China-based, Cornerstone Management, Inc. is a private equity fund manager investing in China-based companies that are listed or seeking to be listed in the United States, often referred to as U.S. China concepts stocks. The lines below provide further details on the type of investment made by Cornerstone management:
“Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and raise capital to fund targeted transactions on a deal-by-deal basis as opposed to calling capital from committed investors. ” Source: Form F-1
As of March 31, 2018, the assets under management were equal to $548.5 million. Some of the company’s investment picks are shown in the image below:
With $25 million in assets, 18 million in total liabilities and no financial debt, the company’s financial situation seems stable. In addition, the revenue increase in 2017 is impressive. Cornerstone reported revenues of $6.4 million and $12 million in 2017 and 2018 respectively. The assets under management seemed to increase quite a bit in this time period, which increased the management fees and subscription fees received by the company.
On the bottom line, Cornerstone reported positive net income in 2017 and 2018, equal to $2.7 million and $2.8 million respectively. Additionally, the company also reported positive cash flow from operations, equal to $2.7 million and $4 million in 2017 and 2018 respectively. With all this in mind, the company’s financial performance is very beneficial.
Cornerstone is selling shares at $4 and expects to receive $20 million in the IPO. It seems beneficial that Cornerstone will use the proceeds for increasing its sales efforts and hiring additional personnel for general corporate purposes. The company will not use the proceeds to pay debts, which seems appealing.
The amount of shares outstanding after the IPO will be equal to 153.390 million. At $4, the expected market capitalization will be equal to $613 million, which seems too expensive. Substantial due diligence on how the company is valuing the shares seems necessary. With a net income of only $2.7 million, the market should not be able to justify a market capitalization of $613 million.
In 2018, revenues increased quite a bit. However, the market should know very well that revenue growth may not continue the same growth pace in the future. This is a private equity, not a technological company. Other peers are not growing at the same pace.
Disclosure: We hold no position in Cornerstone Management either long or short and we have not been compensated for this article.