ANALYSIS: YX Asset Recovery Begins Ambitious U.S. IPO Effort

YX Asset Recovery is planning a $200 million U.S. IPO. The firm is growing revenue at an accelerating rate and generating profits and cash flow from operations.

Donovan Jones
    Nov 10, 2019 5:00 AM  PT
ANALYSIS: YX Asset Recovery Begins Ambitious U.S. IPO Effort
author: Donovan Jones   

Short Take

YX Asset Recovery Ltd. (YX) has filed to raise gross proceeds of $200 million from a U.S. IPO, according to an F-1 registration statement.

The firm provides businesses with delinquent consumer debt collection throughout China with a focus on tertiary receivables.

YX is a profitable and fast-growing company in an expanding market.

Company & Customers

Changsha, China-based YX Asset Recovery was founded in 2014 and currently operates as a business services provider of nationwide delinquent consumer debt collection services in China with a network of 34 operating centers spread across 29 cities.

Management is headed by CEO and Chairman Man Tan, who has been with the firm since 2015 and also currently serves as a director of Tulane-Yong Xiong International Credit Law Research Center and the vice president of the Research Association of the Litigation Law Society of Hunan Law Association, among others.

The company's primary offerings include collection of delinquent credit card receivables originated by commercial banks, as well as online receivables originated by online consumer finance companies.

Management says that according to iResearch, the firm is the largest delinquent credit card receivables recovery service provider in China in terms of total value of receivables under collection and number of collection specialists employed as of the end of June 2019, as well as total commissions for the six months ended June 30, 2019.

Additionally, for the six month period ended June 30, 2019, management says YX has serviced seven of the top 10 commercial banks as measured by outstanding balance of credit cards issued in 2018, and online consumer finance companies in China.

According to iResearch, YX Capital are ‘pioneers' in the industry as they provide collection services entirely by remote means, including remote collection, without on-site visit or face-to-face negotiation with debtors to avoid physical confrontation.

The firm has a dedicated marketing department that typically responds to requests for proposals from commercial banks to obtain collection service contracts for portfolio collection and provides a trial of YX's services to potential customers.

Sales and marketing expenses as a percentage of revenue have been minuscule.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, was extremely high in the most recent six-month period.

Market

According to a 2019 market research report by Reuters, China's credit card debt delinquency rate went up by 19% in 2018, reaching 79 billion yuan, or $11.7 billion, representing a 10 times increase since the level in 2010. 

Central bank data shows that the official delinquency ratio of credit cards was 1.16% at the end of 2018.

In 2018, 12 out of 18 listed lenders with disclosed credit card figures showed growth of more than 20% in the number of outstanding credit cards.

The China CITIC Bank posted a 156% rise in non-performing credit card debt in 2H 2018, nearly doubling the company's bad loan ratio to 1.85% at the end of 2018 from 0.98% at the end of June 2018.

The main factor driving forecast market growth is the Chinese government's enforcement activity for banks to provide increased access to consumer finance in an effort to increase retail spending and boost the economy.

Financial Performance & IPO Details

YX's recent financial results can be summarized as follows:

  • Strong growth in topline revenue and at an accelerating rate

  • Accelerating growth in gross profit but reduced gross margin

  • Fluctuating operating profit

  • Uneven cash flow from operations

As of June 30, 2019, the company had $13.6 million in cash and $36.1 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($251,818).

YX has filed to raise $200 million in gross proceeds from an IPO of ADSs representing Class A underlying shares.

Class A shareholders will be entitled to one vote per share and the company's founder, Mr. Tan, will hold all Class B shares and be entitled to ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm's latest filing, the firm plans to use the net proceeds from the IPO as follows:

  - 60% of the net proceeds to expand its operations and the capacity of its operating centers; 

  - 30% of the net proceeds to upgrade its technology and IT infrastructure; and 

  - 10% of the net proceeds for working capital and other general corporate purposes.

Management's presentation of the company roadshow is not yet available.

Listed underwriters of the IPO are Deutsche Bank Securities, CMBI, Raymond James, AMTD Global Markets, SunTrust Robinson Humphrey, Everbright Sun Hung Kai, Wedbush Securities, Prime Number Capital and Fortune [HK] Securities Ltd.

Commentary

YX is attempting to raise U.S. public capital at a challenging time for Chinese firms seeking to do so, due to poor post-IPO performance recently and over the past several years.

However, the firm's financials are impressive, with accelerating topline revenue and gross profit growth.

Sales and marketing expenses as a percentage of revenue are virtually non-existent.

YX is producing earnings and positive cash flow even while growing at a high rate.

The market opportunity for collecting on increasing consumer bad debts is large and YX has significant visibility with major banks non-bank lenders.

The competition is surely looking closely at such a growing and profitable market, so YX won't have the field to itself.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm's operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Deutsche Bank Securities is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of a negative (30.8%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

I'm looking forward to learning more details about the IPO, such as proposed pricing and valuation assumptions, when management files an amended registration statement.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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