9923.HK
Yeahka warns of rough first half

The payment services company said an extraordinary adjustment that hit its revenue last year will continue to weigh on its first-half results, as it talked up progress in its overseas expansion

Key Takeaways:

  • Yeahka said a “non-recurring adjustment on revenue” will no longer be a factor for the company from July, indicating it will continue to impact its first-half results
  • The company also said its “strategic upgrade” is making good progress, including an overseas expansion to diversify beyond China

  

By Warren Yang

The latest regulatory filing from mobile payment services provider Yeahka Ltd. (9923.HK) is an odd one, appearing to brace investors for some ugliness in its upcoming first-half results due out in August. If anything, it shows that a company can disguise bad news only so much.

Last Monday, the company said a “non-recurring adjustment on revenue” will no longer be a factor from the second half of this year. That refers to a significant payment it made last year to its payment network partners over matters that still remain largely unexplained. The company basically said it will continue to book a related charge in the first half of this year, hitting its revenue. That looks like a roundabout sort of revenue and profit warning, although it obviously tried to spin it more positively by highlighting that it’ll be fine for the rest of the year.

“This impact is expected to cease in the first half of 2024 and the revenue will not be further netted-off in the second half of 2024,” the company said.

Seeking to blunt the ominous tone, Yeahka then took the opportunity to highlight that “a strategic upgrade” is well underway at the company. That looks like its way of saying that everything’s going well with its young overseas expansion is it tries to diversify beyond a weakening retail environment in its home Mainland China base. It said it has started operations not only in the nearby Asian markets of Singapore and Hong Kong, but also as far afield as the U.S., and is working on further geographic expansion.

These efforts will ensure “high-quality development of payment services” and “enhance the synergy between its business lines and the commercialization ability of other value-added services gradually,” Yeahka said.

Yeahka was founded in 2011 by Liu Yingqi, a former general manager at Tencent’s (0700.HK) Tenpay, and likens itself to U.S. payments giant Block (SQ.US), formerly known as Square. Reflecting the company’s roots, it has grown on the back of a strategic relationship with Tencent, which has included a partnership for QR code payment services on Tencent’s WeChat payment platform.

Yeahka may have tried to make its brief update sound upbeat, but the underlying message still seems a bit gloomy. For starters, the “non-recurring” charge technically did recur, at least in the short-term, since it extended from last year into the start of this year. The item concerns Yeahka’s primary revenue source, its “one-stop” payment services, which connect merchants and payment networks. The company takes fees from merchants but also pays “interchange” fees to the operators of the payment networks it uses.

In its annual report for last year, Yeahka said it paid a significant 344.4 million yuan ($48 million) in interchange fee rate adjustments for a “suspense account” held by its payment networks. In general, companies use so-called suspense accounts to temporarily put aside unclear funds or transactions.

No such issues occurred prior to last year, so investors might like some more explanation of what’s happening now and assurances that it won’t happen again. Yeahka’s explanation of the extraordinary charge was only brief and sketchy in its annual report for last year. Equally strange, not a single question was raised on the issue during its conference call to discuss its results for the fourth quarter of last year.

Several other payment companies, including Lakala (300773.SZ) and Beijing Cuiwei Tower (603123.SH) have issued vaguely-worded statements about similar adjustments to “preferential merchant transaction rates,” indicating Yeahka’s adjustments may be an industry-wide move related to regulatory changes and aren’t a company-specific issue.

Revenue slowdown

Yeahka’s latest filing also seems to reflect the challenges it’s now facing as its breakneck revenue growth of the past moves further into the rearview mirror. Yeahka posted explosive revenue growth throughout its history until Covid-19 arrived. But then things slowed sharply as many of the retail merchants that are its main customers ran into difficulties, first due to pandemic controls and more recently because of China’s economic slowdown.

Last year, the company’s revenue increased 15.6% to 3.95 billion yuan ($545 million). Granted, that relatively slow growth was affected by the one-time payment to its network partners. But even without such the charge, its former glory days of triple-digit growth are clearly gone. Such a slowdown was inevitable to some extent due to the company’s growing size. But the slowdown for therelatively young company highlights the economic headwinds that consumer-facing businesses in China are feeling in general these days.

To diversify its revenue streams, Yeahka started offering “in-store e-commerce services” at the end of 2020 to its partner merchants. But revenue from that new business dropped to less than 3% of the company’s total last year from about 10% in 2022, partly due to intensifying competition.

With diversification opportunities limited at home, Yeahka stepped up a push to grow outside Mainland China last year, and those efforts are bearing some fruit. Yeahka touts that it’s now working with some 5,000 merchants across various industries, including catering, retail, hotels and luxury goods, in Singapore and Hong Kong for its one-stop payment product. And it plans to use Hong Kong as a hub for expansion further into Southeast Asia and into North America.

It has yet to provide a geographic breakdown of its revenue from those offshore efforts, so it’s probably safe to assume that their contribution is negligible for now and could remain that way for a while. After all, there’s no shortage of digital payment options for shoppers globally these days, and Yeahka has thrived to date in no small part due to the relatively closed nature of China’s financial services market to foreign operators.

Yeahka shares edged up last week, barely responding to its latest disclosure. They have lost more than 40% of their value since the company’s IPO in 2020 to trade at a price-to-sales (P/S) ratio of just about 1, less than half of what PayPal (PYPL.US) fetches and also well behind Block’s ratio of 1.8.

A rejuvenation of Yeahka’s valuation will require some solid evidence that it’s finding new growth drivers, and assurances that whatever led to the recent big adjustments won’t happen again. Some promising data on its global expansion could also help, showing that its products have the potential to be competitive outside its protected home China market.

This story has been updated to include background about the possible nature of Yeahka’s revenue adjustment

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