IPO Update: Building DreamStar Technology Readies $25 Million IPO (Pending:BDS) – Seeking Alpha

Asians working in busy coworking space


What Is Building DreamStar Technology?

Shenzhen, China-based Building DreamStar Technology (BDS) was founded to provide real estate as a service to enterprises of all sizes as well as other related professional services.

Management is headed by co-founder and Chairman Houde Li, who has extensive experience in the venture capital investment industry and general management field.

The firm’s PRC entities operated 46 space locations and had 1,101 clients moved into its spaces.

The occupancy rate of the co-working spaces fell from 81% at the end of 2020 to 73% at the end of 2021.

Building DreamStar has received at least $20.2 million from investors in the form of equity and another $24.4 million in debt from related parties.

The firm markets its services through online and offline means, including partnerships with real estate agents to whom the company pays leasing commissions.

According to a 2019 market research report by China Real Estate Chamber of Commerce, the amount of co-working space in China grew by nearly 60% in the first ten months of 2018.

However, many of those locations were less than 50% leased at the time.

Since the arrival of the COVID-19 pandemic, many co-working space companies have ceased their expansion efforts, focusing instead on making their existing locations more attractive to potential clients while weathering the pandemic’s restrictions.

Major competitive or other industry participants include:

  • MyDreamPlus

  • Kr Space

  • Ucommune

  • WeWork China – sold interest in Sept. 2020

  • Numerous smaller competitors

  • Existing property landlords

Building DreamStar Technology’s IPO Date & Details

The initial public offering date, or IPO, for Building DreamStar Technology has not yet been indicated by the company or its underwriter.

(Warning: Compared to stocks with more history, IPOs typically have less information for investors to review and analyze. For this reason, investors should use caution when thinking about investing in an IPO, or immediately post-IPO. Also, investors should keep in mind that many IPOs are heavily marketed, past company performance is not a guarantee of future results and potential risks may be understated.)

BDS intends to sell 4.6 million shares of common stock at a proposed midpoint price of $5.50 per share for gross proceeds of approximately $25.3 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $227.6 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 11.33%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

approximately 40%, or US$8.88 million (assuming no exercise of the over-allotment option), for expanding our spaces and services offerings, such as online searching tool for office spaces;

approximately 35%, or US$7.77 million (assuming no exercise of the over-allotment option), for potential strategic investments and acquisitions including co-working spaces operated by competitors and businesses that are complementary to the Company’s current business operations in Chengdu, Shenzhen, Shanghai and other major cities in China, although we have not identified any specific investments or acquisition opportunities at this time; and

approximately 25%, or the remaining amount for general corporate purposes, which may include working capital needs and other corporate uses.

(Source – SEC)

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

Management says the company is not currently subject to legal proceedings that would have a material adverse effect on its financial condition or operations.

The sole listed underwriter of the IPO is Univest Securities. Univest is a frequent underwriter for Chinese and Japanese companies seeking to list their shares on U.S. public markets.

How To Invest In The Company’s Stock: 7 Steps

Investors can buy shares of the stock in the same way they may buy stocks of other publicly traded companies, or as part of the pre-IPO allocation.

Note: This report is not a recommendation to purchase stock or any other security. For investors who are interested in pursuing a potential investment after the IPO is complete, the following steps for buying stocks will be helpful.

Step 1: Understand The Company’s Financial History

Although there is not much public financial information available about the company, investors can look at the company’s financial history on their form S-1 or F-1 SEC filing (Source).

Step 2: Assess The Company’s Financial Reports

The primary financial statements available for publicly-traded companies include the income statement, balance sheet, and statement of cash flows. These financial statements can help investors learn about a company’s cash capitalization structure, cash flow trends and financial position.

BDS’ financials are out of date, but the company is producing higher revenue, lower gross loss and negative gross margin, reduced operating losses and net losses but growing cash used in operations

Selling expenses as a percentage of total revenue have dropped as revenue rose; its Selling efficiency rate was 0.9x in 2021.

Step 3: Evaluate The Company’s Potential Compared To Your Investment Horizon

When investors evaluate potential stocks to buy, it’s important to consider their time horizon and risk tolerance before buying shares. For example, a swing-trader may be interested in short-term growth potential, whereas a long-term investor may prioritize strong financials ahead of short-term price movements.

Step 4: Select A Brokerage

Investors who do not already have a trading account will begin with the selection of a brokerage firm. The account types commonly used for trading stocks include a standard brokerage account or a retirement account like an IRA.

Investors who prefer advice for a fee can open a trading account with a full-service broker or an independent investment advisor and those who want to manage their portfolio for a reduced cost may choose a discount brokerage company.

Step 5: Choose An Investment Size And Strategy

Investors who have decided to buy shares of company stock should consider how many shares to purchase and what investment strategy to adopt for their new position. The investment strategy will guide an investors’ holding period and exit strategy.

Many investors choose to buy and hold stocks for lengthy periods. Examples of basic investing strategies include swing trading, short-term trading or investing over a long-term holding period.

For investors wishing to gain a pre-IPO allocation of shares at the IPO price, they would ‘indicate interest’ with their broker in advance of the IPO. Indicating an interest is not a guarantee that the investor will receive an allocation of pre-IPO shares.

Step 6: Choose An Order Type

Investors have many choices for placing orders to purchase stocks, including market orders, limit orders and stop orders.

  • Market order: This is the most common type of order made by retail traders. A market order executes a trade immediately at the best available transaction price.

  • Limit order: When an investor places a buy limit order, they specify a maximum price to be paid for the shares.

  • Stop order: A buy-stop order is an order to buy at a specified price, known as the stop price, which will be higher than the current market price. In the case of buy-stop, the stop price will be lower than the current market price.

Step 7: Submit The Trade

After investors have funded their account with cash, they may decide an investment size and order type, then submit the trade to place an order. If the trade is a market order, it will be filled immediately at the best available market price.

However, if investors submit a limit order or stop order, the investor may have to wait until the stock reaches their target price or stop-loss price for the trade to be completed.

The Bottom Line

Building DreamStar is seeking U.S. public capital market investment to expand its service offerings and acquire competitors or for geographic expansion.

The market opportunity for providing coworking space services in China is large but fragmented and it is difficult to achieve economies of scale due to the sheer size of the market.

Like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

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

The primary risk to the company’s outlook are changing user habits as a result of the pandemic, with more persons and companies seeking to work remotely from home. However, this may also produce growth opportunities as enterprises seek more distributed locations and thus require more in the way of coworking services.

Univest Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (9.1%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

The firm has produced topline revenue growth, and its other major financial metrics have improved but remain substantially negative.

Due to the pandemic’s effects, firms such as BDS have focused on adding services rather than expanding their operations.

While this may appear to be a smart approach that may help the firm reach profitability, it is all subject to the unpredictable whim of Chinese regulators and their heavy responses to COVID-19 outbreaks, with severe regional lockdowns common.

Given these uncertainties and substantial & continuing losses, I’m on Hold for the BDS IPO, although the low nominal price of the stock may attract day traders.

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