AutoNavi Holdings Ltd, whose mapping technology comes pre-installed in some Audi AGs and BMWs in China, may be too dependent on a few customers -- including one whose contract is up for renewal in December -- to be a good bet for investors.
The Beijing-based company, which hopes to raise almost $100 million in its initial public offering this week, is betting that as disposable income and travel in China increase, more people will use digitized maps embedded in the dashboard of their car or on their mobile phone to navigate.
Based on its financial statements, so far AutoNavi's bet is correct: revenue grew each of the past three years and by 26 percent to $57.16 million in 2009. Net income due to shareholders nearly quadrupled to $10.39 million in the same period.
The company's backers also include funds affiliated with well-known venture capital firms Sequoia Capital and Kleiner Perkins Caufield Byers.
But AutoNavi's success is thinly sourced and revenue from one top customer could disappear entirely in the next six months.
Sales of auto-based navigation technology accounted for more than 60 percent of AutoNavi's 2009 revenue.
But only five customers, including Alpine Electronics (China) Co Ltd, China Ministry of Land Resources and AW (Shanghai) Autoparts Trading Co Ltd, accounted for about 70 percent of that business.
"(AutoNavi) faces potential significant disruptions in its operations if any one of these customers goes away, let alone the fact that it holds reduced negotiating power when contracting with these firms. Most notable on that front is the firm's relationship with China Mobile," said Morningstar IPO analyst Michael Gaiden.
AutoNavi also sells mapping technology for mobile phones to China Mobile (0941.HK), the world's largest mobile operator by number of subscribers.
Its claim on that relationship is tenuous. Its contract with China Mobile, which is a main component of a revenue stream that accounted for 9 percent of 2009 net revenue, expires in December. AutoNavi did not say whether the contract would be renewed and said it had little negotiating leverage because of China Mobile's dominant market position.
"We are looking at a relationship that could be a catastrophic loss," said IPO Boutique Senior Managing Partner Scott Sweet.
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