Preview of US stock IPOs | Regulatory tightening poses a "Sword of Damocles", can China Information Technology continue its path of high growth?

In the current tightening policy environment, collection companies have accelerated their listing process, unveiling the mysterious veil of this industry. Recently, a domestic collection company, Suzhou Chengxin Information Technology Co., Ltd. (referred to as "Suzhou Chengxin"), the holding company of GoodFaith Technology Inc. (referred to as "Chengxin Technology"), updated its F-1 filing with the U.S. Securities and Exchange Commission (SEC), planning to list on the NASDAQ. It is understood that the company mainly provides customized pre-settlement risk management and post-default debt collection products and services related to credit loans for commercial banks and non-bank financial institutions. Its listed entity is the offshore holding parent company, GoodFaith Technology, registered in the Cayman Islands. Chengxin Technology's main business is conducted in China through its Chinese operating entities, Suzhou Chengxin Information Technology and its subsidiaries. Facing regulatory pressure, the outlook for the industry is uncertain. Will Chengxin Technology be able to catch a ride on the "bandwagon" of a U.S. IPO and begin its next phase of growth or transformation? Despite the significant revenue growth, the company suffers from a heavy reliance on major clients. It is understood that Chengxin Technology's business consists of two parts. The first part is the pre-approval stage of credit loans, which includes risk assessment and repayment ability assessment products and services. The second part is the post-loan stage, which involves debt collection services for overdue debts. Currently, the company has established a nationwide network consisting of three operation centers and 11 administrative offices in more than 16 cities in China. It has also established a wide customer base with commercial banks and non-bank financial institutions across China. From a financial perspective, Chengxin Technology's growth in recent years has been rapid. In 2022, the company achieved revenue of approximately $45.2185 million, an increase of 118.9% compared to $20.6532 million in 2021. During the same period, the company's net profit increased by 964.3% from approximately $0.403 million in 2021 to approximately $4.2898 million in 2022, an almost tenfold increase. The debt collection service is the company's main source of revenue. In 2021 and 2022, the revenue from this business was $17.0953 million and $43.2007 million, accounting for 82.8% and 95.5% of the company's total revenue, respectively. The increase in net profit is mainly due to the significant increase in gross profit of the post-loan division by 219.7%. This growth can be attributed to the increasing market demand in recent years. Under the influence of factors such as the impact of the pandemic and the changing macro environment, the non-performing loans of commercial banks, consumer finance companies, and other institutions have shown a significant increase. According to data from the China Banking and Insurance Regulatory Commission, as of the end of 2022, the non-performing loan ratio of banking financial institutions was 1.71% with a non-performing loan balance of CNY 3.8 trillion, an increase of CNY 169.9 billion from the beginning of the year. The prevalence of microfinance and online lending has led to a continuous increase in the outstanding principal balance of personal credit loans, as well as an increase in the default rate and scale of loans. In this context, Chengxin Technology has achieved a significant increase in the total amount of debt collection and recovery rate. According to the prospectus, in 2021 and 2022, the company's total debt collection amount was CNY 33.9 billion and CNY 50 billion, respectively, representing a growth of 41% and 73% compared to the previous fiscal year. During the same period, the company's debt collection recovery amount reached CNY 11.03 billion and CNY 13.6 billion, respectively, with a year-on-year growth of 18% and 109%. It is worth noting that in the process of business development, Chengxin Technology's performance growth relies heavily on institutional clients. Currently, the company's clients include commercial banks, e-commerce platform subsidiary financial companies, licensed consumer finance companies, and other financial institutions engaged in consumer credit business. The company has established cooperation with over 75 commercial banks and non-bank financial institutions, including major commercial banks such as Ping An Bank, China Merchants Bank, and China Construction Bank Corporation. However, it is still necessary to pay attention to the concentration risk of major clients, which continues to intensify. In terms of risk factors, Chengxin Technology admits that the majority of its income comes from a few clients. In the fiscal year ending December 31, 2022, three clients accounted for 81%, 6%, and 3% of its total revenue, respectively. This means that the top three clients have already contributed 90% of the company's revenue, a significant increase from 77% in the same period last year. The company stated that these clients could reduce or cancel their expenditures on the company's services in a short period of time, and therefore, the company cannot guarantee that they will maintain their existing business relationship and cooperation with the company in the future. Significant reduction in business demand or cancellation of cooperation by clients would have a significant adverse impact on the company's revenue and profitability. Compliance risks have further increased as industry regulation tightens. It is worth noting that with the negative impacts of violent debt collection, privacy information leakage, and disruptions to normal life, compliance issues in the debt collection industry have received increasing attention. In recent years, regulatory authorities have gradually guided the standardization of the debt collection industry and tightened relevant policies. In May of this year, the China Internet Finance Association (referred to as the Association) held a working meeting on "Developing National Standards for Debt Collection and Promoting the Healthy Development of Debt Collection Business" in Beijing. Representatives from more than ten industry representative organizations, including commercial banks, consumer finance companies, micro-loan companies, and professional debt collection agencies, attended the meeting. At the meeting, the Association's business department introduced the research and formulation of the national standard "Guidelines for Risk Control in Post-loan Debt Collection for Personal Online Consumption Credit in Internet Finance" (referred to as the Debt Collection Standard). The participants discussed the Debt Collection Standard section by section and reached a basic consensus on the core content of the standard, including institutional management, personnel management, outsourcing management, personal information security, and complaint handling. Next, the Association will actively promote the release of the Debt Collection Standard and simultaneously study the evaluation and assessment of the implementation standards for debt collection agencies, gradually establishing a self-disciplinary management mechanism for debt collection business. In May of this year, Yongxiong Group, the largest debt collection agency in China, announced its closure, causing panic in the entire industry. However, on September 22, Yongxiong Group issued a statement explaining the situation of revoking the "Notice to All Employees." However, it should be notedThe fact is, chaos has become rampant, and we have reached the crossroads of regulatory consolidation and increasingly strict supervision.The industry generally believes that the establishment of collection standards helps to rectify the collection business, guide the compliant development of the collection business, and eliminate the trend of stigmatization of third-party collection agencies. The association takes the lead in organizing industry institutions to unite and resist the infringement of black and gray industries, fully demonstrating the association's responsibility and dedication. It can maximize consensus and gather strength to jointly address the invasion of black and gray industries, protect the legitimate rights and interests of consumers and industry institutions, maintain the normal operation of industry institutions and the normal order of the financial market, and promote the healthy development of the industry. On the other hand, in the field of non-performing asset disposal in the personal loan sector, the four major "national team" asset management companies are accelerating their entry. Publicly available information shows that many collection agencies are attempting to contact local asset management companies, focusing on joint operation mechanisms to seek strong credibility endorsements, in order to achieve business monetization. In this context, Shengxin Technology, which focuses on collection as its main business, has limited choices. It can either transform through technology, seek partners with more credibility in the industry, or withstand regulatory pressures and continue to comply below the red line. Regardless, the opportunity of going public in the United States this time will be the key to expanding its brand influence and gaining market attention. Whether the high growth rate in 2022 can continue to be maintained may perhaps be answered by time.