China-Based CLPS Files For $14 Million U.S. IPO

Summary

• CLPS wants to raise $14 million in a U.S. offering of its common stock.
• The firm provides outsourced IT software and services to legacy financial firms in China.
• Management has grown revenues and earnings against a backdrop of increasing demand.

Quick Take

CLPS (NASDAQ:CLPS) intends to raise $14 million from the sale of its common stock in a U.S. IPO, according to an F-1 registration statement.

The firm provides legacy financial institutions in China with a range of software solutions for internet banking, mobile, credit cards, and data.

CLPS is growing top-line revenue and earnings in a high demand market environment.

When we learn details about management's pricing and valuation assumptions, I'll provide a final opinion.

Company And Technology

Shanghai, China-based CLPS was founded in 2005 to sell IT outsourcing services and custom software development primarily to financial firms seeking to improve efficiencies and add functionality to their service offerings.

Management is headed by CEO Raymond Lin, who has been with the firm since 2009 and previously held senior positions in IT and credit card processing solutions companies.

CEO Lin and Chairman Yan Xiaofeng each own 44.287% of company stock pre-IPO.

CLPS has created a suite of outsourced software competencies aimed at the financial services industry including development, testing, localization, BPO and training services.

Customer Acquisition

Management targets Chinese financial services firms presumably via direct sales and inside sales efforts, since it views the growth prospects within China will continue their strong trend upward in the future.

In addition, the firm says it has been 'working with a number of Chinese banks to assist them in leveraging blockchain technology. Using this technology, a loyalty reward solution was developed allowing domestic banks to track and trace transactions in real-time. It was recently implemented in Jiangnan Rural Commercial Bank. Also, the pilot phase of this solution was completed for Taicang Rural Commercial Bank.'

Selling and marketing costs vs. total revenue:

• H2 2017: 5.0%
• FYE 2017: 3.8%
• FYE 2016: 1.4%

Although still low, CLPS's selling and marketing costs as a percentage of total revenue have risen, indicating decreased efficiency as a function of revenue generation.

Market And Competition

According to a 2018 Brookings research note, the Chinese financial services industry is still underdeveloped but has 'leapfrogged from cash to mobile payments, bypassing the payment cards system.'

With the rise of the use of mobile phones and major FinTech startups, existing legacy banks have realized that their offerings are less relevant and are in need of a significant upgrade.

CLPS aims to capitalize on this need by providing next-generation software and services to these incumbent bank entities.

Management cites a 2015 Wind Terminal forecast showing a significant rise in demand for banking IT services in the coming years:

(Source CLPS F-1)

However, IDC analyst Frank Fang said the following about the Chinese banking industry's outlook from 2016 to 2020:

China's banking industry is facing three major challenges - economic slowdown, interest rate liberalization reform, and internet finance, accompanied by dramatic changes in the banking business environment. Digital transformation has become an irreversible trend in the industry. As bank customers improve their management sophistication with changing needs for banking IT solutions, China's banking industry IT solutions market will step into a period of consolidation while maintaining stable growth. Specialized services will remain a major trend in the market and solutions delivery will shift from the software plus service model to a service-dominated model. IT solutions providers are advised to continuously build their expertise, capabilities, and process standardization.

Major domestic competitive vendors that provide outsourced IT services and software include:

• Shenzhen Forms Syntron Information
• Sunline Tech
• Amarsoft
• CSII

Offshore competitors include:

• Wipro (WIT)
• TCS Consultancy
• Infosys (INFY)

Management says that, so far, it hasn't competed against the western, large global consulting firms such as Accenture (ACN), IBM (IBM), Capgemini (OTCPK:CAPMF), or Hewlett Packard (HPQ).

Financials

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

• Growing top-line revenue
• Increasing gross profit
• Stable gross margin
• Lessening cash flow from operations, swing to net cash used in H2 2017

Below are the company's operational results for the past two and ½ years (Audited GAAP for full years):

(Source: CLPS F-1)

Revenue ($)

• H2 2017: $22.2 million, 55% increase vs. prior
• FYE 2017: $31.4 million, 8.3% increase vs. prior
• FYE 2016: $29 million

Gross Profit ($)

• H2 2017: $8.9 million
• FYE 2017: $12.7 million
• FYE 2016: $11.6 million

Gross Margin (%)

• H2 2017: 40%
• FYE 2017: 41%
• FYE 2016: 40%

Cash Flow from Operations ($)

• H2 2017: ($137,467) cash used in operations
• FYE 2017: $624,344 cash flow from operations
• FYE 2016: $4.5 million cash flow from operations

As of December 31, 2017, the company had $4.7 million in cash and $11 million in total liabilities. (Unaudited interim financials)

CLPS's financial statements were audited by New York-based Friedman LLP, a full-service CPA firm founded in 1924 that serves both U.S. and China clients.

IPO Details

CLPS intends to raise approximately $14 million in gross proceeds from an IPO of its common stock.

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

40% for global expansion, i.e., to expand our existing locations to develop new clients by hiring more qualified personnel, system integration and marketing effort

30% for working capital and general corporate purposes

20% for R&D

10% for talent development

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

Listed bookrunners of the IPO are Benchmark and Cuttone & Co.

Expected IPO Pricing Date: Not on calendar.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.