Imminent Nasdaq IPO Of China Smartphone App Play DJI Holdings

| About: DJI Holdings (DJIH)

Summary

DJI has established a firm foothold in China's smartphone app and e-payments businesses.

Local partners in China include Xinhua News Agency, China's official news agency whose mobile app had a reported 120m users in February.

Market cap of £172m (US$222m) compares to Nasdaq listed 500.com's US$715m, despite the latter's much narrower business focus. It is a small fraction of the $60bn value of Alibaba's Ant Financial.

Nasdaq IPO planned for 3Q16. For a pre-IPO position, investors should consider buying the London listed shares.

If everything goes according to plan, in a matter of months investors on Nasdaq will have the ability to invest in DJI Holdings Ltd (Private:DJIH). The London Aim listed company (DJI.L) wants to shift its listing base via an IPO in New York. DJI believes its high-growth Chinese technology business, based on mass transaction computer platforms, will be far better recognized and valued on Nasdaq. Its principal focus is the processing of vast numbers of consumer payments for various government entities in China via smartphone apps.

Mobile e-payments in China will be a hot topic on the markets over coming months as interest and understanding of the sector will be spurred by Jack Ma's next blockbuster listing, of a similar service, AliPay, via its parent, Alibaba (NYSE:BABA) and its payments division Ant Finance. That listing is expected in China by the end of this year, with a secondary listing in Hong Kong in 2017. DJI will beat it to the punch with its own stock debut on Nasdaq, probably this quarter.

After the listing, DJI expects both high revenue growth from its existing businesses and growth by also announcing a series of significant new government joint ventures in China currently under negotiation. As a result of its relative obscurity on Aim, DJI is undervalued relative to its peers. US investors who want to beat the queue can buy DJI in London (DJI.L) and get into a liquid play ahead of the Nasdaq listing. This is effectively a pre-IPO play.

DJI has announced a series of major deals in recent months to put it at the heart of the emerging market of Chinese smart phone e-payments. In anticipation of its Nasdaq listing, DJI has just raised £29m (US$37m) from institutional investors in the UK. This brings its total capital raisings to approximately US$58m in the last eight months, each one at a significantly higher share price than the last. It is now trading on a market capitalization equivalent to $222m.

DJI expects to substantially re-rate on Nasdaq given that the US market has a much better understanding of smartphone technology, mass transaction payment platforms, has a better understanding of China, and DJI's attractiveness relative to peer company valuations.

China has a policy of rapidly migrating its population to mobile internet. Smartphone devices in China cost around just US$30 for a unit which have around 80% of the functionality of an iPhone. The market for mobile payments is so far dominated by Alibaba's AliPay. The Chinese Government is keen to compete for these mobile payments services and has appointed DJI as an exclusive partner for the giant state media company, Xinhua, and its official government payments app.

In addition, DJI has signed a series of other mass-payment joint ventures with various provincial governments as well as numerous joint ventures handling official state lotteries. It has thus created the only broad-based exposure to Chinese mobile internet currently listed in public markets. It is the only listed exposure to Chinese Government-related ambitions in the sector. In particular, the relationship with the all-powerful Xinhua is a key asset.

Until the spring of 2016, DJI's business model was very similar to that of NASDAQ listed 500.com (NYSE:WBAI). It supplied the backbone to online gaming businesses that operated across China through licenses granted by the central government to local authorities and like 500.com it was hit hard by the suspension by the central government of all online lottery licenses in China in March 2015, which drove the company into losses on minimal revenues.

Things started to change at DJI in the spring of this year as it made a series of announcements on the development of the business. On 21 March DJI announced that it had become a 50% joint venture partner with Shandong Sports Lottery, the lottery authority for Shandong Province to promote the first Ministry of Finance approved mobile lottery sales app throughout the province. As the announcement explained:

"It marks a major development and revenue opportunity for DJI while online sales of lottery products remain suspended in China. Shandong, with 15 million lottery players, is a key market for DJI. The province has the second highest sports lottery sales in China, an 11% market share totaling approximately RMB 15.89bn (US$2.37bn) in 2014, with mobile sales comprising 40% and rising. Its Gross Domestic Product is the third highest in China and mobile phone penetration is close to 90%."

Lottery sales in China are currently largely confined to the sale of tickets from corner stores in the wake of the March 2015 online suspensions (as part of the country's anti-corruption program). The lotteries are a potentially significant source of funds for their state-owned operators and for the funding of welfare and the development of soccer in China, which the central government is eager to encourage. President Xi has a stated aim of China hosting (and winning) the World Cup.

Chinese sports fans are keen followers of English Premier League football. Manchester-based DJI has signed exclusive Chinese marketing agreements with Manchester City and Arsenal football clubs. I believe that it is only a matter of time before the lottery suspensions are lifted, which will provide a large new earnings driver for DJI.

As DJI's Chairman Lord Mancroft explained in his Review of the Company's accounts released on 29 June:

"Online sales of lottery products remain suspended in China pending the publication of new regulations by central government lottery authorities and the Ministry of Finance. The lottery industry maintains its firm expectation that the central government will lift the suspension and, in due course, vigorously promote this public welfare project. Recent investment in lottery operations by major Chinese corporations, not least the purchase of a controlling stake in AG Tech, the Hong Kong listed lottery operator and technology business, by Alibaba and Ant Financial, indicate the confidence of sector operators in the opportunity for growth in the lottery market in China."

On 21 April DJI made an even more significant announcement: a major new commercial partnership with the giant Xinhua News Agency, the official news agency of the Chinese government. According to the deal DJI will invest in and work with Xinhua in a joint venture that will supply mobile payments through the Xinhua News mobile app. The payments it will aim to facilitate are public utility bills including electricity, gas, water, mobile phone top ups and traffic fines initially in an initial seven of 12 targeted provinces in China. These seven provinces which had a combined utility spend of more than RMB 1 trillion (US$144m) have agreed launch this payment facility with a further five targeted for launch in coming months.

Xinhua's mobile app was launched in June 2015 and was reported to have 120m users in February 2016, growing at a rate of 10m users a month. Xinhua's stated aim is for its app to become a leading information platform for all Chinese citizens as DJI explained in its announcement on 21 April:

"The immediate opportunity for DJI's platform to facilitate payments through the Xinhua News App is substantial and will utilise its existing relationships with key channel service providers, as well as working direct to customer, through this rapidly growing app. Each of the initial areas in which this facility will be deployed is a very significant market. In 2014, approximately RMB 4.3 trillion (US$642 billion) was spent on electricity, water, gas, waste disposal, toll fees and broadband. Mobile phone top-ups totaled approximately RMB614 billion ($91 billion) in the same year and traffic fines approximately RMB 211 billion (US$31.5 billion).

In 2014 approximately 90% of utility bills in China were paid through physical payments in physical outlets. These methods included rechargeable cards, self-service terminals, company stores and Post Office counters. Where there is the opportunity to use existing online payments methods, this facility is confined to larger cities in the provinces. In the 12 provinces initially targeted, the large sectors of gas, water and electricity payments still collect less than 15% of payments online, while the more competitive sector of mobile top ups receives fewer than 29% of its payments online. The combined utility spend of these 12 provinces was RMB 3.7 trillion (US$553 billion) in 2014, representing approximately 75% of nationwide billing."

DJI will create the functionality for payments and integrate it into each local Xinhua News app, which will make the app the first of its kind in China. DJI will charge a commission on each payment made through the app.

The Xinhua announcement was the largest, but not the first venture by DJI into the e-payments business. In September 2015 DJI announced in a joint venture with an entity controlled by the state-owned Heilongjiang Sports Bureau (HSB) that will operate a booking system for an extensive portfolio of sports venues currently generating over US$650m of sales annually currently entirely offline. In addition, the JV has been awarded additional contracts to operate sports lottery and betting businesses in the Province both online and through scratch-cards. DJI raised £5.6m (US$7.3m) in new equity in September 2015 to fund the launch this business and replenish its working capital.

This stream of announcements has made it possible for the company to raise significant new funds at steadily rising prices in 2016, and the shares are now back to where they were when they listed on the LSE AIM in July 2014 at a share price of £1, peaking subsequently to £1.60. In the wake of the online lottery suspension, the shares drifted down to 37p in late 2015 where they remained until the recent string of important announcements and two equity issues that have raised a total of £39.5m (US$51.4m) in two tranches, £10.5m (US$13.65m) announced 21 April at 60p and a further funding of £29m (US$37.7m) in at 95p was announced on 1 July. With the shares now trading on good volumes at £1.05 on the LSE, DJI is currently valued at £172m (US$222m).

For a China-focused company listed on a small, unpopular exchange (London's AIM market) to raise this sort of money is no mean feat. The money was raised by their London broker, Miraubaud Securities, which is primarily an institutional house.

What's clear is that DJI has been able to use a combination of technical skills and excellent high level Chinese government contacts to get to where they are now. Until it can prove that it can successfully execute, it will remain a company with a history of losses, but the future could be very bright. Mobile e-payments are a fast moving business in China right now. The biggest player in this space Alipay, which owned by Alibaba division Ant Financial. In April this year Ant Financial raised $4.5 billion, valuing it at $60 billion. According to news reports, Alibaba plans to list Ant Financial on the Shanghai Exchange in 2017.

DJI's three most recent announcements of results, new equity funding and director appointments suggest that the momentum of the first half of 2016 could be just the beginning of something much bigger. With the fresh infusion of £29.5m of equity in the bank, CEO Darren Mercer commented in the 2015 Annual Results announcement, "…a number of new material opportunities are being progressed. The Board therefore views the remainder of 2016 and beyond with considerable confidence and excitement."

Appointments to the Board and Executive team announced last week show DJI responding to the need to bolster its team in order to rapidly scale up. A key hire was senior CFO Scott Kennedy. Kennedy began his career at GE Capital, moving on to HSBC where he was Global Head of Business Information, Planning and Analysis. He went on to become CFO of Willis Group Holdings (NASDAQ:WLTW), a Nasdaq listed global insurance brokerage with 39,000 employees operating in 120 countries and revenues over $8 billion. Kennedy is clearly experienced in handling complex systems and has experience on Nasdaq. Along with the CFO, two new directors were appointed, Mr Wei Qi, who is the CEO of DJI's operations in China, and Mr Dong Jinhua who is the founder and CEO of Xinhuatong Software Development, DJI's partner in China.

In the 30 June 2015 annual results statement, DJI reiterated longstanding plans to list on Nasdaq, targeting 3Q16. With a full year's audited results now public, a very good share of the necessary documentation for a Nasdaq listing should be ready for filing with the SEC. Nasdaq rather than London AIM is the logical place for a listing of a company of this kind. Once it is listed, it will be obliged to be a great deal more communicative with the marketplace on its progress and it will be inevitably compared with the likes of WBAI and BABA.

Valuation

DJI is currently trading on a market capitalisation of £172m (US$222m). By comparison 500.com, listed on Nasdaq, trades on a market capitalization of US$715m with a much narrower (lottery service provider) business model.

Alipay, as part of Ant Finance, which is in the same space, has recently privately raised $3.5bn on a valuation of $60bn. Ant Finance is expected to list in Shanghai this year, a high profile event, probably in the range of US$80-$100bn. Ant Finance is then expected to list in Hong Kong next year. In this context, it is not difficult to envisage DJI as the only listed play in Chinese smartphone e-payments, being valued at a market capitalization of at least $2-3bn. This equates to a London share price of £8-£12 (vs its current share price of around £1). The forward growth story suggests valuations that will considerably larger.

I understand that DJI is currently submitting its application to the SEC for the Nasdaq listing. Obviously the listing is dependent upon that application procedure, and I certainly don't want to pre-empt the decision of US regulators. In any event, given that the company is already listed in London, investors can be secure in being able to trade this increasingly liquid growth story.

The information in this note has been taken from publicly available announcements.

Disclosure: I am/we are long DJI.LN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.