Linklogis appears to build shaky house on lower fees for suffering customers

The supply chain financing services provider reported growing transactions in the first nine months of this year, but remains heavily exposed to China’s sagging property market

Key Takeaways:

• Linklogis reported its total transaction volume increased 17% year-on-year in the first nine months of this year
• The company’s first-half results showed its revenue grew much more slowly than its transaction volume, suggesting it lowered its fees to generate more business

By Warren Yang

Business diversification is important for any company, and online financier Linklogis Inc. (9959.HK) is certainly making moves in that direction. But doing that profitably is even more important, and the company doesn’t seem to be doing quite so well in that regard.

Real estate companies traditionally have been the biggest customer group for the provider of cloud-based software-as-a-service (SaaS) platforms for supply chain financing. This served Linklogis quite well when property developers in China were booming. But the slump now plaguing the sector, which shows no signs of easing anytime soon, is pressuring the company to expand its clientele to different industries.

The bottom line for Linklogis is that its business continues to expand, probably as the result of the company lowering fees for its services. But its profitability is under pressure as its continued reliance on real estate-related businesses creates multiple headaches.

On the surface, at least, things look good for the company in terms of business volume. The total amount of transactions Linklogis processed in the first nine months of this year increased 17% year-on-year, according to a business update released last Wednesday. While that kind of growth seems decent at first glance, it may not be sufficient for Linklogis to improve its bottom line, based on other information in its results for the first half of the year.

The company’s total transaction volume grew about 17% year-on-year as well during the six-month period, implying the growth rate was steady at that level in the third quarter as well. But its revenue increased only about 6% in the first half of the year. One likely explanation for the large gap in the growth rates for transactions and revenue is that the company slashed fees for its services, probably to bring in more business.   

Another big red flag in the first-half earnings report was a more than doubling of the company’s impairment charges, which erased a large chunk of its revenue, reflecting challenging economic conditions for businesses in China, especially those closely tied to the property market.

At the end of June, real estate companies accounted for 20% of Linklogis’ total supply chain asset transactions. That’s down quite substantially from 42% at the end of 2021. But the proportion of transactions from the related infrastructure and construction sector, which is also feeling the pinch of the property downturn, increased to 31% from 9%. So the combined share of those two vulnerable customer groups continues to be more than half of Linklogis’ business.

In supply chain financing, a company, or “anchor,” uses unpaid bills to its suppliers to help those suppliers obtain financing, essentially leveraging its own creditworthiness to assist its suppliers. Both the anchor and its suppliers benefit because the former gets more time to pay its bills, while the latter can get fresh cash to finance their operations. Supply chain financing in China has been booming, partly because of a general shortage of financing from traditional banks for small and medium-sized enterprises (SMEs).

Changing times

In the past couple of years, Linklogis has benefitted from a government mandate for state-owned enterprises to use technology platforms to aid their suppliers through supply chain financing. That’s helped to raise the number of Linklogis’ anchor partners and customers.

The company’s two main platforms also help to facilitate the pooling of supply chain assets, such as unpaid bills, into investable asset-backed securities (ABS). Such securitization can help companies holding illiquid assets like receivables to raise money. But the process of creating ABS can be daunting for smaller companies that are not financially savvy, which is where Linklogis provides assistance.

But like bonds or loans, ABS also carry the risk of default if a company that owes money doesn’t pay its bills. That creates vulnerabilities for Linklogis because it collects supply chain assets like unpaid bills that can be securitized, and then carries them on its own balance sheet temporarily for certain periods, a process known as “warehousing.”

As property developers and related companies come under strain and don’t pay their bills in growing numbers, investors have become more reluctant to buy ABS linked to the unpaid bills of such companies. As a result, Linklogis’ warehousing periods have increased, with securitization deals sometimes delayed or even canceled. If a company defaults on its bills during this warehousing period, Linklogis must swallow any resulting losses in the form of impairment costs.

In addition, growing difficulties among Linklogis’ own customers means they could ultimately fail to pay their own bills to Linklogis, which would result in yet more impairment losses.

Another challenge for Linklogis is that its anchor customers are increasingly building their own supply chain platforms, eliminating the need to use third-party products from Linklogis or others. This factor, coupled with likely efforts to assist its many financially strapped customers, may explain why Linklogis seemingly cut fees for its services in the first half of the year.

In a move that may help Linklogis overcome all these difficulties to some extent, the company has just agreed to increase its stake in a treasury management company to more than 50%, following up on a letter of intent signed in August, according to an announcement on Wednesday.

Such diversification is a step in the right direction, especially given that it’s not too far off the company’s main business. But it’s also just a small step, as reflected by the relatively modest purchase price of about 68 million yuan ($9.5 million) for the majority stake. The acquired company won’t do too much for Linklogis’ business for now, since its profit after tax last year stood at just 2.9 million yuan, down sharply from 11.9 million yuan in 2022.

Linklogis shares have lost most of their value since their IPO in 2021 to trade at a depressed price-to-earnings (P/E) ratio of 0.8. That’s not too surprising, since the company is likely to fall into the red this year after reporting a 240 million yuan loss in the first half of 2024. By comparison, the multiple for online loan facilitator FinVolution Group (FINV.US) is more than 5, which isn’t great but looks quite typical for Chinese financiers in the current business climate.

As Linklogis’ prospects fade with no apparent hopes for a turnaround soon, major investors are also growing impatient with the company. Singaporean sovereign investor GIC this week disclosed it dropped its stake in the company to less than 5%, down from the 8.4% it held at the beginning of the year.

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