My Thoughts on Chanjet and XIRR Update

 

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I talked briefly about Chanjet on July last year, those interested can read here.

Chanjet mainly provides platforms, applications and data value-added services focusing on financial and management services for small and micro enterprises. It provides cloud services and products including accounting, business, and fiscal and taxation software. Chanjet was established in Mar 2010 and was listed on the HKEX on 26 Jun 2014(Current price is still lower than its IPO price $16.38). 

Yonyou Network Technology Co Ltd (Yonyou) [600588.CH] is the largest shareholder of Chanjet, with a 65.68% stake, all of which are unlisted domestic shares. Chanjet's H shares accounted for 25.32%. Yonyou focuses mainly on large and medium-sized customers, and Chanjet focuses on the SME segment. Yonyou is one of the leader in China for cloud/enterprise software, a direct competitor to Kingdee.

A few days back it was announced that Chanjet intend to list on A shares(Shanghai). Total of about 38 mil shares from Yonyou's unlisted domestic shares. After listing, Yonyou will still be controlling shareholder of Chanjet. The market might have concerns about Chanjet regarding its small market cap and low trading liquidity previously. At this stage, only the H-share portion is listed on the HKEX; its domestic shares are unlisted. The policy on full circulation of H-shares is positive for Chanjet. 

Broaden financing channels to serve cloud computing is beneficial. Chanjet's A-share issuance will help it diversify its financing channels in the capital market, promote the transformation and development of cloud service businesses, and further enhance its influence in the Chinese domestic market. At the same time, the domestic market's special preference for cloud computing also helps to increase the company's valuation. The company's recent intensive changes, involving company executives, equity, operations and other levels, shows the company's determination to focus on cloud computing.

When the intention of A shares listing was announced, Chanjet's share price went up 23% on that day. Even after the 23% rise, Chanjet is still lower than its IPO price six years ago. The highest price it has reached was HK$45, and that was one year after listing on HKSE.  

The amount of price destruction in the past for Chanjet is quite evident. The transformation to cloud services for small and micro enterprises and the cost amortization of employee incentive plans was the main reason for Chanjet's loss at that time. Since then, Chanjet started to make profits in 2017.

My guess is the A share listing will take around one years time to happen(admin stuff and paper work) and likely on STAR board. That if it happens is a clear positive catalyst for Chanjet. Since even small cap software stocks on STAR board are trading at 6x EV/sales vs Chanjet's 3x EV/sales. This will also rectify Chanjets lack of liquidity of its stock in HK.

The proportion of Chanjet's cloud business has gradually increased, and the cloudification trend has accelerated. Chanjet has developed its strategy of transforming to the cloud as a whole in recent years. At present, each product line has realized the iteration of cloud version. In the first three quarters of 2020, Chanjet's revenue from cloud business was 152 million yuan, a year-on-year increase of 126%, and cloud business revenue accounted for 44%. The cloud business added 44,000 paying enterprise users, a year-on-year increase of 45%, and the cumulative number of paying enterprise users exceeded 201,000. 

The needs of small and micro enterprises are relatively simple and the products are easier to standardize. Therefore, the public cloud SaaS model in the small and micro market is easier to promote compared to the large and medium-sized enterprise market. In the first three quarters of 2020, Chanjet's cloud business grew by 126% year-on-year, and the growth rate was even faster than the 74% in 2020H1, reflecting the further acceleration of Chanjet's cloud transformation. 

Cloudification helps the company reach more long-tail users of small and micro enterprises. It reduces the cost of deployment and implementation, and can achieve agile development and delivery, improve user experience, and further enhance customer stickiness. The amount of recurring cashflow for Cloud Saas model is superior to that of enterprise software model in all aspects. Chanjet is targeted to have their Cloud Saas business segment contribute more than 50% of their revenue in 2021. With a current market cap of only 3.4 bil HKD, Chanjet is still tiny compared to its competitors. See how it goes.

Risk includes: 1) Risk of lower-than-expected software business growth. 2) The risk of lower than expected cloud product promotion. 3) Increased competition in the ERP industry. 4) Macroeconomic downside risks.

Full disclosure, I have vested interest in Chanjet and it is currently up 37%.

Snap shot of my portfolio performance as of today: Total profit for 2021: S$24,647.18. Manage to exceed 1x gain for Weimob(+100.18%) and China Youzan(+114%).


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