Yusys Seeks A Second Listing In Hong Kong

The Baidu-backed provider of technology services for banks reported falling revenue last year, reflecting a challenging environment for its customers

Key Takeaways:

• Shenzhen-listed Yusys has filed for a Hong Kong IPO at a time when its bank customers are struggling
• The company's revenue dropped by a quarter last year, forcing it to aggressively cut costs to maintain its profits

Getting investors excited about anything related to banking in China looks like a tough sell right now, as lenders grapple with multiple issues flowing from the nation's sluggish economy.

And yet that's what Yusys Technologies Co. Ltd. (300674.SZ) is trying to do as it files for a Hong Kong IPO to complement its existing listing in Shenzhen. The big challenge for the Baidu-backed company will be finding ways to convince investors of the big potential for its business helping China's banks upgrade their technology, even if that potential may lie several years down the road.

Banking isn't a sexy business to begin with, and it isn't growing fast in China. The country's weak economy has softened demand for borrowing by both consumers and companies, dampening business for banks. Those same banks also need to be extra cautious about the loans they make to avoid getting hit by defaults from shaky borrowers. Such constraints are pressuring bank profits, leading them to spend less on third-party services like the ones Yusys supplies.

Yusys' financial performance is "directly exposed to risks inherent in the banking industry," the company said in its recently filed IPO document.

Yusys' latest annual results show how the growing chill for Chinese banks is infecting their third-party suppliers. The company's revenue dropped by a quarter to about 4 billion yuan ($557 million) last year, according to its prospectus filed last Thursday. It derives most of its revenue from services that help banks digitalize their operations, and its customers include China's "big four" national banks, as well as the country's monetary authority and policy lenders.

The big four banks' combined profit grew just 2% last year as they struggled to boost lending. Their weak loan growth was compounded by declines in interest margins as China's central bank cut interest rates to stimulate the economy. The outlook for banks continues to be bleak this year as well, as economic conditions in China remain gloomy despite various government efforts to stimulate spending.

Despite the falling revenue last year, Yusys managed to record net profit growth through a cost reduction campaign. It may resort to more cost-cutting this year to shore up its profits, even though such a strategy could undermine its longer-term prospects.

Leading last year's cost cuts were Yusys' 24% reduction in R&D spending, the largest component of its operating expenses. More specifically, the company slashed expenses related to benefits for R&D personnel, which account for more than 90% of spending for the category. Yusys attributed the steep cuts to its shifting resource allocation based on future plans and business requirements.

That hardly looks promising since Yusys is a technology company and thus needs to continuously enhance its offerings to retain existing customers and find new ones. Innovation is crucial for the company, particularly because it operates in a highly competitive sector. In its prospectus, the company says it is the largest listed provider of banking fintech services in China. But it also points out its market share is just 2%, showing there are lot of competitors looking to take away its business.

Firmly profitable

That said, Yusys may still appeal to investors looking for a company that has well-established operations and is firmly profitable. It has been around for quite some time, founded in 1999 and going public in New York eight years later, before privatizing in 2013. Five years later, it became a publicly traded company again by listing on Shenzhen's Nasdaq-style ChiNext board for growth companies. Its current investors include Baidu, which hold a 3.6% stake.

Yusys has served more than 1,000 customers in the last three years and has been profitable throughout that time. The company's business should indeed have strong demand, especially in the current market where China is encouraging companies to make technology upgrades as one of its many economic stimulus measures. Banks in China, and globally as well, are using technology like big data and AI to cut costs and improve the quality of their services and decision-making.

Technology spending by financial institutions across the world will increase about 11% annually over the next five years to reach $990 billion in 2029, according to a third-party projection included in Yusys' prospectus. That should bode well for Yusys and its peers, since a significant amount of that spending is expected to go to the purchase of technology services provided by outside companies.

Yusys has won some significant projects this year, including the development of a platform for data management, regulatory compliance and analytics for the London branch of a major bank.

Its services can be even more attractive for smaller financial institutions that lack internal resources to develop their own digital capabilities. In the first quarter of this year, a number of regional banks in China adopted the company's upgraded chatbot software.

Yet its customers are likely to rein in their own spending on third-party services as their business suffers in China's slowing economy. Yusys says it is looking to win more business from foreign banks to offset that risk, but its revenue from overseas customers is negligible for now.

Yusys' Shenzhen-listed shares have risen substantially since its Shenzhen IPO to trade at a healthy price-to-earnings (P/E) ratio of 47 and a decent price-to-sales (P/S) ratio of 5. By comparison, Tencent-backed Linklogis (9959.HK), which provides cloud-based software-as-a-service (SaaS) platforms for supply-chain financing, is losing money and trades at a lower P/S ratio is 3.3. The China-listed shares of the big four state-run banks also trade at P/S ratios in the 3 to 4 range.

Whether Yusys can fetch a higher valuation than its peers with the Hong Kong listing could be challenging, since Hong Kong investors often value companies lower than their Mainland Chinese counterparts. The company's revenue is expected to return to growth this year, with seven analysts polled by Yahoo Finance forecasting an 11% rise to 4.4 billion yuan. But even with that growth, the figure would still be well below its 2023 revenue,

Such lackluster prospects may not win over investors to Yusys' IPO, especially as it makes its listing into one of the hottest – but also most crowded – IPO markets that Hong Kong has seen for several years.