeds from an IPO of its ordinary shares, although the final figure may be different.

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

to set up our new subsidiary or representative office in the United States to enhance sales and service support for our customers and future expansion in marketing and internet sales of self-branded products.

to establish production facility(ies) outside China in order to mitigate the effects of additional tariffs that may be levied due to trade war between U.S. and China and to leverage lower labor costs in southeast Asia counties.

for working capital of our Hong Kong operation, including but not limited to sale and marketing expenses, and research and development expenses of smart locks, smart security and internet of things (IoT) products.

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

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Commentary

Intelligent Living is seeking U.S. capital to essentially begin to diversify its operations and revenue opportunities.

The company’s financials show the negative effects of the Covid-19 pandemic and U.S China trade tensions with contracting revenue and swings to operating losses and operating cash used.

Sales and Marketing expenses as a percentage of total revenue have dropped; its Sales and Marketing efficiency rate remains at a healthy level.

One problem is that the financials are quite old, only through the end of calendar year 2019, so we haven’t seen financial information on the business since the start of the Covid-19 pandemic.

The market opportunity for traditional locksets is expected to grow at a moderate rate in the near term.

There is a growing opportunity for smart locks, but management has restrained itself in that regard and focused its limited resources on its core business.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a structure where U.S. investors would only have an interest in an offshore firm with uncertain rights to the firm’s operational results.

Management asserts that it has no unconsolidated VIEs, or variable interest entities.

This is a legal gray area that brings the risk of management changing the terms of the relationship or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Notably, many of the firm’s entities have been incorporated in Hong Kong, where in the past it has been easier for them to serve U.S. and other foreign customers.

With the recent crackdown by Beijing on Hong Kong, this advantage may be under some question as to the terms under which these businesses may operate in the future.

When we learn more about the IPO from management, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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