Huifu Payment, a Shangahi-based fintech that competes directly with AliPay and Tencent Pay, is aiming for a pricy valuation for its initial pubic offering this Friday in Hong Kong.
If it gets away with high pricing, it could provide a tailwind for other China-based fintechs looking to IPO in Hong Kong this year.
Huifu plans to issue 225 million shares on Hong Kong Exchange’s main board at a price ranging from HK$6.5 per share to HK$8.5, generating up to HK$1.9 billion ($245 million).
Unlike many fintechs, Huifi makes a profit, but at HK$8.5 per share, its earnings per share would be a startling multiple of 64x.
“The price is aggressive,” said Ryan Roberts, senior research analyst of MCM Partners in Hong Kong.
No Comparables
One of the challenges with this deal is the lack of direct comparables in Hong Kong or the U.S. Investors can look at payment companies in New York such as Square and Worldpay, but these are far more diverse businesses.
“These guys [Huifu] are trying to get there,” Roberts said, “but they’re pricing like they’re already there.”
But the fintech+China theme may attract plenty of investors anyway. China UnionPay is taking a cornerstone position, agreeing to purchase Rmb80 million at the offer price.
“We see a lot of interest from Asian as well as U.S. investors,” said a source close to the deal.
Huifu provides merchant payments and fintech-enabling services in China. In payments, it targets small businesses with point-of-sale services, mobile payments and cross-border payments. It also provides technology to SMEs to help them acquire customers.
Despite having a tiny market share – Huifu has 2% of China’s payments space, a distant third place to Tenpay (35%) and AliPay (25%) – the company generates a profit by focusing on SMEs in tier-2 and tier-3 cities.
Although this works, it also limits the company’s ability to expand.
Setting the bar high
“It’s almost impossible to compete with Alipay and Tenpay in retail payment,” said Michelle Li, head of research of AMTD Group. Niche services for SMEs is a finite market.
Nonetheless, the company makes money. It turned a profit in 2016. In 2017, it reported revenues of Rmb1.7 billion ($270 million) and a profit of Rmb132.8 million ($20.75 million). Huifu’s prospectus says the IPO proceeds will go to improving its tech, making strategic investments, expanding its sales channels, and hiring.
There are no comparables in the market, but the price range suggests a P/E ratio of 64 times. It looks expensive by other measures, too. For example, its price-to-sales ratio is 4.9x, but analysts say average P/S multiples are 2-3x.
The lack of comparables means Huifu can try to take advantage of being the first payments fintech to list in Hong Kong – so it is setting the bar high.
Other companies in the queue will be cheering Huifu on, as it could set the tone for any China fintech.
HKEx’s website lists several fintechs readying listings, including VCredit, which refinances credit card debt; 51 Credit Card, which provides credit-card management; and FinUp Finance Technology, a peer-to-peer lender.
And, of course, looming in the background, is the long anticipated IPO by Ant Financial, the Alibaba fintech business.
A warm reception from HK
Analysts think these companies will get a warm reception – or at least, a better welcome than they’d receive in New York.
The U.S. used to be the venue of choice for its flexible stance on voting rights, and its liquidity. But HKEx now allows dual-share listings, and it provides better liquidity from mainland China investors through its Stock Connect links to bourses in Shanghai and Shenzhen.
Moreover, investors in the region claim to understand Chinese fintech models better than analysts and traders based in the U.S. “Most investors [in Hong Kong] understand Huifu is not a P2P fintech,” said a banker.
But China fintechs and their sponsors will have to accept some of the laws of gravity: if Hong Kong-listed companies are deemed too expensive, investors will allocate more back to New York, says AMTD’s Li.
CLSA and J.P. Morgan are the joint sponsors of the IPO.
