Recently, Xinhua Technology International Co., Ltd. submitted its prospectus to the Hong Kong Stock Exchange, aiming for a listing on the main boardThis significant move is co-sponsored by CITIC Securities and Daiwa Capital, marking a new chapter in their business journey.
However, the company’s path to a successful IPO may be fraught with challengesNotably, Xinhua has a high dependency on the Japanese market, overlaps between its shareholders and clients, and reliance on third-party technologiesThe question remains: can Xinhua navigate these hurdles effectively in a competitive landscape?
Founded as an international provider of digital software solutions and technology services, Xinhua focuses on delivering software development, digital products, and application hosting services to system integrators and end clientsIts business spans across crucial international markets, including Japan, Hong Kong, and Southeast Asia.
According to data from Zhaoshi Consulting, Xinhua emerges as the largest enterprise in China handling software technology services and solutions for the Japanese market as of 2023. By the end of the first three quarters of 2024, it is reported that over half of the top 30 companies in Japan's information service business have long-term collaborations with Xinhua, and the firm has sustained partnerships with its top five clients for more than 15 years.
Currently, the bulk of Xinhua’s revenue derives from three main business lines: software development and delivery services, digital products and solutions, and application hosting servicesFrom 2022 to the first three quarters of 2024, the income from software development constituted approximately 92.6%, 89%, 89%, and 84.9%, respectively, while digital products and solutions contributed 3.9%, 8%, 8%, and 9.1%. Application hosting services accounted for 3.5%, 3%, 3%, and 6% over the same periods.
On the financial front, Xinhua reported revenues of RMB 1.632 billion and RMB 1.925 billion for 2022 and 2023, with profits of RMB 182 million and RMB 270 million respectively
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However, the income dropped to RMB 1.31 billion in the first three quarters of 2024, reflecting a 5.33% year-over-year decline, with profits dropping by 27.36% to RMB 120 million during this periodThe decline was mainly attributed to the significant depreciation of the Japanese Yen.
This heavy reliance on the Japanese market shows signs of volatility and raises concernsAny change in the economic, political, or social landscape of Japan can critically impact Xinhua’s operations and profitabilityThe firm faces fierce competition in the software and IT services industry, marked by swift changes in market conditions and customer demands.
Global giants like Accenture and McKinsey leverage their brand recognition and extensive service networks to maintain their market dominanceOn the flip side, domestic players such as Yonyou and Kingdee hold substantial market shares in enterprise management softwareTo remain competitive, Xinhua needs to invest consistently in research and development to adapt to evolving customer needs, which, while essential, inevitably increases operational costs and compresses profit margins.
Despite rising R&D expenses, Xinhua shows certain dependencies on third-party suppliers for technology infrastructures such as cloud services and platformsThis reliance introduces various uncertainties in their business operationsIf a third-party provider faces service disruptions or technical difficulties, Xinhua's service quality could decline, leading to customer dissatisfaction and losses.
Furthermore, Xinhua grapples with customer credit risks and uncertainties regarding the recovery of contract costs and trade receivablesTypically, payments for software development contracts are due after project acceptance, which involves a waiting periodConsequently, Xinhua may incur substantial upfront costs before receiving full payment from clients
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Analysis from 2022 to the first three quarters of 2024 indicates days sales outstanding (DSO) of 49, 52, and 61 days, respectively.
Another challenging aspect of Xinhua’s business model is the intertwining relationship between its shareholders and major clientsFrom 2022 to the first three quarters of 2024, revenue from the top five clients represented 54.8%, 55.5%, and 59.4% of total revenue, highlighting an alarming over-reliance on a small number of clientsParticularly, their largest client, Daiwa Research Institute, contributed significantly to revenue, accounting for 15.1%, 15.1%, and 16.1% during this same period, emphasizing the strategic risks involved.
Interestingly, Daiwa Research Institute not only tops the list as Xinhua's largest client but also acts as a cornerstone investorOn September 11, 2024, Daiwa acquired an additional 25.1% equity stake in Xinhua, indirectly holding 3,946,132 shares, which equates to 4.5% of the company’s total issued shares.
The principal stakeholder in Xinhua is Xinhua Technology Co., Ltd., which was listed on the New Third Board on July 15, 2015. Following a series of reorganizations and business spin-offs, Xinhua has effectively separated its operations from Huaxin Co., allowing for independent functioning.
As per the prospectus, before going public, Xinhua's shareholder structure indicates that Huaxin Co. holds 86.9% of shares, Itochu Corporation possesses 8.6% through its subsidiary in Hong Kong, and Daiwa Securities Group owns 4.5% through its subsidiary in Japan, Daiwa Research Institute.
Despite these performance fluctuations, Xinhua remains committed to distributing dividends generouslyAs of the first three quarters of 2024, dividends distributed to Xinhua Technology Co., Ltd. reached RMB 132 million, alongside RMB 65.7 million from its subsidiaries, and smaller amounts to its other subsidiaries, totaling RMB 148 million in dividend payments.
When it comes to strategic market outlook, Xinhua aims to methodically penetrate international markets, particularly in Hong Kong and Southeast Asia
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