Author|Ning Chengque

Source|Bowang Finance

After three failed attempts at the A-share market, Fuyou Payment is still undeterred and has turned its attention to the Hong Kong Stock Exchange. Unfortunately, its first attempt at a Hong Kong IPO also failed to materialize, as its prospectus automatically became invalid due to the failure to complete the listing hearing or go public within the stipulated six months.

However, Fuyou recently updated its prospectus again to continue its progress towards a listing on the main board of the Hong Kong Stock Exchange, with CITIC Securities and Shenwan Hongyuan Hong Kong serving as joint sponsors.

In this updated prospectus, Fuyou Payment provides key explanations for issues such as revenue structure, declining gross margin, industrial and commercial tax opinions, and low net assets. However, it does not provide a clear explanation regarding whether it has obtained approval from the competent authorities.

Having said that, with the vigorous development of e-commerce, online transactions, and mobile payments in recent years, electronic payments have quietly become an indispensable part of our daily lives, and the payment business has also grown rapidly. In this huge payment market, Fuyou Payment, as a third-party payment service provider, competes alongside giants like Alipay.

Fuyou Payment holds multiple payment licenses in China and is one of the few companies in the industry that simultaneously holds five payment business licenses, alongside Alipay, UnionPay Business, One Wallet, and AllinPay. Additionally, it holds payment licenses in Hong Kong and the United States and is one of the first batch of companies to obtain licenses for cross-border payment services, demonstrating its considerable strength.

Since its inception to June 30, 2024, Fuyou Payment has processed a total payment volume (TPV) of up to 14.04 trillion yuan and handled a cumulative total of 46.8 billion payment transactions. According to Frost & Sullivan's report, based on the number of transaction receipts processed, Fuyou Payment ranked first among China's independent integrated digital payment service providers in 2023.

However, despite its impressive performance, Fuyou Payment still faces fierce competition in market share from non-independent digital payment enterprises such as Alipay. At the same time, its business structure is relatively simple, dominated by "merchant acquiring," lacking significant innovation and differentiation.

Furthermore, the company faces risks such as large fluctuations in net profit, declining gross profit margins year by year, and multiple penalties for violations. Against the backdrop of strict regulation in the payment industry, regulators hold a cautious attitude towards Fuyou Payment, making its path to listing particularly difficult after years of twists and turns.

01

Twists and Turns: Fuyou Payment Attempts IPO on the Hong Kong Stock Exchange for the Second Time

Fuyou Payment, a payment company established in 2011, boasts a core team that can be described as "veterans" in the fields of finance and the internet.

Founder and Executive Director Chen Jian has left his mark at several heavyweight financial institutions such as Shenzhen City Commercial Bank, China Merchants Bank, and China UnionPay during his career. Senior executive Zhang Yiqun also has rich experience, having served as a planning manager at Shanghai Yinshang Information Co., Ltd.

In terms of business, Fuyou Payment has diversified operations, possessing multiple business qualifications such as internet payment, bank card acquiring, multi-purpose prepaid cards, and cross-border payments. Fuyou Payment's primary customer base includes small and medium-sized merchants, enterprises, and financial institutions. By the end of June 2024, it had cumulatively served 4.6 million customers.

In terms of performance, Fuyou Payment is also noteworthy. During the reporting period, the company's operating revenues were approximately 1.102 billion yuan, 1.142 billion yuan, 1.506 billion yuan, and 782 million yuan, respectively, with a compound annual growth rate of 16.9%, demonstrating robust growth momentum.

Among these, integrated digital payment services are the company's "cash cow," contributing more than 90% of revenue. In particular, merchant acquiring services for domestic payment services account for approximately 80% of revenue.

Of course, Fuyou Payment is also attempting diversified development, with digital business solutions being one of its important layouts. This part of the business primarily provides customers with SaaS solutions and intelligent marketing services. Although its current contribution to performance is limited, the revenue share of this part of the business has increased from 3.1% to 5.3% from 2021 to 2023.

However, Fuyou Payment's path to an IPO has not been smooth. As early as 2015, 2018, and 2021, the company prepared for an A-share listing three times but failed each time. In April of this year, Fuyou Payment made its fourth attempt at an IPO by submitting listing hearing materials to the Hong Kong Stock Exchange.

On June 7, the China Securities Regulatory Commission (CSRC) issued supplementary material requirements for overseas listing registration, requiring the company to provide supplementary explanations regarding the basis and rationality of the company having no actual controller. Since then, there has been no news regarding Fuyou Payment's response to the regulatory inquiry letter.

However, this has not deterred Fuyou Payment's determination to go public. In November, the company submitted another application, demonstrating its urgent need for the capital market and firm confidence in the future.

Regarding the funds raised through this IPO, Fuyou Payment also has plans. 35% will be used to enhance the product portfolio through differentiated innovative solutions, 30% will be invested in technology platforms and infrastructure to enhance technological capabilities. Another 15% will be used to expand the payment network and deepen relationships with partners. 10% will be allocated to expanding overseas business, consolidating market position, and implementing growth strategies. The remaining 10% will be used for working capital and general corporate purposes.

02

Profitability Decline: Internal and External Challenges for Fuyou Payment

Looking back over the past few years, the external environment has had a significant impact on the payment industry. In 2015, the internet finance and P2P industries retreated en masse, and payment institutions also suffered; in 2018, the suspension of Ant Group's IPO also blocked the path to listing for payment companies; and in 2021, tighter payment regulations and the onset of the pandemic added insult to injury.

However, even in difficult environments, many payment institutions have bravely advanced on the IPO path. For example, in March of this year, Lianlian Digital successfully listed on the Hong Kong Stock Exchange, setting an example for the industry; in August, Modern Financial Holdings also announced its intention to officially initiate an IPO; and Shanghai Shouqianba completed the 13th phase of its IPO coach in October.

It should be noted that multiple third-party payment institutions have successfully listed in China, such as Lakala, Jialian Payment, and Lianlian Digital. However, the businesses of these payment enterprises are quite similar, resulting in fierce competition.

Take Lakala as an example; its primary businesses are digital payment and technology services. When it listed in 2019, its share price was 33.28 yuan per share, with a market value of up to 38.721 billion yuan. But now? The share price has fallen to 19.52 yuan, and the market value has dwindled to only 15.6 billion yuan.

It is not an easy task for Fuyou Payment to go public. With tightening policies, some institutions have undergone several rounds of regulatory inquiries, while others have received large fines. Still, others have been questioned by the market due to poor performance growth. Coupled with the overall tightening of the IPO market in 2024, the number of successful listings has decreased significantly compared to previous years.

Let's talk about the overall environment of the payment industry. In recent years, China's payment industry has developed rapidly. From 2019 to 2023, the total transaction volume in the payment market increased from 402.94 trillion yuan to 559.16 trillion yuan, with a compound annual growth rate of 8.5%. However, the problem is that there are too many participants and fierce competition. The "Matthew Effect" in the payment industry is becoming increasingly apparent. Companies like Fuyou Payment lag far behind leading enterprises in terms of market share and brand influence.

According to Frost & Sullivan's report, the TPV of China's integrated digital payment service market reached 247.3 trillion yuan in 2023. Among them, Alipay, WeChat Pay, and UnionPay Business accounted for 75% of the market share. Fuyou Payment only accounted for 0.8%, ranking ninth, revealing its weak position in the industry.

As customer needs change, industry standards are updated, and new services and solutions continue to emerge, future competition may intensify. If competitors can launch innovative services at lower prices or more efficiently, Fuyou Payment's revenue growth and market share could be jeopardized.

Fuyou Payment also faces considerable challenges internally.

In terms of performance, it has increased revenue without increasing profits, with net profit fluctuations that are alarming. During the reporting period, the corresponding net profits were approximately 147 million yuan, 71 million yuan, 93 million yuan, and 42 million yuan, respectively.

This is primarily because Fuyou Payment faces immense pressure in controlling costs and acquiring customers. To attract customers, it invests heavily in marketing and promotion, leading to persistently high customer acquisition costs. Sales costs have also risen along with revenue, reaching 766 million yuan, 818 million yuan, and 11.26 billion yuan over the past three years, with the proportion of operating revenue increasing from 69% to 75%.

What's worse, the company's revenue from major customers has significantly decreased since last year. In 2021 and 2022, the revenue from the top five customers accounted for 6.5% and 6.6% of total revenue, respectively. However, in the last year and the first half of this year, this revenue decreased to 3.7% and 4.4%. In particular, the revenue contribution from Ant Group dropped from 1.4% to 0.4%, significantly impacting the company's profits.

Additionally, the gross profit margin has declined year by year. During the reporting period, Fuyou Payment's gross profit margins were 30.5%, 28.4%, 25.2%, and 26.3%, respectively, showing an overall downward trend.

The company attributes this to the increase in transaction volume driving up acquiring service commissions. However, to collaborate with channel partners, it has also optimized pricing strategies, offering higher commission rates to some channel partners, which is concerning for profitability.

03

Dividend Distribution and Compliance Risks

In addition to declining profitability, Fuyou Payment has also been questioned by the outside world for its "clearance-style" dividend distribution.

During the reporting period, the company was not vague and conducted four significant dividend distributions. From 2021 to 2023, the dividend amounts were 140 million yuan, 25 million yuan, and 120 million yuan, respectively, each time in cash. In the first half of 2024, another 40 million yuan was distributed. Calculating, in these three and a half years, Fuyou Payment's cumulative dividends amounted to 325 million yuan, accounting for 91.3% of the total net profit during this period, a significant proportion.

The CSRC is highly vigilant about this type of clearance-style dividend distribution and has a clear negative list for management. Fuyou Payment's dividend distribution ratio over the past three years was as high as 92.64%, far exceeding the 80% red line set by the CSRC. Although the Hong Kong Stock Exchange has not explicitly stated that such dividend distributions are not allowed, some companies have been inquired by regulators about this issue on their path to listing.

It is worth mentioning that Fuyou Payment adopts a light operating model with low demand for capital reserves, so most of the net profit ends up in the pockets of major shareholders. While this dividend distribution method makes major shareholders smile, it makes it difficult for the company to increase its net assets. Currently, Fuyou Payment's net assets are only 590 million yuan, a stark contrast to Lakala's 3.54 billion yuan. Continuous high dividend distributions have made Fuyou Payment's shortcomings in net assets increasingly apparent.

Apart from dividend distribution issues, Fuyou Payment's compliance issues are also a significant headache. As an industry dealing with money, legal compliance is crucial for third-party payment companies. However, Fuyou Payment has a long history of "previous convictions" in this regard. It has been named multiple times by the Ministry of Public Security and the Supreme People's Procuratorate, involving illegal cases such as Routine loan and online gambling. The People's Bank of China has also suspended its acquiring business in seven provinces, and it has been penalized multiple times for business violations.

In particular, the entanglements with P2P platforms have tarnished Fuyou Payment's reputation. Once, Fuyou Payment provided payment services for these platforms, but as regulation tightened, the company began withdrawing in 2019. However, even so, Fuyou Payment was still involved in 46 dispute lawsuits with P2P platforms.

In 2020, the Supreme People's Procuratorate directly named Fuyou Payment on its official WeChat public account, accusing it of providing payment channels for illegal platforms, severely damaging Fuyou Payment's image within the industry.

Moreover, Fuyou Payment has received countless fines due to compliance issues in the past two years. In November 2023, the Shanghai Branch of the People's Bank of China disclosed that Fuyou Payment was fined 4.55 million yuan for three violations, including failing to perform customer identity verification obligations as required. Although these fines may only be a drop in the bucket for the company, they have once again exposed the company's compliance issues to the public.

Looking at Fuyou Payment's shareholding structure is also worrisome. The company currently has no actual controller, and its shareholding structure is fragmented. Fuyou Group holds a 61% stake, and 65 other shareholders hold a 33.36% stake. Furthermore, Fuyou Group's shareholding is also highly dispersed, with 53 shareholders (all independent third parties and shareholders holding less than 10% of the shares) holding 74.93%. This shareholding structure raises concerns among regulators regarding the company's governance structure and decision-making efficiency.

It is worth mentioning that the capital market also appears cautious towards Fuyou Payment.

As early as 2018, Ningbo Zhefu and Shanghai Qingyi were willing to acquire shares at a price of 1.3 yuan per share. However, by 2021, the price had soared to 10 yuan per share. However, there has been no fluctuation in share price or stagnation in company valuation since then. In April of this year, Ningbo Zhefu, Shanghai Qingyi, and some individual investors chose to withdraw and transfer all their shares to Fuyou Group. After the transfer, Fuyou Group's shareholding ratio increased to 61%.

It is not difficult to understand why Fuyou Payment is eager to go public. On the one hand, going public can enhance the company's image and strengthen the trust of customers and suppliers. On the other hand, going public can also raise funds to support the company's business expansion.

Compared to the A-share market, the Hong Kong stock market is relatively open and inclusive towards both foreign capital and mainland enterprises, with a relatively low listing threshold. This is undoubtedly good news for Fuyou Payment. However, the path to listing is not smooth, with fierce market competition, stringent financial performance requirements, and no room for error in compliance issues.

Today, the payment industry is undergoing digital transformation, and cross-border payments are becoming increasingly popular. If Fuyou Payment can find growth points in these emerging fields, it may carve out a new world for itself. But the prerequisite is that it must first resolve its own issues, including dividends, compliance, and shareholding structure.

Only in this way can Fuyou Payment go further and steadier in the capital market.