"Harbor Business Observer" Shi Zifu

On July 26, Beijing Xunzhong Technology Co., Ltd. (hereinafter referred to as Xunzhong shares) submitted its application to the Hong Kong Stock Exchange, with DBS Bank as the exclusive sponsor.

It is worth mentioning that before submitting to the Hong Kong Stock Exchange, Xunzhong shares had previously submitted to the Beijing Stock Exchange before voluntarily withdrawing its listing application soon after.

01

Reliance on a single business leads to significant fluctuations in net profit margins

Founded in 2008, Xunzhong shares positions itself as a smart cloud communication construction and service provider, leveraging cloud computing and artificial intelligence technologies to provide comprehensive communication services and digital city operation solutions for enterprises and governments. According to Frost & Sullivan, Xunzhong shares ranks as the largest full-stack cloud communication service provider in China in terms of revenue in 2023, and is one of the earliest providers of cloud communication services in the country.

Xunzhong shares' business segments and main services and solutions are divided into cloud communication services and intelligent communication solutions. Cloud communication services encompass a range of value-added communication services, primarily providing messaging, voice, and mobile data communication to customers online through application programming interfaces (APIs). These services primarily include CPaaS and contact center SaaS.

Intelligent communication solutions utilize software or a combination of software and hardware to enhance communication and connectivity for public sector clients across various use cases such as municipal governance and security. By leveraging technologies like data analysis, cloud computing, edge computing, and visual recognition, customized solutions are developed to meet clients' individual needs.

From 2021 to 2023, Xunzhong shares provided services and solutions to over 3,500, 2,400, and 2,400 enterprise clients, respectively. During this period, a total of 63 key clients were served, each contributing over RMB 5 million in annual revenue, accounting for approximately 85%, 80%, and 86% of Xunzhong shares' total revenue for those respective years.

From 2021 to 2023 and the first three months of 2024 (hereinafter referred to as the reporting period), Xunzhong shares' total revenue was RMB 994 million, RMB 810 million, RMB 916 million, and RMB 152 million, respectively. Over the same period, the company's net profits were RMB 74.816 million, RMB 74.66 million, RMB 76.584 million, and RMB 5.148 million, respectively.

During the reporting period, Xunzhong shares generated revenue from cloud communication services of RMB 883 million, RMB 695 million, RMB 851 million, and RMB 138 million, accounting for 88.9%, 85.8%, 92.9%, and 91.2% of total revenue in each period, respectively. Specifically, revenue from CPaaS accounted for 83.1%, 78.1%, 85.2%, and 84.0% of total revenue, respectively, highlighting Xunzhong shares' reliance on a single business segment for revenue generation.

Xunzhong shares noted that the revenue from its cloud communication services depends on customer demand for cloud messaging, voice, mobile data, or virtual goods services and the unit price charged for these services. A significant portion of the company's contact center SaaS revenue is related to voice, with a revenue model similar to that of its CPaaS voice services.

In terms of other profitability indicators, Xunzhong shares' gross profit margins during the reporting period were 18.5%, 24.1%, 21.4%, and 22.2%, respectively. The net profit margins were 7.5%, 9.2%, 8.4%, and 3.4%, respectively. Xunzhong shares mentioned that the profit margin in 2023 was negatively impacted by a significant increase in messaging service revenue, which has a lower gross profit margin compared to voice services.

02

High-premium acquisition six years ago, withdrawal from Beijing Stock Exchange

Public information shows that in June 2015, Xunzhong shares were listed on the New Third Board with the stock code 832456. Three years later, in 2018, listed company Dahua Intelligence (002512.SZ) planned to acquire all shares of Xunzhong shares through cash, but the acquisition ultimately failed.

In March 2022, Xunzhong shares began coach with CITIC Securities and planned to list on the Beijing Stock Exchange. On June 30 of the same year, Xunzhong shares' IPO application for the Beijing Stock Exchange was accepted; on July 14, the Beijing Stock Exchange issued an inquiry letter for review; and on October 11, the Beijing Stock Exchange announced the termination of the review process for Xunzhong shares' public issuance and listing on the Beijing Stock Exchange. The announcement indicated that Xunzhong shares voluntarily applied to withdraw its application on September 23.

In the inquiry letter issued by the Beijing Stock Exchange, issues such as the stability of Xunzhong shares' control rights and the legality and compliance of its operations received regulatory attention.

According to public information, Xunzhong shares' actual controller, Piao Shenggen, held 24,984,600 shares before the issuance, representing a 27.36% stake, which decreased to 21.30% after the issuance. No single shareholder held more than 7% of the shares directly. The third-largest shareholder, Suzhou Mingcheng Group's wholly-owned subsidiary Suzhou Mingcheng Venture Capital, held 2,960,000 shares, or a 3.24% stake, making them a concerted action person with Piao Shenggen, with a combined shareholding of 8.90%.

Regarding the stability of control rights, the Beijing Stock Exchange raised questions such as the accuracy of identifying the actual controller, whether the actual controller with a relatively low shareholding percentage can effectively control the company, the impact of the low control rights ratio and the situation of major shareholders, the existence of concerted actions among major shareholders other than the actual controller, and measures or arrangements to maintain the stability of control rights.

In terms of financing, Tianyancha shows that on June 10, 2015, Xunzhong shares received RMB 8 million in strategic financing from Tianxing Capital. In November 2015, December 2016, and May 2017, Xunzhong shares completed three rounds of private placements, with amounts of RMB 30 million and RMB 35 million in 2015 and 2017, respectively. In August and October 2017, Xunzhong shares completed equity financing and a private placement, respectively. In February 2020 and March 2022, Xunzhong shares completed two more private placements, with transaction amounts of RMB 78 million and RMB 99.8981 million, respectively.

The prospectus for this Hong Kong Stock Exchange listing shows that Xunzhong shares completed Series A funding in July 2015, Series B funding in January 2017, Series C funding in 2017, Series D funding in December 2019, and Series E funding in March 2022.

Notably, in June 2015, Xunzhong shares were listed on the New Third Board. In September 2018, Dahua Intelligence (002512.SZ) planned to acquire 100% of Xunzhong shares for RMB 1.225 billion to enter the cloud communication industry. Based on Xunzhong shares' net assets of RMB 222 million at the end of the first quarter of 2018, this transaction represented a premium of up to 450.61%.

Subsequently, the Small and Medium-sized Enterprise Board Management Department conducted a formal review of the disclosure documents and identified numerous errors and omissions, including inconsistencies in the number and amount of shares to be acquired, the estimated value of the target company's shares, the average trading price over the 20 trading days prior to the announcement of the board resolution, the book value of the target company's net assets, and the failure to disclose the target company's key financial data for the past two years and the most recent quarter as required. The regulatory authority requested an explanation for the multiple errors and omissions.

At the same time, the transaction involved two changes of independent financial advisors within a short period, prompting regulatory inquiries into the specific reasons and rationality behind these changes. During the restructuring process, Dahua Intelligence experienced a trading halt exceeding three months, prompting the Shenzhen Stock Exchange to inquire whether this constituted an abuse of the trading halt. Regarding the source of funds for acquiring Xunzhong shares, as well as the target's equity structure, intangible assets, and net cash flow, these also became key areas of inquiry. According to commitments made by both parties at the time, Xunzhong shares was expected to achieve after-tax net profits attributable to shareholders of the parent company of no less than RMB 70 million, RMB 100 million, and RMB 140 million from 2018 to 2020, respectively, whereas in 2017, the company's after-tax net profit attributable to shareholders of the parent company was only RMB 41.103 million.

03

Poor cash flow and significantly increased days sales outstanding (DSO)

Regardless, the acquisition attempt several years ago ultimately failed. Looking at the current submission, Xunzhong shares' cash flow during the period also exhibited significant fluctuations.

At the end of each reporting period, Xunzhong shares consistently recorded cash outflows, with amounts of RMB 1.249 million, RMB 117 million, RMB 56.21 million, and RMB 65.009 million, respectively.

Xunzhong shares attributed the cash outflows primarily to extended account settlement processes for postpaid customers amid economic slowdowns, leading to increased trade receivables, as well as increased prepayments, deposits, and other receivables.

At the end of each reporting period, the company's total trade receivables (net of impairments) were RMB 410 million, RMB 551 million, RMB 609 million, and RMB 736 million, respectively. Trade receivable impairments were RMB 25.1 million, RMB 37.7 million, RMB 44.5 million, and RMB 52.1 million, respectively. The average days sales outstanding (DSO) for trade receivables were 149.8 days, 230.7 days, and 247.5 days, respectively.

Xunzhong shares stated that the increase in trade receivables and DSO was primarily due to business expansion and extended settlement cycles for postpaid customers amid economic slowdowns. The increase in DSO may expose the company to higher credit risks. If customers encounter cash flow issues, some trade receivables may not be recovered on time or may even become bad debts, potentially impacting the company's cash flow, liquidity, and overall cash position.

As trade receivables and DSO continue to climb, will this potential financial pressure pose significant challenges to Xunzhong shares' listing journey? (Produced by Harbor Finance)