Infinova's Huge $1.2 Billion IPO Examined

JH
John Honovich
•Published Jan 07, 2011 00:00 AM
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Relatively unknown surveillance manufacturer Infinova announced an IPO valuing the company at $1.2 Billion USD and raising $300 Million USD. This is a huge event. Inside this note, we provide feedback from an interview with Infinova and our commentary on the implications for China and the overall market.

To put this IPO in perspective, Infinova's public financial valuation is now about the same, or slightly more, than Axis Communications (see Axis's stock summary), a company that generates about 6 times as much revenue. Also, see Infinova's stock summary.

Let's start with some basics financial information about Infinova:

  • In 2009, the company generated about $57 Million revenue
  • Over the last 3 years, annual growth rate has been in the range of 12% to 18%
  • 2010 growth rate looks to be in the same range (review the Financial Prospectus in Chinese [link no longer available])
  • For surveillance manufacturer standards, Infinova is a moderately sized company, bigger than most earlier stage IP companies but smaller than, for example, Dedicated Micros, IndigoVision, March Networks, Mobotix, etc.)
  • Growth rate is in-between analog incumbents (0-10%) and new IP entrants (25%+)
  • Funding was raised in the Shenzhen China stock market

Now let's examine the company's positioning (which is different than many Asian companies):

  • Infinova focuses on relatively complex, larger scale projects (such as fiber optics and switching products). They are not a 'budget' nor 'SMB' supplier.
  • Infinova primarily sells under their own brand. Infinova's says they have a very small OEM business and that they prefer branded sales. They say they are not looking to grow their OEM business.
  • Infinova does not and has no plans to be an integrator / general contractor in China (unlike Hikvision and CSST which have large operations in this area). Their slogan/moto is actually 'The Integrator's Manufacturer'.
  • Infinova is heavily focused on International expansion and presence (e.g., the corporate headquarters are in the US)
  • The $300 Million raised is being retained by Infinova and will be used to grow the company. Infinova is looking to accelerate sales growth through a combination of channel growth, product development and acquisition.

This is a lot of money, a big opportunity for Infinova and an interesting sign for the market. We see 2 main areas for consideration:

Warchest of $300 Million 

Infinova now has a massive $300 Million 'warchest'. This is an enormous amount of cash for the surveillance industry. For sake of comparison, 'big' late stage VC investments in surveillance are about $15 to $25 Million (e.g., 3VR, Pivot3). With $300 Million, Infinova could pay cash for any number of US independent surveillance companies (note: I am not claiming they will, it's just financially feasible).

Infinova now has a major tactical advantage against almost all of their competitors. It will be very interesting to see what they do with the money.

Chinese Stock Market Valuations

A key element in the fund raising and a dynamic that goes beyond Infinova are the valuations of IPOs in the Chinese Stock Market. For Western standards, a 20x Price to Revenue ratio is astronomical (that's Facebook level). However, both Infinova and Hikvision have both IPOed in the last 12 months at these levels (e.g., Hikvision's valuation is 7x Axis's at roughly the same revenues as Axis).

We cannot rationally justify such a variance in valuation (the implicit CAGR needed to justify this on a DCF has to be over 40%). It seem, to us, to be unsustainable and a bubble in the making. However, even if the valuations are not theoretically 'correct', if the valuation levels hold for a number of years, the impact could still be significant.

  • Will we see more Chinese companies take advantage of this extremely favorable IPO market?
  • Will this provide them a significant advantage in competing and expanding with global surveillance players?

This may develop into one of the most interesting trends in the surveillance market.

[Update 2012: Infinova's stock price has dropped more than 75% since IPOing - not surprising.]