Shanghai Able’s renewed IPO plan hobbled by weak appetite for new tech listings

The digital education company’s business is subject to seasonal factors, causing its revenue to be stronger in the second half of the year than the first half

Key Takeaways:

• Shanghai Able Digital Science has updated its Hong Kong IPO application, showing it focuses on the higher education services market, with Baidu among its backers
• The edutech company’s knowledge graph business is growing strongly by drawing on AI, but its loss widened in the first half of this year

By Bai Xinrui

The end of year is always busy for IPOs, and this year has been especially strong for new Hong Kong listings. Shanghai Able Digital Science & Tech Co. Ltd., a provider of information services for higher education institutions, is hoping to jump on that listing train, recently filing an updated application for its planned Hong Kong IPO. 

Founded in 2008 by Wang Hui and wife Ge Xin, Shanghai Able launched its Zhihuishu brand in 2013. Since then it has attracted the likes of Sina and Baidu (BIDU.US; 9988.HK) as investors in 2016 and 2020, respectively. Its service and support centers numbered more than 100 in 2017. Its latest listing document shows Wang and Ge were its biggest shareholders with a collective 38.44% of the company. Sina is next with 17.9%, followed by Baidu with about 10%.

Shanghai Able engages in higher education informatization services, which refers to using technology for educational activities through the informatization of education content, methodologies, resources and evaluations. Third-party market data in the listing document shows China’s education informatization market grew 10.4% annually between 2019 and last year, when it reached 114 billion yuan ($15.7 billion). The market is expected grow at a slower 7.9% annually in the five years after that to reach 166.5 billion yuan by 2028.

Rising revenue per customer  

Shanghai Able has developed more than 33,000 digital courses, and its products and services spanned 12 disciplines and 92 subjects recognized by China’s Ministry of Education. It is the top-ranked company in China’s higher education teaching and learning digitalization market in terms of revenue.

The company’s business consists of two parts, digital education content products and services, and digital teaching and learning environment products and services. The company had 1,422 customers in 2023. But more impressive was its average revenue per customer, which rose 34.7% year-on-year to 459,200 yuan. Digital education content products and services were the company’s biggest breadwinner, accounting for 87.1% of its revenue in the first half of 2024.

The company’s digital education products and services business caters to higher-education institutions and converts traditional teaching material into digital forms starting with online course development. With an aim of providing more interactive, engaging and personalized learning experiences for students, the company offers products and services such as digital courses, knowledge graphs and virtual simulation courses.

The company typically requires customers to pay a certain percentage of the total contractual amount up front as prepayment, with the outstanding balance due upon delivery, inspection and acceptance of services and products. Digital courses are typically priced anywhere from 10,000 yuan to 100,000 yuan each.

As the application of AI becomes more widespread, the digitalized education market is also embracing such technology. Shanghai Able is using AI technologies in its knowledge graph business to meet different customer needs by delivering software over the cloud or using offline channels, especially in core subjects of engineering and medical education. AI has been particularly useful in the company’s knowledge graph business, whose revenue grew an impressive 7.7 times in the first half of 2024.

The second pillar of its business is digital teaching and learning environment products and services, accounting for 12.8% of revenue. Product offerings in this area include cloud-based learning management system (LMS) and digital classrooms. Cloud-based LMS allows customers to use personal computers or mobile apps to manage or construct simple and interactive teaching processes based on specific application scenarios. The company typically charges based on the number of function modules subscribed to, with subscription fees ranging from 50,000 yuan to 200,000 yuan per year.

Annual profits in sight

As a participant in the highly cyclical educational industry, Shanghai Able’s financial results are also highly variable based on the time of year. The higher education institutions that are its main customers typically finalize their annual procurement schedules and budgets in the first quarter of each year. They usually only make small pre-payments at that time, with the balance typically paid in the second half as products and services are delivered. Thus, the first half of the year is typically a lighter revenue period for the company.

Seasonal factors aside, falling government subsidies have also weighed on the company’s growth in revenue from other sources. At the same time, its distribution and sales expenses increased 32.9% to 104 million yuan in the first half of the year, while its revenue only grew 18% to 241 million yuan. The bottom line was that Shanghai Able not only landed in the red in the first six months of 2024, but its loss widened 80% year-on-year to 109 million yuan.

The pattern was similar in 2023, with the company losing money in the first half of the year, but turning a profit for the whole year after logging more revenue in the second half. Accordingly, the company could still log a profit for all of this year if the previous pattern holds.

Broadly speaking, Shanghai Able is in a high-growth sector, which should technically be attractive to potential investors. But sentiment in Hong Kong is not particularly strong towards new tech listings right now. A case in point is Dmall (2586.HK), a provider of software services for retailers, whose stock tanked 54.3% on its first trading day earlier this month.

Investors also seem relatively lukewarm on the education sector in general these days, with the average stock trading at a forward price-to-earnings (P/E) ratio below 20 times. In such a tepid climate for edutech, Shanghai Able may be wise not to set its IPO valuation sights too high, lest it repeat Dmall’s disastrous trading debut.

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