Linklogis Deconstructed By China's Slumping Property Market

Key Takeaways:

• The total volume of supply chain assets processed by Linklogis’ two key platforms decreased in the first nine months of 2023, as its customer retention rate dropped
• The provider of supply chain financing services has reduced its reliance on real estate companies, but the sector still remains a major customer group

By Warren Yang

What a difference a year makes for Linklogis Inc. (9959.HK).

Just a year ago, the provider of cloud-based software-as-a-service (SaaS) platforms for supply chain financing seemed like a no-brainer beneficiary of Beijing’s efforts to assist businesses by letting them use unpaid bills owed by their state-owned customers to obtain new financing. Fast-forward to now, however, when the Tencent-backed company is among the growing casualties of China’s deepening real estate slump that is sending ripples through the vast economy.

Real estate companies collectively represent a large customer group for Linklogis, and, simply put, their troubles are translating to reduced demand for the company’s main products. The total volume of assets processed on Linklogis’ AMS Cloud platform decreased about 13% year-on-year in the first nine months of this year, according to its latest business update released last Friday. Transactions on its ABS Cloud platform also fell nearly 30% in value. Linklogis’ customer retention rate that once hovered near perfect dropped 10 percentage points to 86% as well.

In supply chain financing, a company, or an “anchor,” uses unpaid bills it owes to its suppliers to help them obtain funding, leveraging the anchor’s own creditworthiness. Both the anchor and suppliers benefit because the former gets more time to pay its bills, while the latter can get fresh cash to finance their operations. Such supply chain financing in China has been expanding fast, partly because of a general shortage of financing available to small and medium-sized enterprises (SMEs) from traditional banks.

A growing number of Linklogis’ users with real estate sector ties may be dropping off the company’s platforms as the sector’s overall creditworthiness worsens. Making matters worse, banks in general are becoming more risk-averse as China’s economy slows.

Since the end of 2021, state-owned companies have been required to use technology platforms, like Linklogis’, to aid their suppliers through supply chain financing. Consequently, the number of Linklogis’ anchor partners and customers jumped last year, and that growth continued this year. But it seems that acquiring more customers may be the easy part, while getting them to use the company’s products more is another matter.

Linklogis’ AMS and ABS Cloud platforms are designed to make it easier to pool supply chain assets, such as unpaid bills, into investable securities. That process is normally cumbersome, if not a daunting, for smaller companies that are not financially savvy. Such securitization can be a handy way of raising money for companies using illiquid assets like receivables. But like bonds or loans, asset-backed securities (ABS) carry default risks since they can go unpaid.

That means when investors lose confidence in the financial health of businesses, issuing ABS becomes more difficult. And that’s exactly what’s happening in China right now. Issuance of structured financing instruments like ABS decreased about 12% year-on-year in the first half of 2023, according to S&P Global Ratings, which projects the figure for the whole year will fall about 8% from 2022.

Issuance of securities backed by supply chain assets shrank by an even larger 20% during the January-June period, according to Wind data included in Linklogis’ interim report. And issuance by real estate companies dropped even more, nearly halving during the six months.

Real Estate Reliance

Real estate enterprises represented as much as 42% of Linklogis’ anchor customers and partners at the end of 2021, though that ratio has shrunk fast since then. Even so, they still accounted for a sizable 15% at the end of June. Also, infrastructure and construction enterprises, which are often closely tied to the real estate sector, made up another 29% of Linklogis’ anchors and partners.

There’s no sign that China’s property downturn will end anytime soon, with a lot of structural issues still remaining to be worked out. Borrowing has been hard for the sector since Beijing started to rein in reckless debt-fueled expansion in 2020, making it difficult for developers to refinance their debt and also raise funds for new projects.

Declining home prices are also keeping many buyers on the sidelines, depriving developers of their main revenue source and adding to their liquidity stress. Developers’ growing difficulties finishing their projects is making potential homebuyers even more anxious, leading to further delays in property development due to lack of cash.

Beijing recently eased borrowing rules for home buyers, and local governments have been scaling back purchasing curbs in some cities. Still, new home prices in China fell for a third consecutive month in September, as odds for a quick revival look pretty long.

To reduce its reliance on ABS-related transactions, and to diversify away from real estate-related companies, Linklogis is trying to its boost its other products, including sales over its “Multi-tier Transfer Cloud” platform. This financing solution converts receivables from transactions between SMEs and their anchor customers into digital payment obligations (Digipos) through the use of blockchain technology.

Linklogis’ assets processed into Digipos surged more than 70% year-on-year in the first nine months of this year. But fees from that business appear to be much lower than those from ABS-related transactions. That may explain why even though the volume of Multi-tier Transfer Cloud transactions more than doubled in the first half of the year, Linklogis’ overall revenue still declined 23% year-on-year during the six-month period. The company confirms that in a way by saying its “pricing strategy” for the product “negatively” affected its revenue growth during the six months.

Linklogis’ gross profit margin also fell more than 20 percentage points to about 60% during the six-month period. And worse, it plunged into the red.

Linklogis shares are down more than 60% this year and now trade at a miniscule trailing price-to-earnings (P/E) ratio of less than 1 even as its profits evaporate. The stock is worth a tiny fraction of its price at the time of Linklogis’ IPO less than three years ago. By comparison, the P/E ratios are higher for another major fintech group of online loan facilitators, including a 4 for FinVolution Group FINV and a 7 for Lufax LU.

The gap shows that as creative as Linklogis has been with its innovative financing services, the company is still highly vulnerable to macroeconomic headwinds.