IT Provider Edianyun Seeks IPO With Finances Under a Cloud – Workday (NASDAQ:WDAY), Salesforce (NYSE:CRM)

Key points to remember:

  • Edianyun’s pre-listing finances have deteriorated sharply, as the company’s net loss in the first half of this year is almost equal to the total combined losses of the previous three years.
  • The company relies on leasing computer and office equipment and is under severe capital pressure due to its asset-intensive business model.

By Stone Shek

China’s leading IT provider Edianyun Ltd. started out selling used computers, but changed its name along the way to include the Chinese word for cloud, signaling a shift from the hardware business to services.

Despite the reference to “yun,” or cloud, the company remains primarily a provider of leased office equipment, and that asset-heavy business model casts a financial shadow over the tech provider’s new IPO bid.

Edianyun, which filed its first application for listing on the Hong Kong Stock Exchange in February this year, launched a second attempt on September 9 after its prospectus expired in August, with CICC as its sole sponsor. Meanwhile, the company also updated its financials for the first half of this year, and the numbers aren’t pleasant to read.

Edianyun is described in his latest flyer as China’s leading desktop information technology (IT) integrated solution provider for small and medium-sized enterprises (SMEs) on a subscription basis, with approximately 40,000 enterprise subscribers and approximately 1, 1 million subscription devices by the end of June this year. Frost & Sullivan’s research found it to be China’s first and largest integrated desktop computing solution provider by revenue, number of devices served and remanufacturing capacity, with market share 19.6% last year.

Originally known as “Edianzu”, Edianyun began 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 holding 60% and 40% of its shares.

Since 2014, Edianyun has completed 10 pre-investment rounds from sources including Source Code Capital, Shunwei Capital and Singapore’s sovereign wealth fund GIC, raising a total of around 1.5 billion yuan ($212 million).

Prior to the tender offer, 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 respectively. .49%. In 2018, the company adopted a weighted voting shareholding structure, giving minority shareholders disproportionate voting power. According to the structure, each common share held by Ji and Zhang is entitled to 10 votes, while the remaining common and preferred shares only get one vote per share. Accordingly, Ji and Zhang can exercise 45.06% and 30.04% of the company’s voting rights, although they are not majority shareholders.

China’s enterprise IT services market has taken off in recent years to meet the digital needs of a growing business community. The number of SMEs in China has grown 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 expected to reach 84 million in 2026. And IT spending by Chinese enterprises, which grew from 2.66 trillion yuan in 2017 to around 3.26 trillion yuan in 2021, is expected to reach nearly 4.35 billion yuan in 2026. , with a CAGR of 5.9%. from 2021 to 2026.

However, the largest source of income remains the rental of computer and office equipment, as evidenced by sales of integrated pay-as-you-go office solutions, which increased from around 500 million yuan in 2019, or nearly 79% of revenue, to nearly 1 billion yuan in 2021, or just over 84% of revenue. By the first half of this year, the revenue share had risen to almost 89%.

Full-year device sales ranged between 14.6% and 20.5% of revenue in the three years to 2021, falling to 10.2% in the first half of this year. Meanwhile, software as a service (SaaS) and other businesses, the segment that best exemplifies the “cloud” in the company’s name, generated only a tiny 1% to 1.6% turnover over the last three years. The figures show that the company is primarily a provider of IT equipment, not cloud services.

But Edianyu, as an equipment supplier, needs to operate in heavy active mode, to allow its customers to benefit from light active. Thus, the company alone must bear the risks of large capital needs, cash flow stress and finding itself in a situation where liabilities exceed assets.

Assets do not cover debts

According to the prospectus, Edianyun has been in the red from 2019 to June 2022. The company has managed to maintain losses between around 88 million yuan and 348 million yuan over the past three fiscal years. But the shortfall exploded 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 of the previous three years, mainly due to higher financing costs. and impairment of financial liabilities. related to the issue of preferred shares.

As it grappled with chronic losses, the company’s asset-liability ratio dipped 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 small and medium-sized business customer base, with their financial difficulties driving up the equipment maker’s trade receivables, money owed to the company 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. Payment defaults and associated impairments have worsened the company’s financial situation in recent months. Impairments jumped to 32.28 million yuan in the first half of 2022 from 5.68 million yuan a year earlier.

More importantly, Edianyun has consistently recorded 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 only had 494 million yuan in cash and cash equivalents at the end of June. Low liquidity and a possible need for short-term funding would explain why Edianyun re-applied for a listing so soon after its first attempt failed.

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 655 million yuan revenue of the first half is extrapolated to the full year, which is lower than that of its peers. such as international HR services giants. Workday Inc. WDAY, Salesforce Inc. RCMP and Kingdee International Software Group (0268.HK), with P/S ratios of 6.9 times, 5.2 times and 8.3 times respectively.

Edianyun’s apparent valuation discount may reflect the company’s troubled financial outlook. If it’s looking for a higher valuation from the IPO, the company will likely need to provide a roadmap to better times that could smooth investors’ frowns.

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