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Things Don't Add Up Well in Used Computer Renter's IPO Bid - (NASDAQ:JD)

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Key Takeaways:

  • LX Technology, parent of Little Bear Rental, has been approved for a Hong Kong IPO, despite losing over 740 million yuan in the past three and a half years
  • Its major early shareholders, including Tencent, Lenovo and, have started cutting their ties with the company even before the IPO

By Tina Yip

These are not the best of times for new listings in Hong Kong, as the Hang Seng Index plumbs new lows not seen since the global financial crisis of 2008. But that’s not deterring LX Technology Group Ltd.despite its status as a cash-strapped low-tech dealer in used computers that has lost more than $100 million in the last three and half years.

LX is better known for its Little Bear Rental outfit, a renter and seller of refurbished IT equipment, which finally passed its listing hearing on the Hong Kong Stock Exchange on Oct. 20 after filing for the listing a second time the previous month.

Despite losing money, which often disqualifies companies for new Hong Kong listings, LX Technology still managed to make the cut by meeting a number of other criteria. Those include its revenue of over HK$500 million ($64 million) last year, positive cash flow from operating activities of over HK$100 million in the past three years, and an expected market value of over HK$2 billion. Still, many investors may find the company’s business doesn’t add up, at least not to near-term profits.

computer recycle

LX Technology’s preliminary prospectus shows its revenue has grown steadily from about 500 million yuan ($69 million) in 2019 to 1.33 billion yuan last year. The figure was up another 59% year-on-year to 850 million yuan in the first half of this year.

The company refurbishes obsolete computers and other equipment bought from large companies and then leases or sells them to other buyers. That part of the business grew from 300 million yuan in 2019 to 920 million yuan last year, accounting for more than 60% of total revenue. The ratio jumped further still to 74% in the first half of this year.

Despite its less glamourous nature, the company still gets to carry the high-tech company moniker due to its “Device as a Service”(DaaS) model that allows companies to rent its equipment and, when combined with software as a service (SaaS) from others, reduce hardware costs to spend their money in other areas.

But such a “tech” company without recurring income from proprietary services can only go so far. LX Technology is a case in point, with revenue from its smaller device subscription services ranging between just 14% and 20% of its total in the past three years and a half years. Its IT technology subscription services have also been declining, falling steadily from 23.1% of revenue in 2019 to just 8.4% in the first half of this year.

At the same time, gross margins for the company’s device recycling business are razor thin, hovering between 0.1% and 6.5%, including 2% in the first half of this year. That brought the company’s overall gross margin down to just 11.7% in the first half of the year, far below the 18.1% a year earlier.

Given such poor gross margins, it comes as no surprise that LX Technology lost 450 million yuan last year. Its performance improved to a loss of 58.3 million yuan in the first half of this year, narrowing from 270 million yuan a year earlier. When all the numbers are totaled, the company has lost 744 million yuan over the last three and a half years.

Fleeing shareholders

In the face of big capital costs to procure and refurbish old computers, LX Technology has survived to date mainly through bank loans and outside funding. Since Little Bear’s launch in 2018, LX Technology has received six financing rounds backed by such tech giants such as J.D., Tencent (0700.HK) and Lenovo (0992.HK), totaling nearly 1 trillion yuan.

But things change. With little hope for profitability, LX Technology’s big-name investors appear to want out sooner rather than waiting for an IPO. The company signed agreements with shareholders this year to buy back previous registered capital contributions from, Fortune Capital, Tencent and Lenovo, bringing its registered capital down to 54.16 million yuan from 107 million yuan in the process.

High costs and the departure of investors have forced LX Technology to turn to bank loans, resulting in an increase in current liabilities from 290 million yuan in 2019 to 680 million yuan at the end of June this year. The company’s bank borrowings have grown from about 180 million yuan to 540 million yuan between 2019 and last year, and it has incurred interest expenses of over 62 million yuan during the period.

By the end of June this year, LX Technology’s liabilities had reached 1.93 billion yuan. Its total assets were 1.32 billion yuan, or 1.53 billion yuan after adding in its 210 million yuan in cash equivalents. That means the company’s liabilities outpaced its assets by 400 million yuan. The company said the situation owes mostly to heavy recent investments to expand its user base and promote business growth, as well as expenses incurred under three employee incentive programs.

“The company can only get new funds, either by borrowing from banks or raising capital. But since LX Technology’s debt keeps rising and early investors are starting to exit, going public is the only choice for it,” said Kenny Wen, head of investment strategy at KGI Asia.

LX Technology’s story is centered on Chinese entrepreneur Hu Zuoxiong, a young man from Hunan province, who started off selling computers in the southern boomtown of Shenzhen in 2004. It became the country’s largest used computer wholesaler in just four years, and is now trying to go public 18 years later. But now Hu needs to convince investors to trust that he can complete his listing despite the weak market.

To that end, Wen was not optimistic. “The stock market is nothing like what it was two years ago,” he said. “Given that even the largest technology stocks are hitting new lows, I don’t think LX Technology can make history here. But as a small and medium-sized enterprise with urgent need for capital, I believe it will try to achieve its IPO objective by adjusting its price, even in the face of unstable market conditions.”