Lichen China’s plan to raise $25 million avoids most of the controversies that have plagued US-listed Chinese companies of late.
Key points to remember:
- Lichen China has filed for an IPO to raise about $25 million, positioning itself as a potential consolidator in China’s vast but highly fragmented tax services market.
- The company stresses that it should be able to avoid many of the recent controversies currently plaguing U.S.-listed Chinese stocks.
While controversy on multiple fronts is keeping Chinese companies from listing in New York, the latest contender, a company called Lichen China Ltd (LICN), seems to have found an effective recipe to avoid many of them. Of the society IPO prospectus filed last week is filled with discussion of many of the latest topics that have created problems for Chinese companies in the United States, and why Lichen thinks he is above the fray.
The many minefields that now lie in wait for most US-listed Chinese companies have tripped up much bigger names, including Uber-like ones. Global DiDi (DIDI) and e-commerce giant JD.com (JD; 9618.HK), to name a few.
Based in the southern port city of Xiamen, Lichen, which also uses the name Legend Consulting, is a financial company providing tax services. While that doesn’t sound too sexy, it does mean that the company doesn’t handle real money besides the payments it receives from customers. It also means it can avoid the woes faced by the many Chinese fintech companies listed in the US, mostly lenders that once boomed but are now in check to avoid ending up with too many bad debts.
Then there’s the issue of data protection, which has tripped up the likes of DiDi and jobs specialist Kanzhun (BZ), which are currently being reviewed to ensure that their listings in the United States do not pose a national security risk. It could be argued that the tax information that Lichen prepares is quite sensitive and therefore could pose a data security risk.
But Lichen stresses that he shouldn’t need a data security review now required for all overseas-listed companies under China’s recently enacted cybersecurity law. This is because the law only applies to companies with data on 1 million or more users. We “do not anticipate collecting the personal information of more than one million users in the foreseeable future,” Lichen points out in the prospectus.
Then there’s the question of potential violation of the US Holding Foreign Companies Accountable Act (HFCAA), which currently threatens to kick all US-listed companies off Wall Street. Almost all Chinese companies now listed in the United States are in violation of HFCAA because Chinese law prohibits their auditors from turning over their audit records for investigation by the US securities regulator. China considers these documents to be “state secrets”, although it is currently in talks with the US regulator to change this ban through an information-sharing agreement.
But no matter what, Lichen stresses that he shouldn’t be affected. Indeed, the company recently brought in two US-based auditors, Briggs & Veselka Co. and TPS Thayer, who are not subject to Chinese law prohibiting such information sharing. By comparison, most other Chinese companies listed in the United States use China-based units of major global accounting firms like Ernst & Young and Deloitte.
Reflecting its reliance on US-based auditors, Lichen quotes all of its finances in US dollars, although it does all of its business in China and the Chinese currency, the yuan, has been quite volatile of late. It also seems to emphasize its more American flavor by filing an S-1 document for its prospectus, which is the form typically used by US-based companies. In comparison, most Chinese companies that do IPOs in the United States typically use another form called an F-1.
Small but safe
Now what Lichen actually does and how it is rated against some global and national peers. We’ll start with the IPO itself, which aims to raise a relatively modest $25 million by issuing 6.25 million shares for $4 each.
It should be noted that Lichen has been working on the deal since last August, when it filed its first confidential filing. That means it’s entirely possible the deal was delayed, as much of the controversy surrounding US-listed Chinese companies reached a crescendo last July shortly after DiDi’s IPO. , which earned the company a strong rebuke from China’s cybersecurity regulator for failing to pass the required data security review. .
Since then, only a handful of Chinese companies have successfully listed in the United States, and nearly all of them have been smaller IPOs like Lichen’s, typically raising $50 million or less.
Lichen’s business actually looks rather attractive in the current climate, as it is currently China’s largest tax services provider in a highly fragmented market. Such services are not very controversial and the high degree of fragmentation means the company could be well placed to emerge as a future consolidator.
Data cited in the prospectus indicates that Lichen controlled just 0.5% of a Chinese tax services market that was worth 70.1 billion yuan ($10.4 billion) in 2019 and is expected to grow 12.5% per year between 2020 and 2025. These tax services account for about three-quarters of the company’s total revenue, which grew 11.8% last year to $34.3 million. Another 10% comes from the company’s new tax software business, and the rest comes from its executive education services business.
The company also seems very adept at controlling costs, with its operating expenses actually dropping 8% from 2020 to 2021. As a result, its profit rose 32% to $8.5 million, from 6, $4 million in 2020. This type of growth is a bit slower than what you expect from a young tech company. But that’s certainly not bad for this kind of more traditional company with nearly two decades of history.
Information in the company’s prospectus shows that it would have a market value of approximately $115 million after listing, giving it a price-to-earnings (P/E) ratio of 14, based on its earnings from last year. By comparison, the US tax software maker Intuitive (INTU) trades at a much higher P/E of 52. But the more comparable traditional tax services giant H&R block (HRB) is trading at a much lower ratio of just 8. And most Chinese fintechs are trading even lower, with P/E ratios of 3 or less.
Ultimately, Lichen certainly isn’t very sexy, but offers strong upside potential and appears to have avoided many of the problems currently facing Chinese equities. This could be exactly what investors want right now, meaning the listing could generate some interest and get a solid valuation if the company and its underwriters can draw enough attention to themselves.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.