Being aware of the capital temperature of cross-border payments is becoming a common proposition in the domestic payment industry.
As Lianlian Digital (2598.HK) was officially listed on the Hong Kong stock market at the end of March and became the first cross-border payment concept stock, many market participants are also speeding up preparations for related capital market plans.
As one of the few “sunrise businesses” in China’s current domestic payment industry, cross-border payment has become an important layout direction and new business growth point for licensed payment institutions in recent years.
However, what needs to be noted is that in the market environment where the Hong Kong stock market continues to be sluggish, although Lianlian Digital has achieved a leading position in the industry and has scarce license barriers, and the cross-border payment track is developing rapidly, the above-mentioned “plus points” have not been reflected too much in its IPO pricing.
A former Hong Kong licensed securities strategist and independent stock commentator said: Currently, the Hong Kong stock market is overall weak and the sector rotation is obvious. Targets with market imagination still need to be given a certain amount of time. Long-term cycles can better reflect their growth and strength.
The first cross-border payment stock is shining brightly
According to the announcement, Lianlian Digital sold 64.3 million shares globally in this IPO, with public offerings accounting for 30% and international placement accounting for 70%.
The final offering price was HK$10.22, and the global offering net raised HK$548 million.
It is worth noting that this is the largest Hong Kong IPO project of a licensed digital technology company in the past three years.
Official information shows that Lianlian Digital was founded in 2009 and is one of the earliest digital technology companies in China to provide a wide range of payment solutions globally.
Judging from the license status, Lianlian Digital obtained a domestic payment license in 2011, and its joint venture with American Express, Connect Company, is currently the only joint venture clearing agency in the country.
In terms of business scope, LianLian Digital has accumulated services covering 3.2 million merchants and enterprises in more than 100 countries and regions.
Lianlian Digital Chairman Zhang Zhengyu said at the bell-ringing scene that after listing, the company will actively embrace the market opportunities brought by global digitalization, further expand global business, explore the application of the latest technology, continue to innovate, and promote long-term value growth.
If you look at the purpose of raising funds from this IPO, investment in technology is indeed the top priority.
The prospectus shows that the net proceeds from Lianlian Digital’s current global offering will be divided into four parts: approximately 60% will be used to improve technical capabilities, approximately 30% will be used to expand global business operations, approximately 5% will be used for future strategic investments and acquisitions, and approximately 5% will be used for general corporate purposes and working capital needs.
The market consensus is that China’s cross-border e-commerce export industry is still in a relatively rapid development stage. In recent years, favorable policies such as the “Opinions on Promoting the Stable Scale and Optimized Structure of Foreign Trade” and the “Notice on Supporting Cross-border RMB Settlement of New Foreign Trade Business Forms” have continued to increase, showing the support of relevant government departments in this field.
Data from the General Administration of Customs show that in 2023, China’s cross-border e-commerce exports will exceed RMB 1.8 trillion, with a year-on-year growth rate of 19.6%.
From the perspective of growth, Lianlian Digital has maintained a relatively strong growth rate with the help of a series of favorable market conditions.
According to the prospectus, in the first three quarters of 2023, Lianlian Digital’s total revenue increased by 38.4% from RMB 532 million in the same period of 2022 to 737 million yuan, which is close to the full-year revenue scale in 2022.
Judging from the number of merchants, as of the end of September 2023, the number of merchants and enterprises has increased to approximately 3.2 million; judging from the key indicator of payment companies “total payment volume of digital payment services” (TPV), the TPV in the nine months ending September 30, 2023 reached 1.312 billion yuan.
The above two data also exceed the data for the whole year of 2022.
However, the above-mentioned growth rate and license resources are not fully reflected in the capital market’s pricing.
On the day of listing, Lianlian Digital closed at HK$9.44 per share, a decrease of 7.63%.
In terms of transaction size, the trading volume on the day was 15.43 million shares and the transaction volume was HK$150 million.
Calculated based on the closing price, the total market value of Lianlian Digital is HK$10.1 billion.
Perhaps it is because it has not yet recovered from losses, which has affected market pricing and opening performance to a certain extent.
According to the prospectus, Lianlian Digital’s net losses from 2020 to 2022 were 368 million yuan, 747 million yuan and 917 million yuan respectively.
According to the prospectus, the net losses in the first nine months of 2022 and the first nine months of 2023 were 649 million yuan and 607 million yuan respectively, showing a slight narrowing trend.
From the perspective of factors affecting profits, most of them come from its investment in Connected Company – in 2020, 2021, 2022 and the first nine months of 2023, the net losses of Connected Company calculated by Lianlian Digital according to the equity method were 328 million yuan, 687 million yuan, 805 million yuan and 470 million yuan respectively.
Another factor affecting its issuance and opening performance comes from the weakness of the Hong Kong stock market environment.
According to the “2023 Mainland China and Hong Kong IPO Market Report and Outlook” released by Ernst & Young in November 2023: In 2023, the average amount of funds raised by Hong Kong IPOs will only be HK$677 million, a new low in the past ten years.
As of November of that year, the average over-subscription ratio on the Hong Kong stock market was 9.8, which has been in single digits for two consecutive years. More than 30% of new shares broke on the first day, indicating that investors’ interest in subscribing for new shares is quite sluggish.
However, facing the capital winter in Hong Kong stocks, state-owned assets showed their confidence in the cross-border payment track at the critical moment and gave real money votes.
According to the announcement on the eve of Lianlian Digital’s listing (March 20), it introduced two cornerstone investors, Hangzhou Urban Investment Industrial Development Investment Partnership (Limited Partnership) and Hangzhou High-tech Venture Capital Co., Ltd.
Cornerstone investors purchased shares for a total amount of HK$364.8 million, corresponding to 34.478 million shares (assuming the offer price is the mid-point of the offer price range), accounting for 61.65% of the total number of shares on offer.
The introduction of cornerstone investors is actually an affirmation of the company’s fundamental development prospects, and is usually a stabilizer for the uncertain IPO market.
The above two cornerstone investors, after the equity penetration, are respectively backed by the Hangzhou Municipal People’s Government, the Finance Bureau of Hangzhou High-tech Industrial Development Zone, and the Finance Bureau of Binjiang District, Hangzhou.
Focus on sustainable growth
In recent years, the payment industry has faced compliance pressure and model iterations under the regulatory requirements of “returning to the roots”, and the development of domestic traditional acquiring business has faced severe challenges.
Relatively speaking, cross-border payment has benefited from the development of new foreign trade formats and continues to be active and enthusiastic, becoming the focus of many payment institutions.
According to incomplete statistics, since 2021, more than 20 payment institutions have obtained licenses around the world. In addition to the continuous figures, many institutions including Xinguodu (300130.SZ), Yeka (09923.HK), Huifu, PingPong and other institutions have increased their license and business layout speed.
In terms of market value, as of the close of trading on April 2, Lianlian Digital’s total market value was approximately HK$10.1 billion, which is comparable to other peers whose payment business is mainly domestic.
As of April 2, Lakala (300773.SZ) has a market value of approximately 11.2 billion yuan (RMB), and Xinguodu has a market value of approximately 12.2 billion yuan (RMB).
A senior analyst at Broadcom Consulting said that combined with the market prospects of facing the global market and serving new foreign trade formats, if it can continue to maintain revenue growth and further narrow losses, the market value of cross-border payment targets should have room for further growth.
However, whether it can maintain strong and stable revenue growth is a common challenge for current cross-border payment institutions.
At the beginning of 2023, Tencent officially launched the cross-border payment platform “Zhihui Goose” to provide cross-border e-commerce sellers and other groups with one-stop solutions for global collection, payment, exchange, etc., with a rate as low as 0.05%-0.3%.
Wanlihui, a subsidiary of Ant Group, had already announced a cap rate of 0.3%.
The reduction in payment rates is an important sign of escalating competition.
It is also understood that the rates of cross-border collection platforms were previously maintained between 0.7% and 1%, but since 2023, this price has dropped to 0.3% and 0.7%.
The founder of a wallet technology company once said that in the past seven or eight years, payment institutions have basically figured out the process of overseas business, and the supply side is very sufficient.
Under the premise that the scale of the entire industry and the scale of merchants are relatively constant, there is no need for excessive supply. Our goal is to focus more on how to do a good job in existing customers.
Therefore, it is not easy for the company to maintain sustained revenue growth after completing the rapid development.
In his view, the core competitiveness of cross-border payment institutions mainly has three aspects: the first is compliance competitiveness, which must ensure the safe and smooth flow of user funds; the second is the service ability to discover needs and solve problems; the third is technical capabilities, especially the ability to tend to aggregation and integration.
A closer look at Lianlian Digital’s business layout shows that it is indeed in line with the construction ideas in the above three directions.
As a strongly regulated industry, a license is a prerequisite for the development of cross-border payment business compliance.
According to official information, LianLian Digital has established a global license layout consisting of 64 payment licenses and related qualifications, covering more than 100 countries and regions including mainland China, Hong Kong, the United States, the United Kingdom, Thailand, and Singapore, including scarce resources such as the highly valuable MTL (Money Transmission License) license across the United States.
As for the layout of domestic clearing licenses, the Connecting Company in which it holds shares is currently the only joint venture clearing institution in the country, and there are high license barriers.
According to the prospectus, the establishment and maintenance of the liquidation system of Connected Company requires a large amount of initial investment, especially partner incentives, marketing and welfare expenses, technology and infrastructure, etc.
According to Frost & Sullivan, new players like Connectivity typically take several years to break even.
In July and December 2023, Lianlian Digital injected RMB 130 million and RMB 74.6 million respectively into Connected Company to support its operations.
A senior analyst at Broadcom Consulting said that although continuous capital injections in recent years will have a short-term impact on Lianlian’s digital income statement, clearing institutions are scarce in the country and have high entry barriers. In the future, they can not only obtain investment rights with China Connect’s profits, but also operate in conjunction with China Connect in the high-end credit card market.
