The American vaping company with strong Chinese ties reported its revenue fell 12.7% in the three months to March, as it rushes to set up a new manufacturing facility in Malaysia
Key Takeaways:
- Ispire’s revenue fell and its loss widened in its latest fiscal quarter, as it overhauled its operation to reduce exposure to the U.S.-China trade war
- The company is rushing to open a new factory in Malaysia, mirroring similar moves by other vaping companies to diversify their production away from China
A landmark trade deal between the U.S. and China lit a fire under U.S.-traded Chinese stocks on Monday, but you would never know from looking at shares of Ispire Technology Inc. (ISPR.US). Perhaps the vaping company would like it that way, since it’s trying hard to convince investors it’s a Los Angeles-based, U.S. entity, despite its strong China ties.
The reality is that Ispire is still quite reliant on China, which currently supplies most of its vaping hardware from its self-owned subsidiary in the Southern boomtown of Shenzhen. But the company is moving quickly to reduce those China ties, and provided a detailed update of its plans to move a major portion of its production to a new facility in Malaysia in its latest quarterly results announced on Monday.
Co-CEO Michael Wang also detailed a broader scramble by vaping product makers in general to move production out of China to lower exposure to potential U.S. tariffs in the ongoing trade war. He said that movement includes a couple of Ispire’s competitors trying to set up factories in Vietnam, while others move to Indonesia.
“In this industry, literally 99.99% of vaping devices up to, say, two years ago were made in China,” Wang said on Ispire’s earnings call to discuss the latest results for the three months to March, its third fiscal quarter. “Today, there is a little bit of diversification in terms of country of origin, but still well over 90% of products are made in China.”
Trade wars aside, Ispire is also being dogged by its own internal issues, which may explain why its stock fell 3% on Monday after it released its latest report. That contrasts sharply with a 3.4% rally for the MSCI China Index, as investors cheered a sharp reduction in tariffs imposed by the U.S. and China on each other’s products for 90 days while they try to hammer out details of a new, longer-term trade deal.
Ispire’s issues include declining revenue, high accounts receivable, margins that are well below its global peers, and ongoing losses that are only getting larger. Adding to the problems are earlier company hype about the potential of the cannabis vaping market, which led it to predict that sales of related products could help to drive its overall revenue to $1 billion by 2027 and $2 billion by 2029.
Such astronomic heights would require breakneck revenue growth, which was hardly what Ispire delivered in its latest results. Instead, the company reported its revenue fell 12.7% in the three months to March to $26.2 million from $30 million a year earlier – making the $1 billion revenue forecast look almost laughable.
The company provided a few updates on its cannabis business on its earnings call, including the launch of a new device called Sprout in a new partnership with a company called Raw Garden. But, probably wisely, it refrained from providing any inflated revenue forecasts for the business. Instead, Wang characterized his company as being in a “restructuring and manufacturing transitional period,” which includes moving some of its manufacturing to Malaysia and also weaning itself from lower-quality customers who were driving up its accounts receivable to dangerously high levels.
Back to basics
Ispire has repeatedly drawn attention to its growing accounts receivables in earlier reports, showing both the company and investment community were worried about the trend. Against that backdrop, it said it recorded a milestone in the latest quarter by reducing its accounts receivables for the first time in its history. Specifically, it said the figure dropped to $60.4 million by the end of March from $67.7 million three months earlier.
We should point out the newest amount is still more than double the company’s latest quarterly revenue. Still, the reduction shows Ispire realizes it can’t just sell products to deadbeat customers who never pay their bills. Such deadbeats are eating into the company’s cash, which plunged about 40% to $23.5 million at the end of March from $39.5 million a year ago.
As we’ve previously noted, the other focus for Ispire was its ongoing efforts to set up a new production facility in Malaysia to lower its geopolitical risk. On that front, Wang said Ispire recently received an interim license to manufacture nicotine products in Malaysia and anticipates getting a final license in the next few months. He added the facility is designed to eventually house up to 80 production lines.
“We have made significant strides as we are transitioning our manufacturing to Malaysia, effectively de-risking our production strategy for the current geopolitical climate,” Wang said. “During the third fiscal quarter, in an effort to further streamline our operations and increase margins, we moved a number of our daily functions to our Malaysian campus, which we anticipate will reduce our operating expenses by $8 million annually.”
Growing expenses are indeed a problem for the company. Its gross profit fell 21.3% during the quarter, dragging down its gross margin to 18.2% from 20.4%. Both margin figures are well behind rival RLX’s (RLX.US) gross margin of 27.0% in last year’s fourth quarter, showing just how much work Ispire needs to do to become more efficient. At the same time, Ispire’s operating expenses rose 30.5% year-on-year to $15.4 million in the latest quarter, as it blamed factors like stock-based compensation, bad-debt expense and one-off severance costs.
That combination of falling revenue and rising expenses caused Ispire’s net loss to widen to $10.9 million in the latest quarter from $5.9 million a year earlier.
The company held out a glimmer of hope for investors by saying that benefits from its restructuring in North America – which accounts for about a third of sales – will start to show up in its next quarterly report for the three months to June.
Investors seem to be losing patience with the company, with its shares down about 50% over the last year to trade at just under $3 – less than half their IPO price of $7 in 2023. At that level the stock now trades at depressed price-to-sales (P/S) ratio of just 1.14, a small fraction of the 6.94 for RLX, and a similar 6.90 for Hong Kong-listed rival Smoore International (6969.HK).
Add Comment