The cash-strapped provider of digital invoice and tax services is seeking to list its shares on the Hong Kong Stock Exchange, two years after a mainland IPO fell through

Key Takeaways:

  • Baiwang, which has just applied to list in Hong Kong, lost nearly 1 billion yuan over the last three years and is grappling with negative cash flows from operating and investing activities
  • The company has been branching out into loan facilitation in recent years but profits are being drained by hefty referral fees


By Fai Pui

Shoppers may quickly discard their sales receipts, but companies must maintain a neat paper trail of invoices, transactions and tax filings, or their digital equivalents. Which is why tools to manage these processes have become a big business.

One of China’s leading providers of cloud-based digital invoicing, tax and finance solutions, Baiwang Co. Ltd., is hoping investors will look past its current financial woes to see the potential for its expanding services, as it aims to list on the Hong Kong Stock Exchange.

The company filed a preliminary prospectus last Wednesday, following an unsuccessful  attempt at an A-share listing in 2021. Investors may wonder why Baiwang is still so eager to go public, when the Hong Kong market has been on the slide.

The company’s earnings record raises some red flags. Baiwang has expanded its revenue over the past three years, from 291 million yuan ($40.3 million) in 2020 to 526 million yuan last year, according to figures in the prospectus. But the digital services provider is still languishing deep in the red, with a cumulative loss approaching 1 billion yuan during the period. Excluding non-operating factors it works out to an adjusted net loss of 129 million yuan for the period, with 70.3 million yuan of that in the last year alone.

Like other tech companies, Baiwang has not been short of star investors in the past. Four funding rounds since 2017 netted more than 1 billion yuan, from backers such as Alibaba (BABA.US; 9988.HK), Fosun International (0656.HK) and Shanghai Dazhong Public Utilities (1635.HK). Other investors include the National Small and Medium-sized Enterprises Development Fund, and Shanghai Guoxin, which is involved in managing Shanghai’s state-owned assets. At the time of the IPO filing, founder Chen Jie was the largest shareholder with a 27.1% stake, followed by Alibaba with 11.87%.

Despite the star power of its backers, the company’s operating performance has been less than stellar. Aside from the sustained losses, the company’s cash flow from operating activities and investments has been in negative territory for the past three years.

Operating activities in the three years consumed about 160 million yuan, while investment activities generated more than 580 million yuan of cash outflow, according to the firm’s financial report. That left cash and cash equivalents of just 237 million yuan at the end of last year. However, current liabilities reached 2.48 billion yuan, with total assets minus current liabilities as much as 1.22 billion yuan in negative territory.

Baiwang said in the prospectus that it may be exposed to liquidity risks if net losses mount up in the future, along with net current liabilities and net cash outflow from operating activities. It’s hardly surprising that the company wants to bolster its finances with an IPO, as high interest rates have also made it harder to access loans.

But the bigger picture looks more promising, as enterprises seek ways to streamline and digitize their paperwork while complying with China’s tax rules. A Frost & Sullivan report cited in the prospectus found that China’s market for digitized tax-related transactions grew from 3.7 billion yuan in 2018 to 5.9 billion yuan last year in revenue terms. The report predicted the market would balloon to 19.3 billion yuan in 2027.

As a deep specialist in the business, Baiwang has developed a platform integrating digital certificates, electronic files and signatures, big data analytics, artificial intelligence and blockchain to provide services to governments, corporations and public organizations.

However, China’s market for tax-related digital transactions has always been fragmented. Based on last year’s revenue, the market share of the top five players only totaled 21.3%, with Baiwang ranking second with a 4.3% portion. As for cloud-based tax-related transactions, Baiwang topped the revenue stakes, but commanded only 6.6% of the market, as it processed about 700 million invoice requests and issued about 1.7 billion VAT invoices last year.

Moving into loan assistance

Baiwang’s revenue from cloud-based solutions rose nearly 26% last year to 422 million yuan from the previous year, accounting for around 80% of total turnover. However, the revenue proportion derived from digitized tax solutions fell from almost 43% in 2020 to 34.5% in 2021 and slipped further to just over 30% last year. But the company can draw on its treasure trove of corporate financial data to offer clients other services such as digital precision marketing and risk intelligence. Thereby it can recommend financial products to smaller customers, or provide risk control input for enterprises, which essentially puts it in the business of facilitating lending.

These data-driven intelligence solutions have contributed a growing slice of revenue over the past three years. The income stream rose from about 63 million yuan in 2020, or nearly 22% of revenue, to 179 million yuan a year later. The revenue reached 264 million yuan last year, half of the company’s total. These numbers underline Baiwang’s ambition to harness the financial data of its customers to gain traction as a lending facilitator.

However, the expansion into the finance realm comes with its downsides. Baiwang recommends financial products to small and micro-enterprises through a host of marketing agents, as well as its own sales team. The agents for its precision marketing service numbered around 500 by the end of last year, driving the rapid growth of the business. But the surge came at a cost.

Baiwang’s expenses from referral fees soared from 24 million yuan in 2020 to 154 million yuan last year, representing the biggest cost of sales item. The referral fees depressed the firm’s gross margin from 46.1% to 40.8%, hurting profitability.

Meanwhile, the weak Hong Kong market has been stony ground for IPOs. Some companies have even pulled the plug on their listings after a lukewarm response from investors. Add to that a poor performance by cloud-concept stocks such as Ming Yuan Cloud (0909.HK), whose share price has more than halved in the past six months. Share prices at TI Cloud (2167.HK) and Bairong Inc. (6608.HK) have also fallen 19%, while Edianyun Ltd. (2416.HK) is still below the listing price after going public in May this year. All in all, investors may be unlikely to have high hopes for Baiwang.

Edianyun, which is also in the red, can serve as a valuation guide for Baiwang, having closed at HK$8.10 on Tuesday with a price-to-sales (P/S) ratio of about 3.36 times and a market capitalization of about HK4.65 billion ($596 million). On a comparable basis, Baiwang is estimated to have a market capitalization of only about HK$1.94 billion. With a question mark hanging over cloud stocks, the company may have to convince investors that it has a plan to reverse losses and achieve positive cash flow, if it succeeds in passing the listing hearing.

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