Two Years After Its Initial Filing, Sancai Keeps Trying for New York IPO

The company is one of the few survivors from a former group of apartment rental specialists that later collapsed, and has transformed to a software services provider

Key Takeaways:

• Sancai is seeking to raise up to $15 million in a New York IPO, or half the $30 million it initially targeted when it first filed for the listing two years ago
• The company has experienced a bumpy transition since switching from a property rental specialist to a software services provider in 2019

By Trevor Mo

The word “bumpy” may best describe software services provider Sancai Holding Group Ltd.’s journey to a New York IPO, which has dragged on for more than two years. After first applying to list back in September 2020, Sancai filed updated versions of its prospectus at least nine times, grappling with its own identity crisis all the while.

That’s not exactly the best formula for attracting investors, though the company thinks it’s finally found a formula for success that we’ll detail shortly.

The latest update of its IPO plan, filed last week, shows Sancai aims to raise a relatively small $15 million, half of the $30 million target it set two years ago. The deal is being underwritten by Univest Securities, a smaller investment bank linked to many of the handful of New York IPOs for Chinese companies over the last year, as most of the big banks have avoided such listings due to political uncertainties.

An issue of around 10% of its total shares would give Sancai a modest valuation of $150 million. But even that looks ambitious when one considers its annual profit was just $926,718 in its latest fiscal year, which would give it a lofty price-earnings (P/E) ratio of 161.

The company’s long road to market may owe partly to a broader wave of regulatory tightening in China towards companies holding sensitive consumer data. Sancai’s prospectus is full of information in that regard, discussing the regulatory risk it faces because its operations are in the sensitive telecommunications business.

But broader market conditions aside, Sancai also has plenty of its own issues. Chief among those are its finances, which show the company is facing both revenue and profit declines.

We’ll look shortly look at Sancai’s current business and some of the major challenges it faces, in an effort to determine its investment value. But before that, we’ll review its development history, including a 2019 strategic move that saw the company entirely change its business focus – something that’s less seen in more mature western markets but quite common in China’s young and constantly changing business landscape.

Sancai touts itself as a player in the sexy software-as-a-services (SaaS) sector, providing such services to smaller businesses. But it actually started as an apartment rental specialist in late 2017. Back then it was among a group of highflying startups seeking to profit from strong demand for rental housing services at a time of strong government support and investor interest.

Companies seizing on the craze used an innovative model of leasing residential apartments from individual property owners on a long-term basis, then renovating and furnishing them in a clean and modern manner, before renting them out to individual tenants. But the model proved to be unsustainable due to its high requirement for upfront investments.

Dozens of startups eventually crashed after running out of cash amid a bidding war to attract property owners and then sign up tenants. A company called Danke became a poster child for the group, briefly soaring to fame with a New York IPO in early 2020 under the name Phoenix Tree, before collapsing less than a year later.

Lucky survivor

Sancai was one of the few lucky companies to survive from the group, bowing from the business before the big implosion. Its 2019 decision now looks timely, as it sold its portfolio of more than 10,000 properties it was managing to a third-party. In July that year it rolled out a cloud-based mobile management solution system, marking its move into the SaaS business.

While the transition to software looks timely and even smart, the move hasn’t been smooth for Sancai, at least based on its financial metrics. In its fiscal year through September 2020, the first after the transition, Sancai reported revenues of $3.6 million. The figure more than doubled to $7.9 million the next fiscal year, showing some initial traction. But then it dropped sharply in the six months through March this year to just $1.9 million, down 59% year-on-year. Its profit over the period nosedived 96% to just $44,500 in the six months through this March.

The company’s initial strategy aimed to offer cloud-based services to professional landlords that typically own multiple apartments that require tenants. Such services included transaction, settlement and customer management.

The strategy looked logical in concept, aiming to draw on Sancai’s extensive network of contacts and experience in its earlier form. Such a standardized model would give Sancai recurring subscription fees, allowing it to rapidly expand services using a highly scalable model that would keep costs under control. But it seems Sancai didn’t do so well in its execution.

The company did show it could quickly gain customers, with its business clients jumping to 149 in 2020 from just two a year earlier. But the majority of those didn’t contribute any revenue. For its fiscal year through September 2020, nearly 90% of the company’s $3.6 million in revenue came from a single client, City Community Service Group Co. Ltd., where Sancai’s CEO once served as legal representative.

Sancai also failed to stick to its previously envisioned standardized platform model, moving into a more a traditional customization software model that is far costlier due to lack of scalability. That business ultimately grew at the expense of the standard SaaS business.

For the fiscal year through September 2021, the customized and standardized software businesses each contributed about half of the company’s $8 million in revenue. But revenue from the standardized service dropped to zero for the six months through this March, as all of Sancai’s $1.9 million in revenue for the period came from its customized software services.

The company attributed the sluggishness of its standard SaaS service and the overall software business to flare-ups in China’s Covid-19 pandemic, saying frequent resulting restrictions, including city-wide lockdowns, wreaked havoc on the property industry that is its main source of clients.

Its setback in the standardized SaaS business model reflects the rocky road that Sancai has traveled in its radical transition to the software business. To hedge itself against too much reliance on the property sector, the company said it will seek to diversify its customer base into other industries, including agriculture and consumer services. The company has set up a separate unit to push for the initiative, but has yet rolled out any specific products.

But Sancai could also be running out of time to add such new products, as its cash fell by nearly half to $2.1 million at the end of March this year from about $4 million a year earlier.

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