The central theses:
- Lichen China has filed for an IPO to raise approximately $25 million, positioning itself as a potential consolidator in China’s vast but highly fragmented tax services market
- The company notes that it should be able to avoid many of the recent controversies now haunting US-listed Chinese stocks
By Doug Young
When controversy on multiple fronts is keeping Chinese firms out of new listings in New York, the latest suitor, a company, has called Lichen China Ltd. LICN, seems to have found an effective recipe to avoid many of them. The firms IPO prospectus Filed last week, it’s full of discussions about many of the latest issues troubling Chinese companies in the US, and why Lichen believes it’s above the fight.
The many minefields now haunting most US-listed Chinese companies have brought down much bigger names, including the likes of Uber DiDi Global I HAVE and e-commerce giant JD.com JDjust to name a few.
Lichen, also known as Legend Consulting, based in the southern port city of Xiamen, is a financial firm providing tax services. While that may not sound overly sexy, it means that the company doesn’t process any actual money other than the payments it receives from customers. It also means it can avoid the problems facing China’s many US-listed fintechs, mostly lenders that were once booming but are now being reined in to protect themselves from ending up with too many bad debts.
Then there is the issue of data protection, which has caused DiDi and labor specialists, among others, to stumble KanzhunBZ, which are currently under review to ensure their US listings do not pose a national security risk. One could argue that the tax information created by Lichen is very sensitive and therefore could pose a data security risk.
However, Lichen points out that it should not require a data security check, which is now required for all companies listed overseas under China’s recently enacted cybersecurity law. Because the law only applies to companies with data from 1 million or more users. We “do not anticipate collecting more than 1 million personally identifiable information from users any time soon,” Lichen points out in the prospectus.
Then there’s the issue of potential violations of the US Holding Foreign Companies Accountable Act (HFCAA), which is currently threatening to throw all US-listed companies off Wall Street. Almost all Chinese companies now listed in the US are in violation of HFCAA because Chinese law prohibits their auditors from providing their audit documentation for investigations by the US Securities and Exchange Commission. China considers such records “state secrets,” though it is currently in talks with the US regulator to change that ban through an information-sharing agreement.
But regardless of what happens, Lichen points out that it shouldn’t be affected. That’s because the company most recently used two US-based auditors, Briggs & Veselka Co. and TPS Thayer, who are not subject to Chinese law prohibiting such information sharing. In comparison, most other US-listed Chinese companies use China-based units of large global accounting firms such as Ernst & Young and Deloitte.
Due to its use of US-based auditors, Lichen lists all of its finances in US dollars, even though it conducts all of its business in China and the Chinese currency, the yuan, has been quite volatile lately. It also seems to emphasize its more American flair by filing an S-1 document for its prospectus, which is the form typically used by US-based companies. In comparison, most Chinese companies conducting US IPOs typically use a different form called the F-1.
Small but safe
Now for what Lichen actually does and how it compares to some global and domestic competitors. We begin with the actual IPO, which aims to raise a relatively modest $25 million by issuing 6.25 million shares at $4 a share.
It’s worth noting that Lichen has been working on the deal since last August, when it made its first confidential proposal. That means it’s entirely possible the deal was delayed, as much of the controversy surrounding US-listed Chinese companies peaked last July shortly after DiDi’s IPO, which saw the company face a scathing rebuke from Chinese regulators for cybersecurity for failing to obtain the required data security check.
Since then, only a handful of Chinese companies have successfully listed in the US, and almost all of them have been smaller IPOs like Lichen’s, typically raising $50 million or less.
Lichen’s business actually looks pretty attractive in the current climate, as it’s currently China’s largest tax services provider in an extremely fragmented market. Such services aren’t very controversial, and the high level of fragmentation means the company could be well-positioned to emerge as a future consolidator.
Data cited in the prospectus says that Lichen controlled just 0.5% of China’s tax services market, which was worth 70.1 billion yuan ($10.4 billion) in 2019 and is expected to grow by 12.5% annually between 2020 and 2025. will grow. Quarters of the company’s overall valuation, which grew 11.8% over the past year to $34.3 million. Another 10% comes from the company’s newer tax software business, and the rest comes from its executive training services business.
The company also appears to be pretty adept at controlling costs, as its operating expenses are down 8% from 2020 to 2021. As a result, its earnings soared 32% to $8.5 million from $6.4 million in 2020. That kind of growth is a little slower than what you’d expect from a young tech company. But it’s certainly not bad for this type 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 last year. For comparison: US tax software manufacturer Intuitive INTU is trading at a much higher P/E of 52. But the more comparable traditional tax services giant H&R block HRB is trading at a far lower ratio of just 8. And most Chinese fintechs are trading even lower, at P/E of 3 or less.
At the end of the day, Lichen is certainly not very sexy, but it offers strong growth potential and seems to have avoided many of the problems Chinese stocks are now facing. That could be just what investors want right now, meaning the listing could generate some interest and a solid valuation if the company and its underwriters can garner enough attention.
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