Hywin Holdings Seeks $46 Million U.S. IPO

Summary

• Hywin Holdings has filed to raise $46 million in a U.S. IPO.
• The firm provides various wealth management services to individuals in China and overseas.
• HYW has grown topline revenue moderately and produces net profits and free cash flow.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

Hywin Holdings (NASDAQ:HYW) has filed to raise $46 million in an IPO of its ADSs representing underlying ordinary shares, according to an F-1 registration statement.

The firm provides wealth management services in China and overseas.

HYW has produced positive earnings and free cash flow on moderate topline revenue growth.

I’ll provide an update when we learn more about the IPO from management.

Company & Technology

Shanghai, China-based Hywin was founded to offer a range of financial services to clients via its team of 1,700 relationship managers.

Management is headed by founder and Chairman Mr. Hongwei HAN, who was previously Chairman at the Henan Yizhong (Group).

Below is a brief overview video of Hywin:

Source: Hywin Wealth

The company’s primary offerings include:

• Wealth Management

• Insurance Brokerage

• Asset Management

• Other Services

Hywin has received at least $70 million from investors including Grand Lead Group Limited (Chairman HAN) and Vigor Advance Limited.

Client Acquisition

The firm pursues clients through its large network of relationship manager personnel.

The firm's network is the third largest in China and is administered from 167 wealth service centers in 84 cities across 25 provinces and municipalities in China.

For the year ended June 30, 2020, the transaction value per relationship manager averaged $5.6 million, ranking the firm the second highest, according to a report by CIC referenced by management.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
FYE June 30, 2020	19.2%
FYE June 30, 2019	22.8%

Click to enlarge

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 0.4x in the most recent reporting period.

According to a 2018 market research report by Boston Consulting Group and Lufax, China’s overall wealth management market is valued at about $6.1 trillion.

The offline wealth management segment accounted for 65.4%, or about $4 trillion, of China’s overall wealth management market.

Major competitive or other industry participants include:

• Banks

• Non-bank traditional financial institutions

• Non-traditional financial entities

Financial Performance

Hywin’s recent financial results can be summarized as follows:

• Moderately growing topline revenue

• Increased operating profit and operating margin

• Growing net income

• Reduced cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
FYE June 30, 2020	$ 181,491,000	7.6%
FYE June 30, 2019	$ 168,619,412
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
FYE June 30, 2020	$ 22,466,000	12.4%
FYE June 30, 2019	$ 16,105,000	9.6%
Net Income (Loss)
Period	Net Income (Loss)
FYE June 30, 2020	$ 14,481,000
FYE June 30, 2019	$ 8,639,265
Cash Flow From Operations
Period	Cash Flow From Operations
FYE June 30, 2020	$ 18,816,000
FYE June 30, 2019	$ 20,257,353

Click to enlarge

Source: Company registration statement

As of June 30, 2020, Hywin had $15.3 million in cash and $74.2 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $17.3 million.

IPO Details

Hywin intends to raise $46 million in gross proceeds from an IPO of its ADSs, representing underlying ordinary shares, although the final figure may differ.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

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

40% of the net proceeds allocated for the expansion of our asset management service business and wealth management service business in areas such as institutional customer and “family office” services;

30% of the net proceeds allocated for the expansion of our branch network in China and overseas;

20% of the net proceeds allocated for our IT investment, including our IT infrastructure, robo-advisor platform, intelligent customer service technology platform and Hywin mobile platform; and

10% of the net proceeds allocated for general corporate purposes, including working capital, operating expenses and capital expenditures.

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

Listed bookrunners of the IPO are Network 1 Financial Securities.

Commentary

Hywin is seeking U.S. capital market funding for its corporate growth initiatives.

The company’s financials show moderate topline revenue and other metric growth.

HYW is producing profits and positive free cash flow.

Sales and Marketing expenses as a percentage of total revenue has dropped in its most recent fiscal year as revenues increased; its Sales and Marketing efficiency rate was 0.4x.

The market opportunity for providing wealth management services to Chinese clients is significant, whether within China or overseas.

Network 1 Financial Securities is the lead left underwriter and the sole IPO led by the firm over the last 12-month period has generated a return of 22.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.

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.

The primary risk to the company’s outlook is the potential for volatile financial performance of its products or those that it sells to its clients filtering through to reduced client interest in such products.

Hywin appears to be a moderate to slow growing financial services firm that may need to invest more in its online offerings in order to produce enticing post-IPO growth.

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

Expected IPO Pricing Date: To be announced.

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.