ANALYSIS: CDP Holdings Files for Rare Chinese Enterprise Software U.S. IPO
CDP Holdings intends to raise $125 million in a U.S. IPO. The Chinese business software firm is a rare type in U.S. IPO markets, which have generally been more receptive to business software firms in 2019.
CDP Holdings (CDP) has filed to raise gross proceeds of $125 million from a U.S. IPO, according to an F-1 registration statement.
The firm provides human capital management software solutions in China.
CDP has grown quickly but that growth is decelerating while the firm produces increasing operating losses and cash burn.
Company & Technology
Shanghai, China-based CDP was founded in 2004 as CDP Information Technology to develop and provide human capital management software solutions in China through its CDP EcoSaaS integrated software platform.
Management is headed by founder, chairman and chief executive officer, Wei (Wayne) Wang, who was previously chief information officer at Schneider Electric Greater China.
CDP Holdings has developed the cloud-based CDP EcoSaaS human capital management platform that covers payroll, tax and social security management, benefits programs, workforce management and other HR applications, which provides services through Shanghai Caishuo Talent Information in China.
Management says that, according to a 2019 market research report by Frost & Sullivan (which frequently sells its services to IPO firms), the firm was the No. 1 company in China to provide complete and localized human capital management solutions, with a track record of providing services for over 3,600 organizations, of which more than 1,000 were group customers, as of September 30, 2019.
Additionally, the firm is one of the top three cloud-based workforce management service providers in China in terms of revenue in the first half of 2019.
Management says CDP has built subsidiaries in Hong Kong, Singapore, Australia and India, through which it anticipates to expand its operational coverage.
Investors in CDP included Investor AB, CBC Capital, Morgan Sanley (MS), Sumitomo Corporation and Eight Road Ventures, among others. (Source: Crunchbase)
The firm holds an annual industry conference, named the CDP EcoSaaS Partners Summit, and markets its offerings through other channels, such as online search engine marketing, other user conferences, executive events, trade shows, industry events, regional user group meetings and online customer community, as well as participation and sponsorship in third-party marketing events.
Additionally, CDP has a dedicated sales team tasked with converting possible customers to paying ones.
The firm has one large customer, Best Inc. (NYSE: BEST), which accounted for 38.9% of its total revenue for the nine months ended September 30, 2019.
Sales and marketing expenses as a percentage of revenue have been rising.
The sales & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of sales & marketing spend, was 3.1x in the most recent nine-month period.
Average revenue per customer has been uneven, with the most recent nine-month period showing an ARPC of $30,158.
Per management, its revenue retention rate in 2018 was 120.2% for its 2016 cohort of customers.
A number above 100% is considered good as it indicates the firm is increasing its revenue from a given cohort of customers over time.
Market & Competition
According to a 2019 market research report by Fortune Business Insights, the global human capital management market was valued at $15 billion in 2018 and expected to reach more than $30 billion by 2026.
This represents a forecast CAGR of 9.4% from 2018 to 2016, as the chart below illustrates:
The main factors driving forecast market growth are the increasing need for workforce management and core HR for strategic decisions taking while planning talent acquisition and recruitment, and a growing emphasis on digitization.
The North America region accounted for $7.27 billion of the global market in 2018 and is expected to maintain its dominance through the forecast years due to increasing adoption of workforce analytics and employee experience platforms.
Major competitors that provide or are developing human capital management solutions include:
Automatic Data Processing (ADP)
Financial Performance & IPO Details
CDP's recent financial results can be summarized as follows:
Growing topline revenue, but at a decelerating rate
Increasing gross profit and uneven margin
Growing operating losses and negative operating margin
Increasing use of cash in operations
As of September 30, 2019, the company had $20.7 million in cash and $42.7 million in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended September 30, 2019, was a negative ($7.8 million).
CDP has filed to raise $125 million in gross proceeds from an IPO of ADSs representing Class A shares.
Class A shareholders will be entitled to one vote per share and Class B shareholders, who include existing shareholders, will have 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:
- to invest in research and development to enhance our CDP EcoSaaS platform;
- to enhance our sales and marketing efforts to expand our service coverage in China and overseas; and
- to satisfy general corporate purposes.
Management's presentation of the company roadshow is not currently available.
Listed underwriters of the IPO are BofA Securities, Citigroup and Haitong International.
CDP is a Chinese enterprise SaaS firm attempting to access U.S. public capital markets for its expansion plans.
There haven't been many enterprise SaaS firms coming from China to U.S. markets in recent years.
The firm's financials indicate it is growing revenue and gross profit smartly but growth is decelerating as the company has passed through $100 million in annual revenue.
Furthermore, operating losses and operating cash burn are mounting.
Sales and marketing expenses as a percentage of revenue have been rising.
The firm's dollar retention rate was 120.2% for 2018, which is an impressive figure and indicates management's efforts are generating negative net churn.
The market opportunity for human capital management software is large and expected to grow at an enviable rate, so the firm has quite positive industry trends in its favor.
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.
CDP's IPO will be an interesting test for the U.S. IPO market, as the firm is showing strong but decelerating growth while producing increasing losses and cash burn.
(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.)