FD Technology Readies $17.5 Million U.S. IPO (Pending:FDAN)

A Quick Take On FD Technology

FD Technology (FDAN) has filed to raise $17.5 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides payment plan financial services to consumers in China.

Given the numerous risks involved, the company’s small size and contracting topline revenue, I’ll pass on the IPO.

FD Technology Overview

Shanghai, China-based FD Technology was founded to develop a platform to enable persons in China to pay over time for major costs such as weddings, education and family health expenses.

The company provides intermediary services and does not take credit risk.

Management is headed by Chairman and CEO Mr. Chunjie Xu, who has been with the firm since 2016 and was previously senior manager of credit card operations at Industrial Bank.

As of June 30, 2022, FD Technology has booked fair market value investment of approximately $3 million in equity and debt from investors including FD Creative Consulting, FD Entertainment and Oriental FD Innovation.

FD Technology – Customer Acquisition

The firm seeks merchants who want to offer their services via payment plans, financial institutions that provide credit and consumers who seek to pay for products or services using a payment plan approach.

The company’s revenue sources are transaction fees, technology service fees and marketing service fees, usually paid by either the merchant or the financial institution.

Selling and Marketing expenses as a percentage of total revenue have varied as revenues have decreased recently, as the figures below indicate:

Selling and Marketing	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2022	10.2%
2021	7.9%
2020	12.0%

Click to enlarge

(Source – SEC)

The Selling and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing spend, was negative (3.1x) in the most recent reporting period, as shown in the table below:

Selling and Marketing	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2022	-3.1
2021	2.8

Click to enlarge

(Source – SEC)

FD Technology’s Market & Competition

According to a 2022 market research report by Research and Markets, the Chinese market for ‘buy now pay later’ services had a gross merchandise value of $86.9 billion in 2021 and is forecast to reach $353.9 billion by 2028.

This represents a forecast CAGR of 19.9% from 2022 to 2028.

The main drivers for this expected growth are a familiarity with cashless payment systems, online shopping and e-commerce transactions.

Also, large e-commerce businesses have introduced their payment options, showing consumers the ease of use of payment plans.

Major competitive or other industry participants include:

• Baidu Umoney

• Haier Finance

• Hunliji

• Tencent

• JD Finance

• Alipay

• Huabei

• Baitiao

• Happay

• AsiaPay

• Atome

• Splitit

• UnionPay International

• LexinFintech

• Afterpay

• Fen Fu

FD Technology Financial Performance

The company’s recent financial results can be summarized as follows:

• Dropping topline revenue year-over-year

• Lowered gross profit but increased gross margin

• Reduced operating profit

• Variable cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 2,868,868	-24.2%
2021	$ 9,558,356	27.7%
2020	$ 7,485,730
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 2,136,707	-1.0%
2021	$ 6,847,326	34.0%
2020	$ 5,111,021
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2022	74.48%
2021	71.64%
2020	68.28%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2022	$ 337,077	11.7%
2021	$ 3,453,513	36.1%
2020	$ 1,987,939	26.6%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)	Net Margin
Six Mos. Ended June 30, 2022	$ 477	0.0%
2021	$ 3,928,937	137.0%
2020	$ 2,109,557	73.5%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2022	$ 1,463,304
2021	$ 431,072
2020	$ 1,923,440
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of June 30, 2022, FD Technology had $4.8 million in cash and $1.6 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was $2.1 million.

FD Technology IPO Details

FD Technology intends to raise $17.5 million in gross proceeds from an IPO of its ordinary shares, offering 3.5 million shares at a proposed midpoint price of $5.00 per share.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $49 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 24.57%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

approximately 40% of the net proceeds from this offering for the research and development of new services and technologies, and equipment upgrade for our Aifendan Platform;

approximately 25% of the net proceeds from this offering for marketing and brand promotion activities;

approximately 15% of the net proceeds from this offering for the acquisitions of, or investments in, businesses similar or complementary to our business, although as of the date of this prospectus, we have not identified, or engaged in any material discussions regarding, any potential target;

approximately 10% of the net proceeds from this offering for new hires and employee training; and

approximately 10% of the net proceeds from this offering for working capital and other general corporate purposes.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management said it knows of no ‘material, active, pending or threatened proceeding’ against the firm.

The sole listed bookrunner of the IPO is Aegis Capital Corp.

Valuation Metrics For FD Technology

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$71,228,000
Enterprise Value	$48,973,526
Price / Sales	8.24
EV / Revenue	5.67
EV / EBITDA	17.28
Earnings Per Share	$0.20
Operating Margin	32.78%
Net Margin	33.59%
Float To Outstanding Shares Ratio	24.57%
Proposed IPO Midpoint Price per Share	$5.00
Net Free Cash Flow	$2,075,071
Free Cash Flow Yield Per Share	2.91%
CapEx Ratio	99.37
Revenue Growth Rate	-24.17%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About FD Technology’s IPO

FDAN is seeking U.S. public capital market investment for its general growth and operating requirements.

The company’s financials have produced lower topline revenue year-over-year, reduced gross profit but higher gross margin, decreased operating profit and fluctuating cash flow from operations.

Free cash flow for the twelve months ended June 30, 2022, was $2.1 million.

Selling and Marketing expenses as a percentage of total revenue have fluctuated as revenue has decreased recently; its Selling and Marketing efficiency multiple was negative (3.1x) in the most recent reporting period.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the company’s growth initiatives.

The market opportunity for ‘buy now pay later’ services in China is moderate in size and expected to grow at nearly 20% CAGR through 2028, so the firm enjoys strong industry growth dynamics in its favor.

However, the market features very large market participants who will likely pose serious competitive pressures on small players.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA Act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

Aegis Capital Corp. is the sole underwriter and the only IPO led by the firm over the last 12-month period generated a return of negative (50.8%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

Risks to the company’s outlook as a public company include unpredictable Chinese government actions in the sector with respect to industry structure, rules and regulations.

Additionally, the company is still tiny and is thinly capitalized.

As for valuation, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 5.7x on dropping topline revenue.

Given the numerous risks involved, the firm’s small size and contracting topline revenue, I’ll pass on the IPO.