Road to the GEM Board—the BlueEX Initial Offering

Business Model

Being an e-commerce logistics solutions company, BlueEX was heavily technology-focused, with an ability to use machine learning tools to process complex data to create efficient and evolving delivery networks across Pakistan. BlueEX, with its vision to become a leading choice in the logistics industry via tech-driven solutions, paved its way strategically over the years. The data insights that BlueEX was extracting from its tech-driven solutions tend to optimize potential avenues of revenue streams further. The company was focused on providing fully integrated solutions for the e-commerce retailer. It was Pakistan’s only fully integrated standalone e-commerce logistics player, providing services covering the entire value chain of e-commerce transactions from first-mile logistics to last-mile delivery. The company had developed its own software suite that was in line with the specificities of its business. Exhibit 1 presents the history and journey of BlueEX, highlighting the key milestones that it achieved over the years.

The two broad service categories that BlueEX operated included airport-to-airport movement and warehousing, distribution and fulfilment (see Exhibit 2). The former category provided low acquisition costs for final delivery to the logistics arm by managing cargo space on airlines. The latter provided a steady stream of shipments to be delivered through the logistics network. BlueEX then leveraged its logistics network, home-grown technology stack and hosted contact centre to deliver reliable, swift and time-efficient services to its valuable customers. ¹ The logistics arm transported products across the country, and the technology-driven approach helped the company keep track of the delivery portfolio in addition to the inventory. The in-house contact centre further tied in everything by responding to queries efficiently, leading to higher customer satisfaction. With its unique offering and current business model, BlueEX had no direct competition in the domestic market.

The breakdown of income earned by the company based on the different services it offered is presented in Exhibit 3. The cargo segment contributed most to the company’s income and included domestic and international freight customers. The company was an exclusive cargo service provider for two domestic airlines, Serene Air and Shaheen Air. Based on its host of services, BlueEX enjoyed a very prominent customer profile (see Exhibit 4). It had a diversified client base, from fashion places such as Gul Ahmed, Sapphire and Al-Karam to fast-moving consumer goods manufacturers like Unilever, Nestle and Coca-Cola to pharmaceuticals and car manufacturers. The long-term contracts with some of the largest conglomerates gave BlueEX recognition and a competitive edge in the industry. It had around 391 customers for the international freight category and 29 customers for domestic cargo. Under its courier segment, it had around 11,814 customers.

Industry

BlueEX was a unique company because of its operations and the diversity in its offerings, making it non-comparable to any company in Pakistan. However, few logistics companies operated in the courier segment, including DHL, TCS, Leopards Courier, M&P, TRAX, Rider, MoveX, Call Courier, Speedex, APX and FedEx. Exhibit 5 shows the breakdown through the respective market share of the players. The two companies, TCS and Leopards, had high market shares due to their presence as document couriers. However, UNS focused on niche e-commerce-based domestic and international courier services. Deutsche Post AG, a German firm listed on the Frankfurt Stock Exchange, United Parcel Service, an American firm listed on the New York Stock Exchange, and Blue Dart, an Indian firm listed on the Bombay Stock Exchange, were some listed industrial competitors in the international domain (see selected financials of global competitors in Exhibit 6).

Funding Need

The COVID-19 pandemic took over the world in early 2020 and ended up halting several businesses, but for BlueEX, that was a blessing in disguise. With the surge in infections, the need for last-mile logistics solutions increased; people moved from conventional modes of shopping to a more online-reliant system, which further increased the relevance of BlueEX in the market. Hence, the company wanted to increase the number of stations and distribution hubs used to route parcels from 35 to 160. This was a 357% aimed increase in the firm’s capacity, and to achieve this, BlueEX had planned to raise PKR 445.7 million (approximately $2.67 million) by issuing 6,857,000 ordinary shares, which made up 25% of post-issue paid-up capital. Exhibit 7 provides the break-up of the proceeds required and their utilization categories.

Going Public

The company opted for an IPO to operationalize its expansion plans. During the IPO, a company offered its shares to the public for the first time, and the shares then started trading on the stock exchange. The choice of going public was unique for a tech-driven company like BlueEX that had ample room to reach out to venture capitalists or angel investors in different rounds, but listing on the GEM board meant that they were adding themselves to the list of higher investment risk, including liquidity risk, with the incentives such as that of a lower listing fee and better tax shields among others. With the growth plans that BlueEX had coined, as shown in Exhibit 7, an amount of PKR 445.71 million was calculated to fund the foreseen requirements. BlueEX wanted to be on top of the tide as it rode in its direction and aimed to capture the market during this period by leveraging the trend towards e-commerce ventures. To do so, it hired Topline Securities and Arif Habib as joint advisors on the issue. It had decided to take the leap to showcase itself on the GEM board, which itself was a venture that had recently been introduced on the PSX.

Functionality of the GEM Board

The formation of the GEM board under PSX provided the necessary platform for SMEs and emerging corporations to get listed on the stock exchange, raising the necessary capital for their future growth plans. GEM acted as a secondary board for listing and trading apart from the main board, allowing small firms to receive funds from the capital markets with some laxation on the strict rules and regulations for companies listed on the main board. This was important for a market like Pakistan, where SMEs made up most of the enterprises, providing a huge number of jobs in the market and contributing significantly to the country’s GDP. According to the Small and Medium Enterprises Development Authority, there were approximately 3.2 million business enterprises in Pakistan. These contributed over 30% to the GDP, PKR 140 billion to exports and accounted for 25% of exports of manufactured goods—additionally sharing 35% in the manufacturing value-added goods.

GEM Board: An Opportunity for Growth Enterprises

Listing on the GEM board provided many advantages for starters. Signing up on the GEM board benefited the firms via two main prongs: tax benefits and compliance relaxation. The firm listing on the GEM board got a 20% tax benefit for the first year of listing, a 20% benefit in the subsequent tax year and a 10% benefit in the following two years, respectively. Moreover, the GEM board firms did not need to comply with the exact requirements for the companies listed on the main board, were not asked to follow the code of corporate governance as stringently and could request the SECP for relaxations with valid reasoning.

Further, a firm was qualified for the GEM board if it had a minimum post-issuance paid-up capital of PKR 25 million. In contrast, the main board required a significantly higher minimum post-issuance paid-up capital (PKR 200 million). Though the GEM Board listing required the firms to have audited financial accounts by an approved Quality Control Review (QCR) rated agency for at least two preceding years, the main board listing required the firms to be in business for at least three years and profitable for at least two preceding years. ³ For a GEM board listing, all Trading Right Entitlement Certificate (TREC) holders could act as advisors to the issue, whereas for the main board, only approved TREC holders by the SECP could act as advisors to the issue. ⁴ Lastly, the GEM board required the company to curate an Information Memorandum, whereas the main board required a full prospectus.

Challenges

Pakistan was already late in developing the concept of a dedicated board for SMEs and tech-centred companies, the likes of which had already been active in neighbouring countries like India for some time. With the launch of the GEM board, an official channel was offered to a big chunk of business industries in the country to garner capital for growth in exchange for some equity in the business, but it came with its challenges. Even though the investment, via stocks and trading, was not a new concept to an average Pakistani, the PSX, as a means of investment and growing their capital, was unfortunately not the first option for most of the population.

There were some restrictions placed on investment in GEM board-listed firms. The investors eligible to buy and sell shares on a GEM board-listed firm included institutional and individual investors registered with the National Clearing Company of Pakistan (NCCPL), which has net assets of PKR 15 million with a minimum number of subscribers of five. In contrast, the entire public could invest in the main board-listed companies. ⁵ Hence, one primary concern regarding the GEM board was the liquidity of investments. The GEM board was supposed to have companies looking for capital to grow. Hence, they would not be able to offer dividends for at least the first few years and would be offering a lower volume of trading, owing to the restriction on the kind of investors allowed on this board. The clientele effect could be seen here, with some investors who wanted their assets to be liquid shirking away from investments in the GEM board.

Collaboration Between Topline Securities and Arif Habib

After multiple discussions of BlueEX Management with Topline Securities and Arif Habib Limited, it was decided that the offering project should be a joint effort of the two consultants. Arif Habib, given its experience in the industry, had a sound investor base that trusted the brokerage house, and Topline’s customers had a similar relationship with them. However, Mr Sohail realized that they would need all the help they could get with this initial offering, given that a limited investor base would take part in the venture, that is, the GEM board. Additionally, he knew that the marketing for the project and the initial offering would not be easy. The Pakistani market had not explored the kind of business that BlueEX was offering; thus, getting the attention of the investors was a task at hand. Hence, amidst all these challenges, a joint venture option was a welcoming step for everyone involved.

Challenges and the Marketing Techniques

The tech sector had already been comprehended as a high-risk sector in domestic, regional and global markets. Few tech companies had been leading the NYSE and NASDAQ exchanges, with Apple, Google and Amazon being some of the more prominent names. However, many players had dropped out of the race because they were not able to catch up with the upcoming trends. BlueEX found itself in this turmoil; it operated in a market where people were wary of high-risk investments. However, some of the listed companies had done their bit to gain investors’ trust back. Specifically, Pakistani tech-based ventures, like Systems and TRG, were hanging high on the stock market, competing with some of the industrial giants.

BlueEX’s initial offering came with its challenges when it came to its marketing and awareness campaign. BlueEX, with its logistics solution and immersive tech involved in automating the business model further, spoke of a very new company to the stock exchange. Hence, a market used to production and manufacturing industries was indeed cautious about it and lacked the general awareness and knowledge about the business that the name represented. The first step in getting the market’s interest in this stock was to get the investor acquainted with the industry. Hence, Topline curated an entire teaching cycle, whereby they educated the investors on the regulations and assured them of BlueEX’s profitability and its promising future in the Pakistani market.

After discussions with marketing experts at Topline and Arif Habib, marketing campaigns and plans were etched to ensure that the subscription targets would be met when the initial offering was made. Awareness sessions were conducted to educate potential investors about the business model and its potential in the Pakistani market. Efficient and intelligent plans were proposed to use social media effectively in this regard, which was not a usual practice in this particular industry and business model but was, in fact, the need of the hour. Wasim Akram, the national cricket hero who enjoyed great popularity and fame in almost every household in the country, became an interesting part of the whole scenario and was used very efficiently by the marketing team. Wasim, who had been showing interest in the tech sector and its growth, invested in the company, and this investment news was made good use of by the smart marketers behind BlueEX’s initial offering.

The Offering

With a face value of PKR 10 and an added premium of PKR 55, the stock was offered at PKR 65 to the investors. The issue comprised 6.857 million ordinary shares that were being offered to meet the requirement of the calculated growth fund. The offering price was estimated as the weighted average price based on absolute and relative valuation methods, and the subscription was scheduled for 17–18 November 2021. Unlike the IPO on the main PSX board, book building was not done, and the issue price was agreed on using the fixed price method.

Recent Financials and Expectations

Exhibit 8 shows the income and expense figures of BlueEX for 2019, 2020 and 2021. BlueEX enjoyed high revenue growth in the last two years. Specifically, the revenues increased by 131% and 31% for 2020 and 2021, respectively. The gross margin also increased by 67% in 2021 after experiencing a negative growth of 8% in 2020. The company was expected to continue its growth momentum in the future, with an anticipated increase in revenue of at least 40% and an increase in gross income of at least 50% for each of the next two years. The company also managed to limit the increase in operating expenses to 28%, reporting a high rise in its operating profit and the bottom line improving to PKR 33 million in 2021 from PKR 2 million in 2020. The company further planned to curtail the increase in its operating expense to 15% per year for each of the next two years and thus expected substantial growth in its bottom-line figures.

High revenue growth during 2021 was supported by a 65% growth in total assets (see Exhibit 9). Trade debts comprised the biggest portion of assets, though the percentage of assets tied up in trade debt declined during 2021. Further, the fixed assets of the company increased by more than 200%, reflecting its expansion plans. On the financing side, the company reduced its reliance on liabilities and was increasing its equity capital over the years. Substantial capital expenditures planned over the next two years may result in negative free cash flows in these years; however, the company had plans to overcome these in the near future through growth in income and efficient expense management.

Identified Risks

The IPO management team analysed the internal and external factors that could hamper the company’s growth as well as the stock price. On top of the list of internal factors were the operational and technical risks involved, considering the highly dynamic business operation of the company and the heavy reliance of those operations on technology. The high trade debt on the company’s balance sheet was another potential risk factor. The company experienced delayed payments from customers both in cargo and courier services. Though it maintained a decent liquidity position, creditors’ risk for the BlueEX remained high, with around a quarter of its receivables due for over 60 days or more.

The uncertainty of the new regulatory framework, the inexistence of entry restrictions in the industry, the expected economic slowdown and varying foreign currency rates were considered significant external risk factors. Further, underwriting risk was a significant risk in this offering, as the underwriter ensured the offering by committing to purchasing unsubscribed shares in case of an undersubscription. However, due to the unavailability of firms willing to underwrite a volatile stock or agreeing to do it at a very high cost, this stock was being floated in the market without an underwriter. Hence, in case of undersubscription, the company would remain unlisted, hindering the implementation of projected expansion plans.