Recently, China Youzan made an important announcement.

According to the announcement, Youzan Technology has re-applied to the Stock Exchange for listing on the Main Board by offering new shares on the same day, and all of the planned prerequisites have been met. This means that after a lapse of half a year, the package plan centered on the “privatization of China's Youzan” and the “listing of Youzan Technology” has taken a critical step forward.

For interested investors, what other key information is worth learning more about this latest announcement?

“Introduce listing” to IPO, or what?

The main change in this latest announcement is that Youzan Technology's listing method will be changed from “introduction method” to “IPO method”, that is, IPO listing. Other than that, there have been no major changes in the content of other proposals. According to further information, the maximum number of shares issued by Youzan Technology this time does not exceed 5% of the number of existing shares. The issue price will be determined after an inquiry for quotations, and an updated listing application has already been submitted.

Figure 1: Arrangements after Youzan Technology's listing is completed

(Source: China Youzan Investor Relations Office)

Figure 2: Introduction to the four listing methods and sources of shares

(Source: Anxin Securities)

Investors are bound to be very curious about the change in listing methods. What are the differences between the two, and what considerations are the favorable aspects based on?

First, let's take a look at the introduction to listing, that is, it is not funded by issuing new shares; its share capital mainly comes from within the original group/stock exchange. This method mainly includes listing on the Hong Kong Stock ExchangeDual listing(such as Xiaopeng Motor and Ideal Motor),Direct listing, spin-off listing(Real estate property stocks in recent years) andStock exchange listingFour ways.

Compared with common initial public offering (IPO) methods, the rules and conditions related to listing are applied uniformly. The relevant financial requirements and management stability requirements are the same, but there are also some differences, mainly reflected in the following three points:

First, the first is the difference in fund-raising. Introduction No new shares will be issued or new capital raised at the beginning of the listing, and financing will be carried out 6 months after listing. As the name suggests, Youzan can take the lead in raising a certain amount of capital through an IPO to seize the opportunity for the continuous development of the SaaS business.

Figure 3: Introduction to the basic differences between listing and IPO

(Source: Anxin Securities)

Figure 4: Main uses of Youzan Technology's listing and fundraising

(Source: China Youzan Investor Relations Office)

Second, since the requirement for listing is that there are already a certain number of public investors and does not involve raising capital, the Hong Kong Stock Exchange's listing approval process will be different, such as how to set prices, so the method of introducing listing is relatively rare.

Third, since the listing did not raise capital, the price was determined entirely by the trading game between buyers and sellers on the day of listing. There is no reference to the issue price. Furthermore, since the proposed listed company can only refinance after 6 months, and the controlling shareholder's shares are locked in for 6 months, they may face a situation where supply is in short supply at the beginning of the listing, and the trading volume will be low, which can easily cause stock price changes.

Therefore, judging from this logic, it is actually not difficult to understand why you are in favor of this transformation. The shift from introducing listing to a more common public offering method is beneficial to gaining higher market recognition. At the same time, stock price trends after listing are also more stable, which helps the company's long-term development.

Waiting for the hearing to pass

According to the disclosure on China Youzan's official website, Youzan Technology has now updated its listing application and completed the first special shareholders' meeting. After that, it still needs to go through the Hong Kong Stock Exchange listing hearing, dispatch of planning documents, court meetings, second special shareholders' meeting, and court approval of the plan, then distribute shares and complete procedures such as the listing of Youzan Technology.

Figure 5: Youzan Technology's listing process

(Source: China Youzan Investor Relations Office)

According to the A1 of Youzan Technology's update this time, China Youzan holds 51.9% of Youzan Technology's shares, and all plans of Youzan Technology need to take effect after the privatization of Youzan in China is approved.

Once Youzan Technology passes the listing hearing, comprehensive privatization documents will also be issued soon, no later than October 19, 2021, and the final completion date of the plan is no later than November 26, 2021.

Figure 6: Background of Youzan Technology's shareholders

(Source: Youzan Technology's prospectus)

However, for the privatization plan to be approved, the following conditions must be met:

1) Court meeting: The number of votes for the resolution is greater than 75% of the uninterested shares held by the shareholders attending the meeting; and the number of votes voting against the resolution is less than 10% of all uninterested shares (that is, including uninterested shares held by shareholders attending the meeting and shareholders not attending the meeting);

2) Second Extraordinary General Meeting of Shareholders: The number of shareholders who voted for a resolution of at least 3/4;

In other words, the choices of uninterested shareholders determine the success or failure of the privatization transaction and influence the listing process. Currently, shareholders of the No Interest Plan will hold 39.56% of Youzan Technology's shares.

Figure 7: Youzan Technology's equity structure before and after completion of the proposal

(Source: China Youzan Investor Relations Office)

However, in terms of privatization considerations and core assets - the development status of Youzan Technology's SaaS business and future imagination space, the approval of the plan and the eventual listing of Youzan Technology on the main board should be a probable event.

Figure 8: The cost of the plan and the terms of the assignment remain the same

(Source: China Youzan Investor Relations Office)

Previously, we had made a clear judgment on China's favorable privatization price. In the process of privatization and listing of Youzan Technology's main board, the interests of small to medium shareholders were not diluted. For investors who are optimistic about the long-term value of Youzan Technology, there is no need for difficult or complicated operations; it would be nice if they continued to hold and enjoy the growth dividends of investing in Youzan Technology.

SaaS business accounts for nearly 80%, core operating indicators are improving, and there is plenty of room for future growth

As we all know, Youzan Technology is China's core asset, and its SaaS sector is unquestionably the most promising in the market, and it is bound to be more focused after the spin-off. According to Youzan Technology's latest prospectus, the share of its SaaS sector (subscription solutions) continues to increase, reaching 75.9% in the first half of this year, which is close to 80%.

Figure 9: Youzan Technology's main business structure

(Source: Youzan Technology's prospectus)

Meanwhile, according to Frost & Sullivan's data, based on 2020 earnings, Youzan Technology is the largest cloud business service provider in China, with a market share of 6.9%. It can also be seen from this that the cloud market where Youzan is located is highly fragmented, which means there is more room for future integration and growth.

Figure 10: Top 5 Cloud Business Service Providers by Revenue in 2020 (China)

(Source: Youzan Technology's prospectus)

The core operating indicators of Youzan Technology also fully show that it is currently in a healthy development stage of rapid growth. According to Youzan Technology's prospectus, in 2018-2020, the overall GMV compound annual growth rate reached 78.35%, with the core GMV compound annual growth rate of Zanwei Mall reaching 72.55%. At the same time, the number of paying merchants, the number of new paying merchants, the conversion rate, and ARPU (subscription solutions and merchant solutions) were all on an overall upward trend during the same period. At the same time, the churn rate was relatively stable.

Figure 11: Changes in core operating indicators

(Source: Youzan Technology's prospectus)

Continued growth can be expected in the future as the trend of privatization of traffic and commercialization of marketing deepens, and in addition to the continuous strengthening of their commercial and technological ecosystems by interested parties.