Can SATP give a good account of itself in seeking listing?

The digital tax and financial services provider for small businesses hopes to differentiate itself from rivals with its direct-to-business and software licensing models

Key Takeaways:

  • SATP has filed for a Hong Kong IPO, reporting a gross profit of 320 million yuan in 2023 and gross margin of 58.6%
  • The digital tax and financial services provider for small businesses boasted a 79.4% customer retention rate last year, ahead of the industry average

By Li Shih Ta

China’s “Golden Tax Project” is an important part of its drive to update the country’s vast tax filing system, which is very much a work in progress in the shift from a planned to a Western-style economy. Now in its fourth phase since 2021, a key element has become the transition from documents to digital filing – a process that has spawned an entire industry of service providers competing for a slice of an emerging new market for digital tax and financial services.

SATP Holding Inc. is one such provider, and is trying to win over investors by recently opening its books with its application to list on the Hong Kong Stock Exchange, its second attempt, with Citic Securities as its lone sponsor. The company is the largest provider of tax and financing solutions for China’s micro, small and medium-sized enterprises (MSMEs), according to third-party market data in its prospectus filed earlier this month. 

Tax and financial management is an indispensable function for any company since the day it opens for business. The industry’s rapid digitization is leaving companies with two choices: spend 100,000 yuan ($13,774) to 150,000 yuan a year for a full-time accountant, or spend far less for online tax and financial services from a third-party vendor.

Nearly 20% of MSMEs in China still choose to hire in-house professionals despite the relatively high cost of paying them, according to SATP. But even then, most will outsource many of their tax and financial functions to third-party bookkeepers that also rely on specialized tax and finance software. Such products are useful for general functions, but are also limited by their inability to provide solutions based on each company’s individual characteristics. That’s where SATP believes it may have an edge over its rivals.

National footprint

Founded in 2015, SATP set up originally as a tax and financial services software provider for bookkeeping agencies. But as time went on, it increasingly realized that software alone couldn’t address many of the pain points for enterprises across a wide range of industries and geographies. That’s when SATP decided to try to become a game changer. It set up its own bookkeeping agency using a direct-to-business model, providing software on both open and licensed bases to bring AI-enabled tax solutions to small- and medium-sized enterprises (SMEs). Its services run the range from accounting to invoicing, tax compliance, and comprehensive financial management.

The company currently has 90 offices in 46 cities across China, and another 395 regional agency partners authorized to use its software. Simply put, SATP is now both a finance and taxation software developer and provider, as well as an acting bookkeeper.

According to its listing document, the company’s core tax and finance system served some 672,000 micro, small and medium-sized enterprises in 2023. It can meet those clients’ varied needs through its accumulation of about 260 million model parameters gathered from more than 310 million finance and tax documents, representing the largest parameter set for its industry in China.

Improving gross margin 

SATP says its own labor cost to provide finance and taxation management services was just 807 yuan per MSME customer last year, much lower than the 2,550 yuan if it used traditional outsourcing solutions, and a fraction of what it would cost to hire an individual accountant for each customer. Its solutions can “fully replace in-house finance and taxation professionals,” it said in its listing document.

Its strong proposition for small businesses has helped SATP log significant growth over the last three years. Its revenue rose from 350 million yuan in 2021 to 540 million yuan last year, representing a compound annual growth rate of 24.6%. Its gross profit over that period grew even faster, nearly doubling from 170 million yuan to 320 million yuan. Its gross margin has also improved steadily from 49.4% in 2021 to 58.6% last year.

Despite the strong revenue growth, SATP’s own bottom line has remained squarely in the loss column over the last three years, though the losses are narrowing. Its 670 million yuan loss in 2021 had shrunk by more than half to 290 million yuan last year, with total losses of 1.45 billion yuan over the three-year period.

As is often the case, the company pointed out that much of the losses were caused by changes in the fair value of its redeemable convertible preferred shares, coupled with higher expenses for marketing and promotion and R&D. A slowdown in business during the pandemic also led to slower revenue growth.

SATP’s business growth depends on its ability to retain existing customers while signing up new ones. The company excels in the former part of that equation, boasting a customer retention rate of 79.4% last year, ahead of the industry average of 60% to 70%.

As a leader in its field, SATP has had a relatively easy time raising money so far to fund its rapid growth. The company has completed 11 financing rounds to date, boasting a string of A-list investors that include smartphone maker Xiaomi with 15.2%, Hexie Jinfeng with 10.6%, and Tencent-backed Image Flag Investment with 8.9%.

The bottom line is that SATP is a tax and financial services specialist focused on Chinese small businesses. Its strengths lie in its R&D capabilities and ability to find and retain clients across a wide range of industries and geographies. But we should also point out that the company’s R&D spending, a key component for staying ahead of its rivals, is still much lower than its marketing spending on finding new customers.

At the end of the day, SATP’s success will be dictated by the success of its customers. That means its ability to accurately anticipate and meet their needs while continuously improving its own technology will be critical to its future success. And maybe just one day in the not-too-distant future, the company may impress its own accountants by finally moving its own finances from the loss to the profit column.

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