Key Takeaways:
- ‘Expert network’ operator Capvision Partners has filed for a Hong Kong listing to raise up to $300 million
- The company boasts fast revenue growth and impressive profit margins, but also faces regulatory risk that was the focus of a U.S. crackdown a decade ago
By Doug Young
An information services provider called Capvision Partners (Shanghai) Corp. Ltd. has just filed for a Hong Kong IPO, offering profit margins that would make some of its global peers quite envious.
There’s just one problem. The company operates in a highly sensitive area by connecting industry experts with institutional investors trying to figure out which way the markets are blowing. Such investors are willing to pay big bucks for this kind of access to people who often work inside major companies and thus have an insider view of what’s happening in both their companies and also their broader industries. Some might call that insider trading.
In fact, this kind of activity made headlines about a decade ago when the U.S. securities regulator charged participants in five such expert networks with “illegally tipping hedge funds and other investors to generate nearly $6 million in illicit gains.” Those employees came from big tech names like chipmaker AMD (NASDAQ:AMD) and PC giant Dell (NYSE:DELL), and were accused of working with such networks to provide big institutional investors with insider information.
There’s no mention of the U.S. scandal from a decade ago in Capvision’s prospectus, which was filed in Hong Kong last Friday. That’s probably because the company currently does the vast majority of its business in China, obtaining 95% of its revenue from the Greater China region in the first nine months of last year, the prospectus shows. What’s more, the company does mention several times that each of its experts is briefed on the importance of refraining from activities like insider trading, as well as other corrupt practices, like bribery.
But technically, providing this kind of information is also illegal in China, though the practice is believed to be rampant in the country. Many company insiders who “share” such information are probably unaware that what they are doing is probably illegal. What’s more, the nation’s securities regulator often has bigger fish to fry and thus doesn’t really focus on such activity.
Still, there’s always the possibility that could change, which could present a major risk to Capvision in the future. Additionally, the company’s practices could make it vulnerable in the U.S., as it considers moving beyond China.
Capvision was originally considering a listing on China’s A-share market in Shenzhen in 2020, and even hired Chinese investment banking giant CICC to consult on such a plan. But it later shifted its focus to Hong Kong, saying it made that decision due to its “intention to further grow our business both domestically within China and in selected international markets.”
A closer look at the prospectus shows the U.S. is the only such market outside Greater China where the company now does business, alongside its domestic operations from its base in Shanghai, and operations in the cities of Beijing, Suzhou, Shenzhen and Hong Kong.
Financial publication IFR reported last August that Capvision was aiming to raise $300 million through the Hong Kong listing. If it plans to sell the typical 10% to 20% of its shares in the offer, that would imply it estimates its market value at $1.5 billion to $3 billion. But it could have trouble achieving that valuation, based on its current profitability and using price-to-earnings (P/E) ratios for some of its global peers. We’ll come back to that part of the equation shortly.
Enviable margins
But for now, we’ll zoom in on Capvision’s financials, starting with the enviable margins that we mentioned at the beginning of this review. The company’s gross profit margin has held steady at an impressive 53% over the last two years, reflecting the fact that it’s a services provider with very low costs compared with the amount of revenue it brings in.
By comparison, global consulting giants Accenture (NYSE:ACN), Booz Allen Hamilton (NYSE:BAH) and Marsh & McLennan (NYSE:MMC) all have lower gross profit margins ranging between 23% and 44%.
Capvision provides its core expert consulting services, which accounted for nearly 90% of its revenue in the first nine months of last year, through a network of 395,000 such experts at the end of last September, up from 230,000 at the end of 2018, according to the prospectus. While such figures are almost certainly inflated, they do seem to show that the company is quite well connected throughout China. The prospectus also cites third-party data saying Capvision is the biggest company in its space in China.
In terms of industries it covers, its network is also relatively comprehensive. Those include consumer and retail, accounting for 15.8% of its network, healthcare (14.8%), technology (13.3%), consulting services (8.0%), automobiles (6.0%) and finance (5.2%).
The company is also growing quite quickly, which, again, is probably why it feels it deserves a stronger valuation than the big global consulting giants. Its revenue grew 43% year-on-year in the first nine months of 2021 to 676 million yuan ($107 million). Its profit grew at a slightly slower but still strong 35% over the same period, reaching 198 million yuan in the first nine months of 2021.
The company’s client base is heavily skewed towards financial institutions, who account for 71% of its customers. That again underscores that most of those customers are big investors looking for “insight” to help them make better investment decisions. Most of the rest of its revenue comes from other consulting companies.
We’ll close by returning to the valuation question and how Capvision seems to think quite highly of itself in that way. The big global accountancies we previous mentioned currently trade at trailing P/E ratios of as low as 17 for Booz Hamilton to 34 for Accenture. Averaging those to assume a P/E of about 28 for Capvision would give it a market cap of about $1.1 billion, based on its expected profit for this year.
As we’ve noted earlier, the $300 million fundraising target would imply the company believes it’s worth at least $1.5 billion and probably closer to $2 billion, which is quite a bit higher. Investors will ultimately need to decide whether Capvision deserves such a rich valuation. On the one hand its fast growth and high margins are definitely major selling points. But the risk associated with its core business is almost certain to temper enthusiasm.
