ANALYSIS: OneConnect Financial Seeks U.S. IPO Capital in Challenging Environment

Ping An-backed OneConnect Financial has filed to raise investment in a U.S. IPO, but the firm's mounting losses make for a tough sell in an IPO market more focused on a path to profitability.

Donovan Jones
    Dec 01, 2019 5:00 AM  PT
ANALYSIS: OneConnect Financial Seeks U.S. IPO Capital in Challenging Environment
author: Donovan Jones   

Quick Take

OneConnect (OCFT) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an F-1 registration statement.

The firm provides a Software-as-a-Service platform to financial institutions in China and overseas.

OCFT is seeking public investment but is producing high and increasing operating losses and cash burn, a challenging sell in the current U.S. IPO environment.

Company & Technology

Shenzhen, China-based OneConnect Financial, a Ping An spin-off founded in 2015, has developed and provides a SaaS financial technology platform to banking service, insurance providers.

Management is headed by Wangchun Ye, who has been with the firm since its inception and was previously general manager of multiple departments in, including the head office of Huaxia Bank.

The firm has more than 3,700 institutional users as of September 30, 2019, to whom it offers 12 cloud-native solutions and over 50 products, such as increasing revenue, managing risks, improving efficiency, enhancing service quality and reducing costs.

Investors in OneConnect have included SoftBank Vision Fund and parent firm Ping An. (Source: Crunchbase)

Customer Acquisition

The firm acquires customers through an "adopt-deepen-integrate" strategy, where the firm first offers its solutions for a low or no cost at all to encourage "adoption", and then seeking to further deepen their relationship with the customer to "integrate" their platform.

OneConnect obtains customers largely through its partnerships with Ping An Group and Lufax Holding, which together accounted for 55.5% of the firm's revenue in the nine months ended September 30, 2019.

Selling and marketing expenses as a percentage of revenue have been dropping.

The selling & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of selling & marketing spend, dropped to 1.3x in the most recent nine-month period.

For the nine months ended September 30, 2019, the firm's average revenue per customer was approximately $59,000, for an average annualized revenue per customer of $78,667.

Notably, management said of its customer retention and expansion rate:

"On average, each of our premium customers purchased 3.0 products in 2018, growing from 1.7 in 2016. Our net expansion rate in 2018 for our 2017 customers was 224%, and our net expansion rate in 2018 for our 2017 premium customers was 167%."

Market & Competition

According to a 2019 market research report by ReportLinker, the global financial services application market was valued at $79 billion in 2018 and is projected to reach $128 billion by 2024, growing at a CAGR of 8.8% between 2019 and 2024

The main factor driving forecast market growth is the growing need for quantifying large quantities of data.

Major competitors that provide or are developing financial software include:

  • Fidelity National Information Services (FIS)

  • Accenture (ACN)

  • Tata Consultancy Services (TCS)

  • Fiserv (FISV)

  • Infosys (INFY)

  • IBM (IBM)

(Source: Sentieo)

Financial Performance

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

  • Increasing topline revenue, but at a decelerating rate

  • Growing gross profit and gross margin, also decelerating

  • Increasing operating losses but reduced negative operating margin

  • Sharply increased use of cash in operations

As of September 30, 2019, the company had $609.4 million in cash and $715.5 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended September 30, 2019, was a negative ($277.3 million).

IPO Details

OCFT has filed to raise $100 million in gross proceeds from an IPO of ADSs representing underlying common shares.

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

  - for enhancement of its platform and technology capabilities; 

  - for international expansion and strategic investments; 

  - for sales and marketing activities to enhance its brand and acquire customers; and 

  - the balance for general corporate purposes.

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

Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs (Asia), J.P. Morgan, Ping An of China Securities, BofA Securities, HSBC, CLSA, and KeyBanc Capital Markets.

Commentary

OCFT is attempting to access U.S. public market capital for its expansion plans and the deal size may be as high as $500 million.

The firm's financials show a company that has grown rapidly but is still generating high and increasing operating losses and cash flow burn.

These aspects will make selling the IPO to institutional investors more difficult, as U.S. IPO investing sentiment has changed toward requiring companies show a path to profitability rather than ever-increasing losses.

The market opportunity for OCFT's solutions to the vast number of small and medium institutions in China and greater Asia is large as many of these banks operate with legacy systems that are inefficient and costly by comparison.

Pricing and valuation assumptions will be critical for this IPO to succeed, which given the current market, is not a foregone conclusion.

(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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