Key Takeaways:
- The pre-listing finances at Edianyun have taken a sharp turn for the worse, as the company’s net loss in the first half of this year alone is almost equal to the total combined losses of the previous three years
- The company relies on the leasing of computer and office equipment and is under strong capital pressure from its asset-heavy business model.
By Stone Shek
Leading Chinese IT supplier Edianyun Ltd. started out selling second-hand computers but changed its name along the way to include the Chinese word for cloud, signaling a shift from the hardware business towards services.
Despite the reference to “yun”, or cloud, the company remains primarily a supplier of leased office equipment, and this asset-heavy business model is casting a financial shadow over the infotech provider’s renewed attempt at a share listing.
Edianyun, which first applied to list on the Hong Kong Stock Exchange in February this year, launched a second attempt on Sept. 9 after its prospectus lapsed in August, with CICC as the exclusive sponsor. Meanwhile, the company also updated its financial data for the first half of this year, and the figures do not make for cheery reading.
Edianyun is described in its latest prospectus as a leading supplier of integrated office information technology (IT) solutions in China to small and medium-sized enterprises (SMEs) on a subscription basis, with about 40,000 enterprise subscribers and about 1.1 million subscription devices as of end-June this year. Frost & Sullivan research found it was China’s first and largest provider of integrated office IT solutions in terms of revenue, the number of devices served and re-manufacturing capacity, with a 19.6% market share last year.
Originally known as “Edianzu”, Edianyun started out by trading in used computers. It is a subsidiary of Beijing Ediantao Internet Technology Co. Ltd., which was incorporated in the Cayman Islands in 2015 as a limited liability company, with its co-founders Ji Pengcheng and Zhang Bin owning 60% and 40% of its shares.
Since 2014, Edianyun has carried out 10 rounds of pre-investment from the likes of Source Code Capital, Shunwei Capital and the Singapore sovereign wealth fund GIC, raising a total of around 1.5 billion yuan ($212 million).
Prior to the IPO bid, founders Ji and Zhang held 13.9% and 9.27% of the shares, while Source Code Capital, Shunwei Capital and GIC held 21.88%, 11.11% and 8.49%, respectively. In 2018 the company adopted a share structure of weighted voting rights, giving minority stakeholders disproportionate voting power. Under the structure, each common share owned by Ji and Zhang is entitled to 10 votes, while the remaining common and preferred shares get only one vote per share. As a result, Ji and Zhang can exercise 45.06% and 30.04% of the voting rights of the company, despite not being majority shareholders.
China’s enterprise IT services market has taken off in recent years to serve the digital needs of a growing business community. The number of SMEs in China rose from just over 30 million in 2017 to nearly 49 million in 2021, according to data cited in the prospectus, representing a compound annual growth rate (CAGR) of 12.7%. The total is projected to reach 84 million in 2026. And China’s enterprise IT spending, which increased from 2.66 trillion yuan in 2017 to around 3.26 trillion yuan in 2021, is expected to reach almost 4.35 billion yuan in 2026, with a CAGR of 5.9% from 2021 to 2026.
However, the biggest revenue source remains the leasing of computer and office hardware, as seen by sales of “pay-as-you-go” office IT integrated solutions, which rose from around 500 million yuan in 2019, almost 79% of revenue, to nearly 1 billion yuan in 2021, equivalent to just over 84% of revenue. In the first half of this year, the revenue share had risen to nearly 89%.
Full-year sales of devices ranged between 14.6% to 20.5% of revenue in the three years through 2021, falling to 10.2% in the first half of this year. Meanwhile, software-as-a-service (SaaS) and other business, the segment that best illustrates the “cloud” in the company name, only generated a tiny 1% to 1.6% of revenue in the past three years. The numbers show that the company is principally a provider of IT equipment, not cloud services.
But Edianyu, as an equipment provider, has to operate in an asset-heavy mode, to enable its customers to benefit from being asset-light. Thus, the company alone must shoulder the risks of large capital requirements, cash flow strains and ending up in a situation where liabilities outpace assets.
Assets do not cover debts
According to the prospectus, Edianyun has been in red from 2019 to June 2022. The company managed to keep its losses between around 88 million yuan and 348 million yuan over the last three financial years. But the shortfall ballooned in the first half of this year, with a net loss of nearly 625 million yuan for the six months, almost equal to the combined losses over the previous three years, mainly due to higher financing costs and the impairment of financial liabilities related to issuance of preferred shares.
As it grappled with chronic losses, the company’s asset-to-liability ratio fell slightly from 159% in 2019 to just over 142% last year. But it rose again to a record high of just over 163% in the first half of this year.
The Covid pandemic and slowing economic growth have hit Edianyun’s customer base of small and medium-sized companies, with their financial struggles pushing up the equipment provider’s trade receivables, the money owed to the business by its customers. Trade receivables doubled from 160 million yuan at the end of December 2019 to 307 million yuan at the end of June this year. Defaults and related impairment losses have worsened the company’s financial position in recent months. Impairment losses jumped to 32.28 million yuan in the first half of 2022 from 5.68 million yuan in the year-earlier period.
Even more significantly, Edianyun has consistently logged negative net cash flow from operating activities over the past three years totaling more than 660 million yuan. Although its cash flow turned positive in the first half of this year, the company had only 494 million yuan in cash and cash equivalents at the end of June. Low liquidity and a possible near-term funding need would explain why Edianyun applied for a listing again so soon after its first attempt faltered.
According to the prospectus, Edianyun, which had issued convertible bonds to investors in August 2020, was valued at $530 million before the investment. Its price-to-sales (P/S) ratio is only 2.8 times if the first-half revenue of 655 million yuan is extrapolated to the full year, lower than counterparts such as international HR services giants Workday Inc. (NASDAQ:WDAY), Salesforce Inc. (NYSE:CRM) and Kingdee International Software Group (0268.HK), with P/S ratios of 6.9 times, 5.2 times and 8.3 times respectively.
The apparent valuation discount for Edianyun may reflect the company’s cloudy financial outlook. If it is looking for a higher IPO valuation, the company would likely need to deliver a roadmap towards brighter times that could smooth investors’ furrowed brows.
