China-based, Puyi (PUYI) is a wealth management business, also offering corporate finance and asset management services in China. Distributing financial products worth $900 million, it seems a good name for investors trying to profit from the growth of the middle class in China.
The market opportunity is huge. China Investment Corporation notes that the wealth management services in China should be equal to more than $400 billion in 2022. In addition, it is expected to shown CAGR of 13.4% from 2017 to 2022. With these numbers in mind, the market will be expecting PUYI to grow its business at similar growth pace. It seems beneficial.
According to CIC, the third-party wealth management services market in China saw a CAGR of 42.8% from 2013 to 2017. In addition, it is expected to reach $409.5 billion in 2022. With these numbers in mind, the target market for PUYI seems massive, and it is growing at a very high pace.
The financial statements are beneficial. As of June 30, 2018, the company has $34 million in total assets and $15 million in cash, no financial debt and liabilities of only $4.8 million. With these numbers in mind, the financial risk does not seem risky. The financial performance is also interesting. The company reported annual net revenue of $25 million in 2017 and revenue growth of more than 6% y/y. The income statement is even more appealing. PUYI reported net income of $9 million with growth of 59% y/y.
The use of proceeds is another beneficial feature. The company will not use the proceeds to acquire equity from existing shareholders. The money will be used to increase the company’s branch network and hire additional financial advisors among other uses. The lines below taken from the prospectus provide further information in this regard:
“-20% of the net proceeds of this offering to expand our branch network, including expanding branches in tier one and tier two cities in China, developing our base of independent investment advisors and additional seed clients, and hiring additional investment advisors.
-20% of the net proceeds of this offering to upgrade our IT infrastructure;
-20% of the net proceeds of this offering to launch additional FoFs and non-performing loan funds under our asset management business; and
The remaining 40% for general corporate purposes, including to fund strategic investments and acquisitions.” Source: Prospectus
While the market may not appreciate that PUYI was incorporated in Cayman, most Chinese companies trading in Wall Street have offshore business entities.
The assessment of shareholders is a feature that the market may not appreciate. There is one shareholder owning more than 90%, which is not ideal. This means that the float will be quite reduced. As a result, the market should expect to see share price volatility. It is quite risky. A lot of money could be made or lost in a short period of time.
Disclosure: We hold no position in PUYI either long or short and we have not been compensated for this article.