Zooming Higher, at Least for the Moment

These shares are up 10 times in a year so something is going on but I must admit it is hard to discover what. ICZoom (IZM) is a tiny company with a market value of around $202m ( now over $400m) and a year ago it was a tenth of that figure so what I make in a month (I wish).

It is also rather mysterious except that what I can discover makes it sound promising and ideal for what I call a toe-in-the-water investment (which I have just made).

A New Addition to the IG Platform

The shares are so below the radar that the company has just 78 shareholders and was unavailable for leveraged trading (CFDs and Spread Bets) on IG. I spoke to them; after two days they relented helped by a rising share price and it is now.

I have bought a strategic stake which I hope will be the beginning of a long and rewarding relationship. I have already got a bit of a crush; I am ready to fall in love.

The company is aiming to use technology to disrupt the market for supplying a huge range of semiconductors and other electronic products principally to SMEs (small and medium-sized companies)in the People’s Republic of China (the PRC). This is a large market, think $250bn and IZM’s latest sales were $214m for the year ended 30 June 2023.

Their market share is minute so if this one comes off it could be seriously WOW! The management, naturally, thinks it is practically a done deal; hence the strong share price. My impression from reading everything I can about the business is that they are in with a shot but with a lot to do.

The first disconcerting thing is that for all the bold talk all the important metrics fell in 2023 compared with 2022 and fell sharply. This may explain the market’s initial lack of enthusiasm. The shares were placed at around $4 in March 2023 and promptly fell below $2.

I have not been able to find any explanation of why 2023 was such a disastrous year but I have begun to form a theory. I think it was a year of transition, from which, like a butterfly emerging from a caterpillar, a new and more exciting IZM is being born.

Here was a clue from the latest fundraising documentation on what may have happened.

Historically we had a series of contractual arrangements with Shenzhen Pai Ming Electronics Co., Ltd., a PRC company which functioned as a variable interest entity and is referred to as “the VIE” or “Pai Ming Shenzhen” in this prospectus. The VIE structure provided contractual exposure to foreign investment in the VIE rather than replicating an investment and the main contribution of the VIE was to hold an ICP license as the PRC law prohibits direct foreign investment in internet-based businesses, such as provision of internet information services platform and other value-added telecommunication services.

We generated more than 96.5pc of our revenue from operations of our wholly foreign owned entity (“WFOE”), Components Zone (Shenzhen) Development Limited (“ICZOOM WFOE”) and its subsidiaries and our Hong Kong subsidiaries for the last two fiscal years and the most recent fiscal semi year. In December 2021, we terminated the agreements under the VIE structure and our Hong Kong subsidiary Iczoom Electronics Limited, or ICZOOM HK, now operates our B2B online platform www.iczoomex.com, which does not require an ICP license under the PRC law.

After the termination of the agreements under the VIE structure, in consideration that it may take some time for customers to take actions to complete the transfer and adapt to the new platform from the old platform operated by Pai Ming Shenzhen, ICZOOM WFOE entered into a business cooperation agreement with Pai Ming Shenzhen on January 18, 2022, pursuant to which Pai Ming Shenzhen agreed to provide us with network services including but not limited to business consultation, website information push, matching services of supply and demand information, online advertising, software customization, data analysis, website operation and other in-depth vertical services through online & offline data push through its platform.

In December 2021, we terminated the VIE arrangements with Pai Ming Shenzhen, and our Hong Kong subsidiary, Iczoom Electronics Limited, or ICZOOM HK, now operates our B2B online platform www.iczoomex.com, which does not require an ICP license under the PRC law. The reason for us to change the entity operating our B2B online platform was twofold. First, with the increased number of customers in Hong Kong and potential demands from other countries for electronic components in China, we were motivated to establish a B2B online platform in Hong Kong for our growth in the Hong Kong market and potential expansion to other markets. Second, the substantially increased regulatory and operational risks of the VIE arrangements accelerated our termination of the VIE arrangements, which as a result terminated our contractual right to access to the old platform held by Pai Ming Shenzhen.

Following the termination of the VIE arrangements in December 2021, we no longer have access to the old platform or website in China, and we now operate a new B2B platform through www.iczoomex.com. The new platform has substantially the same features and functions as the old platform or website, which, among others, enables us to collect, optimize and present product offering information, match orders for customers and fulfil orders through our SaaS suite services. The new platform, however, does not automatically integrate the information of registered customers from the old platform. The customers are mainly small-medium electronic component buyers in PRC, some of which are repeat customers who constantly place orders on the platform and some are less active who place orders whenever they need to. For those repeat customers, we were able to contact them and worked with them even prior to the termination of the VIE arrangement to register with the new platform and continue working with them to transfer over to the new platform. For other random customers, with the assistance from Pai Ming Shenzhen through a one-year business cooperation agreement, we have gradually transferred them over.

Prospectus, ICZoom, 11 March 2024

This is how the company described the opportunity presented to investors in 2023.

Below is the top team intending to make this happen.

This is their business model in a single graphic.

What they need to do to become a huge success is grow the numbers below dramatically, especially, I would imagine, the number of customers.

This probably explains why investors were so disappointed when all these numbers fell sharply in the 2023 financial year. However, what is striking, is that this unimpressive performance did not shake the management’s optimism in the slightest. They are as gung-ho as ever.

The chart below does not paint a picture of an exciting growth company with a huge opportunity. If we added in the 2023 numbers (to 30 June 2023) it would look even more like a business that was stagnating.

The growth strategy is all about scaling the business and improving the technology.

Looking at the chart below, we need sales growth more like we saw in 2020 and 2021, not the flattening that occurred in 2022 let alone the sharp decline (not shown on the chart) which happened in 2023. On the face of it, they could hardly have chosen a worse moment to float the business.

Bloodied but unbowed, this was management’s summary of the exciting opportunity facing the business.

Fast forward to March 2024 and the company has just raised $10.4m at $9 a share versus the $6m raised a year earlier in the initial IPO at $4 a share. This was done against the background of a seemingly downbeat report on trading for the year to 30 June 2023. Our gross profit decreased by $2,521,853 or 32.3pc, from $7,814,464 in the fiscal year 2022 to $5,292,611 in the fiscal year 2023, and our gross profit margin decreased by 0.2pc from 2.7pc in the fiscal year 2022 to 2.5pc in the fiscal year 2023. We have other additional operating expenses consisting of selling expenses and general and administrative expenses. As a result, we reported a net income of $1,751,170 for the fiscal year ended June 30, 2023, representing a $818,640 decrease from the net income of $2,569,810 for the fiscal year ended June 30, 2022.

For the fiscal years ended June 30, 2023 and 2022, our revenues were $214,405,226 and $290,376,371, respectively, and our gross profits were $5,292,611 and $7,814,464, respectively.

Prospectus, ICZoom, 11 March 2024

Sales and profits fell because the other key metrics on suppliers and customers were negative.

For the fiscal years ended June 30, 2023 and 2022, we made purchases from a total of 836 and 1,012 suppliers, respectively. At the date hereof, we have uploaded information of all products we purchased not only from those suppliers but from any new suppliers since 2022 on the new platform. For the fiscal years ended June 30, 2023 and 2022, we generated revenue from a total of 813 and 1,051 customers, respectively.

Prospectus, ICZoom, 11 March 2024

My guess, and, for the moment it is only a guess, is that the problems in 2023 were at least partly caused by the transition to the new platform (see quote above). If so this would explain the company’s confidence in the outlook as the new platform, hopefully, works its magic and any inventory cycles turn positive.

This is how they summarised their business model in March 2024 and if you can understand it you’re a better man than I am, Gunga Din (a classic 1939 film starring Cary Grant fighting the murderous Thuggee with the help of his Indian water bearer, Gunga Din and a poem by Rudyard Kipling – Though I’ve belted you and flayed you,
        By the livin’ Gawd that made you,
You’re a better man than I am, Gunga Din!).

IZM thinks the market is ripe for disruption.

Electronic products typically have a short product life cycle of 18 – 24 months. The electronic industry is always faced with a risk of chip shortages and excess inventory. The current electronic business model is a closed market system dominated by vendors, distributors, and traders with no open market infrastructure. Customers often do not know where to buy the latest scarce electronic parts and the suppliers often do not know where to sell the electronic parts in stock. This not only leads to complex trading processes but also high transaction costs and a low transaction efficiency caused by information barriers. Despite the size of the market, a significant portion of the business value in the global electronic industry is still handled by distributors and traders, who make high profits from the price differences caused by information asymmetry.

Prospectus, ICZoom, 11 March 2024

ICZoom believes its platform can change all this.

They certainly talk the talk.

We are the pioneer building an open market in the electronic component sale and supply industry. The current electronic component supply chain model was established more than 70 years ago before the popularity of e-commerce and it is a relatively closed market system where vendors, distributors, and traders are relying on the interpersonal relationships and business relations with certain entry barriers. In 2012, we started to build an e-commerce platform as the first open market in the electronic component distribution industry that focuses on real-time pricing, anonymous trading, and SaaS [software as a service] solutions. We monitor the orders placed on our platform and the market activities, and obtain electronic components from suppliers based on the volume of orders which enables us to sell electronic components to our customers either on favorable terms, or based on availability of inventory, or with assistance in order fulfilment. Our customers can benefit from the transparent product information and purchase demand, low transactions costs, and transaction efficiency on our platform. After eight-year dedication to our e-commerce platform, we have seen the increase in the registered users of our platform and hold a solid position in this market. In addition, we have been updating our SaaS system on a weekly basis to facilitate our services and assure the customers’ user experience. We believe that our e-commerce business model and strong market position will further strengthen our ability to attract more customers in the electronics industry.

Prospectus, ICZoom, 11 March 2024

It sounds good.

We aim to disrupt the traditional component distribution value chain by reducing product information asymmetry in distribution channels. In the legacy component distribution ecosystem, the procurement needs of SMEs have been underserved. SMEs have been relying on limited distributors and independent traders and suffering high inventory costs. By utilizing the latest technologies in big data and mobile computing, we are able to streamline and optimize the supply-side product offering information from our e-commerce platform. Meanwhile, our SME customers can access a broad set of product offering information. SME customers can conveniently perform all their inventory purchases from our platform and manage their purchase and order fulfilment from our value-added SaaS and logistics services. The suppliers will register on our platform to list their offering information, including the part brand, available volume, and a price range. Once a customer places an order through our platform with reference to a specific part number, brand, and price, our system automatically match the order with a supplier that satisfies the product requirement of pricing, delivery, product quantity, and supply cycle, usually the original source of the product offering information.

Prospectus, ICZoom, 11 March 2024

What they are offering does sound amazing.

As of March 2024, the group had 105 employees so each employee was valued at around $2m ($4m now). For comparison, each Nvidia employee is valued at over $75m, each Meta Platforms employee at $20m and each Microsoft employee at over $14m. I was staggered when I did those calculations, which made IZM look cheap.

I tried the calculation with my latest hot stock favourite, Root Inc., and the MV per employee was less than $1m, $839,160 to be precise. Does that make them cheap? I suspect it does but this is a new way of valuing stocks for me so I have no idea whether it works.

ICZoom – a Mystery Wrapped in a Conundrum

The problem with IZM as an investment is that I don’t know how trading has gone since June 2023, the last date for which I could find any numbers. This is baffling. The company should have reported and if it has and the numbers show strong growth that would explain the explosive rise, especially in the last month. I have searched in all the usual places including on the company’s investment website but can find nothing.

This means I am buying the shares on hope and the assumption that the company was able to raise money at a higher price in March 2024 than it could in March 2023 because it was able to give buyers of the shares reassuring news on current trading. It is frustrating because if I could see some figures and they were good I would be tempted to buy the shares more aggressively.

I don’t even know when we should expect news but it would be extraordinary if the company reports only once a year so it should have reported for the six months to 31 December 2023. It would certainly have known those figures when it did the March fundraising.

This could be a good omen because such poor communication with the investment community leaves room for improvement.

Below is a press release issued by IZM to celebrate its one-year anniversary as a quoted company.

ICZOOM’s CEO, Mr. Lei Xia, commented, “We are honored to celebrate our first anniversary of listing on Nasdaq as we review the progress we have made in the past year. ICZOOM will continue to solidify its position in electronic component products trading and anticipates contributing further to the development of the global market. We look forward to our future growth and remain committed to creating long-term value for our shareholders.”

ICZoom, Hong Kong, 25 March 2024

Strategy – Buy a Pilot Stake in ICZoom

What is clear is that if ICZoom can turn its big talk about the huge opportunity in China into results as it did before 2022 when sales were growing strongly and the return on equity reached nearly 50pc the shares, even after a strong rise, are cheap. The business is capitalised at less than one times revenue (more like two times now). For comparison, an exciting US disruptor like Crowdstrike is valued at 23 times revenue.

One thing to watch out for is that the shares may be a thin market. This can become especially important when trying to sell.

I have tried to give subscribers plenty of material to form a judgement about IZM. My hunch is that they could be an exciting investment but I would love to know how trading has gone since June 2023. For a listed company they should make a greater effort to keep their shareholders informed. I may try and send them a message on Monday. What is particularly annoying is that somebody must know.

I have sent them an email with my queries. If I hear anything I will advise subscribers. This is the world we enter when researching smaller companies. Things like newsflow and marketability become important. The company has not replied. Time to hire some external public relations guys!

Share Recommendations

ICZoom IZM Buy @ $19.59 (now $41)

I am baffled by what is happening here. In recent days the shares have not only been rising strongly but in huge volume. Is there information out there that I have not spotted? Are the shares suddenly going to collapse?

I have been adding to my investment in the usual way but in a separate account and only with money generated by the rising IZM share price so if it does collapse it will do so in a quarantined environment.

Needless to say, I am watching closely for any news. Apologies for not sending this alert sooner but I have been caught unaware by what is happening to the share price and affected by the difficulty of alerting a share where I do not know what is happening.

The good news is that if the business does turn out to be trading strongly from the new platform the opportunity is so huge there should still be plenty still to go for. What does seem to be the case is that there are some serious difficulties in valuing these small capitalisation shares. How can a business be valued at under $2 a share in April 2023 and then reach $41 a share in 2024 with no apparent change in fundamentals other than fundraising at $9 a share?