“The brightest stars will always cast the deepest shadows”
Executive Summary
Valiant Varriors is short Linklogis (9959.HK).
Lying about overexposure to real estate: Linklogis is the backdoor that developers use to skirt the regulations and they have blatantly and publicly downplayed that.
A blatant disregard violation of Notice 205: At 80x debt-to-equity, the company has far exceeded the regulatory limit for commercial factoring enterprises.
Massive financial risk from hiding tens of billions in bridge loans and related-party transactions.
Overstatement of revenues: Questionable accounting practices in the company led to the frequent change of auditors running up to its IPO.
Exaggerated technology capabilities and actual use of manual labour: a closer look at the company’s R&D spend and leadership team raises many questions about its credibility and valuation as a tech company.
Tax fraud: The consequences of underreporting tax is another ticking time bomb that will deal a severe blow to future earnings.
Background
The past year has been an explosive year for all things tech. From Zoom meetings to e-commerce, video games, Netflix and driverless cars, everyone is jumping into everything that proclaims AI, blockchain or crypto.
And rightly so. Who would have believed Facebook when they said that they would be among the largest platforms in the entire world? Or that Netflix would lead the cord cutting revolution? Today, big tech companies are the biggest corporations in the world, driving the next wave of progress.
But not all of them are bona fide innovators. The brightest stars will always cast the deepest shadows, and it is here where we find a strange little company called Linklogis.
Linklogis is a Chinese supply chain financing company founded in 2016 and recently went public in April this year. With the apparent backing of Tencent, a string of reputable cornerstone investors including GIC, and claims of using artificial intelligence and big data as disclosed in its IPO prospectus, Linklogis looks like the perfect poster boy after a series of disappointing tech listings in Hong Kong.
Linklogis raised more than US$1 billion, with its IPO valuing the company at a massive US$5.5 billion.
It achieved these lofty valuations by promising investors a high-technology way to solve issues in supply chain financing - a sector that has been plagued with paperwork, bureaucracy and red-tape.
But beneath the veneer of legitimacy, Linklogis is nothing but a glorified mortgage broker, relying on cheap human labour instead of AI to do the work. It has consistently misled investors by overstating its revenues and has blatantly lied about its large exposure to one of the riskiest sectors in China - real estate.
A castle of lies
So here’s a puzzle we have yet to unlock. Just before they went for listing, Linklogis raised a staggering amount of money through short-term debt. Why? The company had raised loads of money through funding and was primed for an IPO. Yet their short-term borrowing rose from RMB 2.7 billion in December 2020 to RMB 6.2 billion in January 2021.
It is likely their retort will be why not? After all, the maxim that you can never have too much money (cash) rings true, especially in days of ultra-low interest rates.
But the truth is far more complicated and is related to the key pillar of their business model: asset-backed securitization (ABS).
ABS is a big part of Linklogis’ business, contributing to over 90% of its revenues. What it does not disclose is that it is actually both the biggest and the riskiest segment they are in. And they have blatantly lied about the diversity and riskiness of the ABS composition.
We dug through the various financial reports of all its declared subsidiaries and found significant discrepancies between what it said it was doing and what it was actually doing.
Linklogis never disclosed much about its sector exposure in its IPO prospectus. It waxed lyrical about the fact that it served financial institutions, banks, and logistics as well as real estate. But it never did reveal its exact exposure. Companies, with little to hide, are transparent about the sector or even geographical exposure to assure their investors about the resilience of their business.
When questioned in investors’ meetings about the weightage of real estate as part of its ABS/ABN portfolio, the management had to give an answer. Then came the lie.
Below is a translated snippet of a text exchange between an investor and an investment bank analyst:
Investor: When Linklogis IPO-ed, what was the weightage of the Real Estate assets at the time of listing? Already reduced to 40%? Investment bank: 40+% of the total transaction amount, not including city investment (infrastructure)
Clearly, there has been a deliberate attempt to hide the fact that much of its ABS business lies in real estate. We found further evidence from an article from Yingke (盈科律师事务所) law firm’s (specializes in supply chain finances) blog that indicates that although Linklogis did not disclose its exposure to real estate in formal listing documents, company executives have said in public (“insider” information as mentioned in the article) that its exposure has reduced to, in this case, just over 30%. It was flagged out as a very significant business risk in an excerpt below from the blog.
Above: An excerpt from the lawyer’s online blog (link: https://mp.weixin.qq.com/s/g-O8KFFlWTF8I3QleOE9uw)
Translated:
In addition to policy risks, Linklogis faces business risks. An investor told Deng Caidi that Linklogis used ABS issuances as a financing tool to serve customers, of which those involved in the real estate segment accounted for more than 30%. Such a high level of real estate exposure of ABS worries him as recently, the real estate industry has been turbulent.
An insider of Linklogis revealed in an interview with Deng Caidi that “Linklogis’ real estate business accounts for about 30%.” Multi-tiered transfer, echain, etc, are purely technology services, all of which are provided through SaaS, systems integration, etc.
One source indicated real estate exposure amounted to about 40%, while another said it was about 30%.
But our research shows that the truth is much worse. The bulk of ABS deals were highly concentrated within real estate, making up approximately 80% of the total issuances from 2018 to June 2021. In 2021 alone, the composition was closer to 87%[1]. If 30% is flagged as high risk, what about 80%?
We obtained the underlying data by retrieving all the ABS/ABN issuances since 2018 that were facilitated by two of Linklogis’ factoring subsidiaries - Lianjie Factoring and Linklogis Factoring - from Chinese financial database, WIND. The data dump revealed a massive size of over RMB 250 billion of ABS/ABN offerings over the three-year period. A sample snapshot of the details of relating to each transaction including the issuer name, industry segment, issue size and date is shown below:
We even went a step further to even cross-verify this data with the list of account receivables registered under China’s Unified Registration Portal (中登网) administered by the PBOC (China’s central bank).
There were some differences between the asset values registered with PBOC and data retrieved from WIND, but these were likely attributed to other non-ABS/ABN transactions.
Chart above: Comparison of asset values from PBOC and ABS issue sizes from WIND (2018 to June 2021)
30+% vs 80%
We can let it pass if the management exaggerates by say 10-15%. But a 50% difference? This is a clear intention to defraud investors. A closer look at the underlying data also showed that approximately half of these transactions belong to 11 customers of which most are actually some of the largest names in China’s real estate market.
The list of its real estate customers include Sino Ocean, Chongqing Longfor, China Evergrande, Huafa Group. China Evergrande, in particular, is a key customer. And if you have been a keen follower of Chinese corporate news you would know that no sane investor would touch China Evergrande with a 10m pole. In August 2020, the Chinese government initiated cooling measures in the property market amidst looming fears of an asset bubble. The “Three Red Lines” policy (三道红线) limits the amount of borrowing based on the property developer’s leverage, forcing developers to either reduce their debt or resort to tapping alternative sources of funding. Also, many developments of projects have significantly slowed as a result.
Hence, real estate developers are resorting to supply chain financing as a way to bypass the leverage requirement. For real estate developers, the main motivation of issuing supply chain ABS is not to help their suppliers lower borrowing cost, but to improve their own cash flow when other sources of funding are hard to come by. The securitization process is effectively a way for these companies to obtain off balance sheet financing, optically reducing their leverage ratios.
In short, Linklogis is the backdoor that developers use to skirt the regulations. Hardly, the legitimate high-tech company it had painted out to be.
Warehousing – a ticking time bomb
We return to the question we posed at the start of this section: why borrow massive amounts of money if you aren’t actually going to spend it? To what end?
The reality is that it took up all that extra cash because of its business in ABS. As part of the securitization offerings, Linklogis will typically take over the customers’ accounts receivables for a short period of time before moving it to a SPV related to the offering, a process commonly known as “warehousing” or simply just balance sheet lending. While some form of technology in the account receivables documentation process is required, the technicalities in the securitization process is not rocket science.
Linklogis itself acknowledges this. It said that it has about RMB 900 million of its capital tied up in warehouse financing[2]. But investors are never clear about exactly how much it regularly commits to such activities. The amount of funds that the company uses for its warehousing activities is appalling. In 2019 alone, the total funds of its subsidiary, Qianhai Lianjie Factoring exceeded RMB 45 billion. The auditor responsible for its audited financials at that point of time was PricewaterhouseCoopers. Through many of its subsidiaries, Linklogis has been utilizing a considerable part of its balance sheet to facilitate the ABS/ABN securitization of real estate companies, and in the process, taken huge financial risks. These risks weren’t adequately disclosed in the prospectus, instead, the company has chosen to hide them.
A closer look at the audited financial reports of two of its key factoring subsidiaries reveal a disturbing amount of related party transactions to the tune of over RMB 1 billion, which translates to approximately Linklogis’ FY2020 total revenue.
Source: Shenzhen Qianhai Lianjie Factoring Co Ltd FY2019 audited financial report by PwC
Source: Shenzhen Qianhai Linklogis Factoring Co Ltd FY2019 audited financials from PwC
For a company that consistently touts technology as its core revenue model, there is clearly a disproportionate volume of related party transactions in these key subsidiaries that have the licences to engage in warehousing activities.
The company has been consistently using a mix of own capital (self-funded), bridge loans and bank debt to fund the “purchases” of these account receivables. As at end December 2020, the average daily amount stood at nearly RMB 5 billion.
It’s clear now why the company has moved to aggressively raise so much money in such a short term through borrowings.
There are several problems with this deception. One is simply that with its elevated exposure to real estate, it is deep into high-risk territory. A false step such as a customer like China Evergrande blowing up would immediately ruin the company's balance sheet.
One recent example of this happening was in February 2021. The collapse of supply chain financing company Greensill unraveled earlier concerns by investors on its exposure to companies that were part of GFG Alliance (“GFG”) – a group of businesses associated with businessman Sanjeev Gupta[3]. According to those who were familiar with its balance sheet, Greensill’s exposure to GFG was over 50%[4]. So, it was no surprise that when GFG ran into financial distress and insurers decided not to renew those receivables, it set off an irreversible chain of events that led to its eventual bankruptcy[5]. Greensill’s business model is very similar to Linklogis: It also packages accounts receivable and securitizes assets before offloading them to financial institutions to earn an interest spread.
Secondly, its ABS and warehousing activities are in blatant disregard for the Chinese’ government’s rules over the Three Red Lines. China Evergrande, for instance, is likely already well past all red lines when it tapped ABS through Linklogis for financing them.
Linklogis may not be directly exposed to the financial risks in its transactions, but given its significant exposure to real estate, any asset deflation, or potential restrictions on securitized offerings by developers, would cause a serious blowback on its revenue and cash flows.
Numerous ABS issuances have since been terminated this year. On 25 May 2021, approximately 26 ABS products comprising RMB 150 billion were listed as “terminated” by the Shanghai Stock Exchange on a single day alone – the highest amount recorded for the year. Most of these were in the real estate segment[6].
There are opportunities to further expand into other industries, but the barriers to entry for these remain high. According to an industry expert based in China[7], most anchor enterprises prefer to develop and use their own systems or stay with existing vendors as it is more cost-effective.
A blatant violation of Notice 205: 80 times debt-equity ratio
In 2019, the China Banking and Insurance Regulatory Commission (“CBIRC”) released Notice 205 – a set of rules put in place to strengthen the administration and supervision of commercial factoring enterprises. One of the key requirements dictates that commercial factoring companies should not exceed the regulatory gearing limit of 10 times debt-to-equity. Further investigation into Lianjie Factoring, a 100% wholly owned subsidiary of Linklogis Factoring also reveal a whopping 80 times debt/equity ratio based on the total amount of new borrowings, equivalent to eight times above the regulatory limit imposed by the government.
Source: Lianjie Factoring financial reports
Based on publicly available findings, we know that the company has been desperately trying to shore up capital, but even with the recent equity infusion in June 2021, this is still blatantly way above the 10x regulatory limit.
Source: Tianyancha
Linklogis has dug itself a hole so deep in the real estate market that it would be incredibly challenging for the company to climb out and pivot away into other industries. Some call it a sinkhole, we call it the Link hole.
Besides, not all industries use the securitization of account payables and receivables for off-balance sheet financing like real estate. Many anchor enterprises have their own factoring entities that are fully capable of executing their own ABS issuance process without the need to rely on Linklogis.
Linklogis - dancing with numbers
Let’s move on to the next big red flag - highly questionable accounting practices.
Linklogis is more like a master of creative accounting and has been extremely "innovative" in packaging financial data.
The first red flag that investors should note is the frequency in changing their auditors - almost every year. As the saying goes, Linklogis changes auditors as frequently as one changes underwear. Linklogis has changed 4 auditors in 5 years.
Deloitte was rumoured to be approached to become their IPO auditors but were turned down due to the accounting irregularities we are about to explain next. Why then would KPMG pick up the unwanted child when the other big two have rejected it?
Overstatement of revenue
In its IPO prospectus, it stated that its revenue has more than doubled from about RMB 382 million to about RMB 1 billion in just over three years. That seems quite in line with high-growth technology companies. Pretty impressive, until you look at how it calculates its revenue.
These impressive growth numbers include the fees it pays to the various third-party vendors including rating agencies, securities firms and lawyers as part of the ABS issuance process. Simply put: Linklogis classifies these third-party professional fees as part of its own revenue, which is then subsequently expensed, thereby inflating its revenue. These are recorded under various sales service, professional and management service fees.
To put this into context, it’s important to understand the real business that Linklogis is in.
Linklogis claims to be facilitating supply chain financing in China. One of the biggest problems in supply chain financing is problems associated with timely payment. Suppliers (SMEs) hardly ever get paid on time, with payment terms that can stretch anywhere between one and six months, depending on the bargaining power of the customer (also called Anchor Enterprises or buyers). In some cases when the buyer is actually a state-owned enterprise, payments could stretch up to a year or worse; sometimes, payment does not even get delivered. This is a huge source of pain for many smaller SMEs who want to serve bigger clients.
What makes things worse is that there is massive paperwork to be done in order for the SMEs to get funding from the financiers, usually the banks, making the debt financing process an extremely cumbersome one.
Linklogis steps in to say that they can solve all of these woes. Its platform, housed in the cloud, supposedly provides a convenient and efficient way for companies to upload their invoices, contracts and fill in forms to apply for bank loans. No need to manually key in data, SMEs can upload digital copies of their invoices and contracts from the comfort of their smartphones - the platform’s artificial intelligence, natural language processing (“NLP”) and algorithms will take care of the rest.
The financiers/banks can then use Linklogis’ platform to quickly scan and evaluate the creditworthiness of companies seeking short-term loans and issue loans more quickly and be able to grow more quickly without the woes of shortage of cash flow, which resulted from the long receivable days from the Anchor enterprises.
Linklogis supposedly charges a ‘brokering’ fee from the SMEs for using its tech-enabled SaaS platform for efficiently and quickly receiving the payment from financiers. Think Amazon.
On the surface, Linklogis claims to be helping the SME suppliers solve their cash flow problems, but what is happening here is this: Linklogis purchases the account receivables of the SME suppliers (Point A) at a discount and collects the account payables from the Anchor Enterprises (Point B).
These massive liabilities are then “pooled”, packaged and securitized to be sold as asset-backed securities (“ABS”) on the market (Point C), effectively passing the risk on to the buyers who are mostly financial institutions, asset management companies and other investors (Point D).
Linklogis charges the SME suppliers for this process, the costs in which are passed on in the sale of goods and services to the Anchor Enterprises i.e. the ones who are really paying for this.
Should the ABS market implode, this will trigger a capital crunch and a potential chain reaction of defaults, posing a huge financial risk not only to the ABS purchasers and financial institutions, but also Linklogis and the SME suppliers.
So, instead of alleviating the pain points faced by SMEs, Linklogis is really supporting the anchor enterprises, (recall earlier that the significant majority of these firms are operating within the real estate sector which has come under much political scrutiny and policy pressure).
The ABS market is highly competitive with several players in the market including names such as Qianhai Yifang (前海一方) amongst several others. In order to get the business of these large real estate developers, Linklogis has been reducing its fee rates (or even charging no fees) to these developers. The low product and technological barriers to entry has led to a cutthroat price war, resulting in many of these players being unprofitable. Some have even been attempting to capitalize on a good market window to push for an IPO so as to raise money and resolve cash flow issues.
Relationships play a huge role in the real estate ABS supply chain financing market. Linklogis typically leads these conversations with the clients and takes on all of the professional expenses onto its own books. Because the credit ratings, legal opinions and underwriting services are important aspects of the process, Linklogis often pays a huge amount of fees to these professional parties.
Going deeper into the company’s revenue and cost structure reveals that a significant portion of its costs are attributable to:
I. Sales service fees: service fees paid to underwriters for their underwriting services and other entities (mostly financial institutions) for marketing the securitized products in the securitization transactions.
II. Professional service fees: service fees paid to third parties, primarily including rating agencies, law firms and accounting firms, for their services rendered in the securitization transactions such as the collaborative due diligence and documents review.
III. Management service fees: fees paid to the program managers, who are usually the financial institutions such as securities firms and trust companies, that manage the SPV and the underlying assets for the securitization offerings.
The fees are not at all related to Linklogis’ technology offering. Think about it: this is the equivalent of Amazon reporting revenues based on Gross Merchandise Value - the value of goods sold on their site - rather than the ‘brokering’ fees they collect for trade made on their platform. This is a huge inflation on Linklogis’ end.
These items collectively represent nearly 90% of the cost of sales indicating that these workstreams are incredibly important for Linklogis to secure its revenues. In fact, a crucial part of the securitization and offering process is based on professional relationships rather than the technological capabilities of the platform, as evidenced in the costs breakdown.
Source: Company data
These are sizable and have inflated the revenues by nearly 100%, according to our calculations. If we remove these non-tech related items from its revenue make-up, the company’s revenues over the last 3 years are about 35-40% lower.
This overstatement is not a trifling thing to be dismissed. Perhaps this is the reason why PwC, Deloitte decided to give the auditing job a pass? In fact, based on our interview with an unnamed whistleblower who used to work for Linklogis’ previous auditor, it was confirmed that the Big Four firm had refused to sign off on the accounts on this very issue.
An unnamed ex-auditor said that:
“these issues were not a matter of complex financial niceties but rather of clear intention. This is not a dispute about how to apply accounting procedures, this is a fraud case.”
One big question we have here is: Where is the cutting-edge technology in this entire process?
Tech. Or no-tech at all?
Now after addressing the non-tech revenue that should have not been included in the overall revenues of the company, let’s move on to the tech-revenues. Wait, what tech?
Technology companies are defined by their innovation. It’s a word that the company has consistently used through its listing prospectus. But it’s clear that this company is thin on innovation.
Let’s take a deeper dive into the patents situation of the company. In China, there are a total of 5 stages of patent application, starting from 1) Acceptance by the patent office, 2) Preliminary Review, 3) Announcement stage, 4) Substantive examination and 5) granting of patent rights.
As of the IPO date, out of the 233 patents of Linklogis:
Only 3 are have been granted the patent rights, out of them:
2 were acquired (blockchain and data type)
1 design patent (logo) that is self-developed (Yi Xiao Feng)
The rest of the 230 are still in stages 2-4, ranging from 18-36 months before a decision by the patent office. Rejections of patents are not uncommon.
Interestingly, out of the 230 patents that have not been granted, most of them were filed pretty late in end-2019 or early 2020. Linklogis, a fintech firm, owns only three approved patents where only one of them (design patent) is self-developed.
Did the company apply for patents just before the listing to look like it is a technology company?
We dug a little deeper into the so-called tech-enabled cloud software as a service platform and interviewed its customers for feedback. For each of the customer segments, we interviewed at least 5 different people with voice recordings and are happy to provide evidence upon request. Here’s what we found:
1) Anchor Enterprises do not use the platform at all. They may be provided with the user accounts to Linklogis’ online platform but all of the employees of these anchor enterprises said that the user accounts are not required and they do not login to the platforms at all. Instead, anchor enterprises only need to verify suppliers’ list and payables amount and this is currently done manually between Linklogis and the anchor enterprises.
2) Our interviews with financiers/banks also came to the same conclusion: they do not use the platforms either because they have their own requirements in collecting and organising the data for internal loan processing. They find the data in Linklogis’ platform cumbersome and have always asked for the information of loan applicants (SMEs) to be sent to them manually (compressed into a thumb drive or sent directly to their online servers). One would think that it would be a simple task to customise the 'high-tech' platform for the financiers to enable quicker processing - which is the raison d'etre of Linklogis - but clearly this has also failed.
3) Now, SMEs do use the platform to upload basic documents such as invoices and contracts. But the general consensus is that the WeChat app is basic and other smaller factoring companies already have similar or better developed apps. The one thing that most of these SMEs have consistently talked about is that whenever there is an amendment required or missing document to be uploaded on the software, the prompts/instructions are not immediate. It is often manual - it is as if the documents are read by actual humans sitting behind the platform and checking through the submissions one by one. Our interview with a few Linklogis employees also suggested that there is still a whole back-office team handling platform requests, and automation is overrated.
Technology or just no-tech at all? This cuts to the heart of the issue - and we have found that the company uses very little advanced technology to be classified as a high-technology, high-growth company. Maybe Linklogis is just a traditional supply chain financing company making money by moving around huge chunks of financial assets.
Block-less chain Technology in the Multiple Account Receivable (AR) solutions
A visual description of Linklogis’ main technology components, including blockchain:
Linklogis today owns only one approved patent related to blockchain technology and it is acquired - not self-developed. It is supposedly used for the most important segment of the business - the multiple AR solutions - which the company has been frantically trying to signal its intention to move towards from the risky real estate sector. Former Linklogis programmers have also told us that there is a lack of any real blockchain expertise at the company; worse, they say that the company doesn’t really care for developing any real blockchain technologies. Why?
Further interviews with experts and competitors have revealed a very simple and critical flaw to the lack of interest in the blockchain technology. First, we need to address the inherent problem to the supposed holy grail segment of the business - multiple AR solutions.
Many large companies have many layers of suppliers - imagine a big auto company like Volkswagen having tier 1, tier 2… to tier 7 or 8 suppliers. Each of the suppliers in the multiple layers would need financing and supply chain companies like Linklogis claim that they have the ability to serve them with blockchain technologies.
But before Linklogis would be able to serve them, the big client (Volkswagen in this case) would have to disclose and open up their entire supplier network for Linklogis to onboard. Not only does this involve disclosing important and confidential client information for Volkswagen and the fact of the matter is building a blockchain platform to integrate all of the suppliers and sub-supplier’s data is not really difficult. Even companies such as Ant Financial and Tencent offer mature modular products that are widely available in the market. Hence, many large anchor enterprises stopped working with Linklogis after they figured it out and also want a piece of the ‘supply chain financing’ pie which brings additional revenues for the anchor enterprises. Why share valuable data of its clients and let someone else gain from your network of suppliers when these enterprises can do it by themselves?
Further, for blockchain technology to work, Linklogis would have to ensure that only the original (real) data is uploaded into the blockchain system - this is difficult to verify. Because the authenticity of the underlying data may only be verified by the anchor enterprises, the blockchain capabilities in Linklogis’ platform are basically useless and do not provide much value-add.
These reasons are simply too difficult for any supply chain financing companies, much less Linklogis, who has no industry background. In fact, many anchor enterprises have the ability to develop this on their own without the need to engage Linklogis.
Perhaps Linklogis is fully aware of this issue and thus rather just spent the time and resources developing the design patent of this cartoon-ish bee which has now become the company’s mascot (see below), instead of pouring more unnecessary funds into a blockchain technology that would probably not be used in the future.
Above: The Yixiaofeng Bee design, that happens to be the only approved, self developed design patent by Linklogis.
Expenditure on ‘technology’
One of the sure ways you can differentiate a tech company from a non-tech one is how much it spends on, well, tech.
It also promised to devote a significant chunk of the IPO proceeds - more than 40% - to its boost and improve its technology - music to the ears of many investors.
But here’s the thing: it sure didn’t spend anything like this before the IPO. For a company that is all about technology (mentioned 943 times in the prospectus), innovation (55 times in the prospectus, R&D (25 times in the prospectus), it spent less than 10% of the total proceeds raised from convertible shares and borrowings over the last three years on technology development. Unsurprisingly, the bulk of internal costs went towards paying salaries for operations as the customer onboarding process is ultimately quite manual.
Total “investment” in its technology platform over the last 3 years amounted to only RMB 371 million...
...translating to 7.7% of the RMB 4.8 billion in net proceeds raised over the same period. How was the rest of the over 90% of funds used?
Another of the company’s key selling points is that it claims to have groundbreaking technologies in the field of NLP and optical character recognition (“OCR”). It’s one thing to say that it has, it’s another thing to prove. Thus far, there has been no indication that its purported technology is any better than other similar platforms and document processing software such as Docusign, for instance. Name card sensors, which have been around for about a decade, can also claim to be NLP pioneers, but they didn’t demand a massive premium that Linklogis is now commanding.
Likewise, it’s cloud-based applications are little more than borrowed. Linklogis’ platform offers online processing capabilities, but its cloud technology is still inherently based on Tencent’s infrastructure. Innovating? More like imitating.
Interestingly, just prior to its listing, Linklogis conveniently added the word “cloud” to all its products. Based on this logic, should all companies using Tencent’s cloud-based technology be called “cloud” products as well?
A closer look at Linklogis’ staff headcount shows that out of a total of 628 staff, 397 (approximately 63%) comprises so-called “experienced technology professionals” focusing on “investing in next-generation technologies including AI, blockchain and big data”.
Here’s another thing: For all the bells and whistles involving cooperating and leveraging Tencent’s resources, Linklogis’ Chief Technology Officer, Zhong Songran (whose detailed background and experience wasn’t disclosed in the IPO prospectus) spent only a month at Tencent (we wonder why as well). In fact, most of his experience has been in the banking sector.
Even Linklogis’ Chairman and CEO, Charles Song, who proudly puts Tencent above the rest of his banking experience, served only as a strategic consultant to Tencent for less than a year. He wasn’t even a full-time employee! Below is the excerpt from the IPO prospectus:
Therefore, if there is (i) no significant capex relating to developing software and platforms (ii) no cutting-edge technology, and (iii) no real credentials within the technology space, one really wonders what these so-called “tech-staff” are really doing in Linklogis.
Are they handling all the requests on the SMEs’ app manually? It sure looks to be so since you would definitely need a lot of people in the back-office tending to the requests/uploads!
Simply put: Technology is just a façade (挂羊头卖狗肉)
Don’t be fooled by the strong investor line-up…
One of the things that Linklogis has done well is to deceive big name investors to take up private stakes in their equity. Among them are Tencent and Singapore’s sovereign wealth fund GIC, a savvy and sophisticated investor, as well as Standard Chartered Bank. The lineup looks impressive but there is more than meets the eye.
Also, we’d like to ask Tencent: why would a reputable, patriotic, and forward-looking investor like Tencent support a company that does ABS for real estate - something that goes against the CCP’s policy of clamping down on hot money flowing into real estate?
Of course, we have also heard some rumours of open secrets relating to Linklogis’ founder and the previous CEO of Tencent’s Financial Technology (FiT), to which we shall not elaborate further in this report.
In addition to the replacement of Deloitte as auditors, perhaps one should also shine more light on the due diligence process of Linklogis led by the sponsors of the IPO.
CICC’s Head of Compliance, Chen Gang, was removed during the week running up to the listing of Linklogis due to a scandal involving one of its associates in the legal team. This makes the credibility of CICC’s role as joint sponsor of the IPO questionable given its internal procedures. The bank has also been involved in a series of scandals over the last few years. In mid-2020, the SFC also penalized CICC for failing to disclose hedging trades relating to Dalian Port and Maanshan Iron & Steel while acting as the buy-side advisor to Broadford Global.
Looks are deceiving. Remember Luckin Coffee? It also counted reputable investors including sovereign wealth fund GIC among its backers. We, of course, know what happened to the Starbucks wannabe. It’s supposed long list of outlets were completely bogus, with revenues almost made up of the same stuff that it sold its investors – fake dreams. It was ultimately delisted after allegedly fabricating US$300 million in sales and understating its losses[8].
In December 2020, Linklogis was also part of a consortium which included Greenland, one of China’s largest real estate groups (reinforcing yet again, the company’s strong links to real estate) to have obtained a digital wholesale banking license in Singapore. Both firms have basically no related-tech expertise and further raises the question of how the Monetary Authority of Singapore really assesses the credibility and track record of the digital bank contenders.
Significant downside risk to earnings from understating value-added tax
Linklogis’s warehousing activities in the ABS/ABN issuance space face a huge compliance risk – especially with the tax authorities.
Following China’s tax reform in 2016, the new VAT regulations (财税 [2016] 36号附件二《营业税改征增值税试点有关事项的规定》), the nature of factoring income derived from ABS issuances is generally not regarded as a transfer of financial assets but considered more as a “financial service”-related income. As such, the factoring company, being the originator of the asset, should use the underlying asset value (the “Full Value”) as the basis for computing VAT instead of the difference in the security pricing (the “Difference”) as part of the warehousing process.
Based on feedback from industry experts, Linklogis’ two factoring subsidiaries – Linklogis Factoring and Lianjie Commercial Factoring have always been in the gray area, using the “Difference” approach rather than the “Full Value” approach.
To illustrate the magnitude of tax understated, consider a RMB 500 million ABS/ABN securitization exercise with a 5% discount on the underlying account receivables and a 100 basis point spread:
Chart above shows an illustrative calculation of the difference in tax calculation
The difference in amounts between applying the “Full Value” and the “Difference” equates to approximately 0.26% of the ABS/ABN issue size.
Considering that Linklogis has facilitated nearly a total of RMB 300 billion of ABS/ABN issuances since 2016, we could be looking at a whopping RMB 807 million of tax evaded – or the equivalent of wiping out approximately 80% of its FY2020 revenue and potentially also 80% its equity value.
A secret whitelist?
According to our sources, Qianhai is the only area in China in which the tax bureau has at its discretion, allowed certain commercial factoring companies to enjoy the benefits of employing the “Net Gain Approach”. We believe that this was an effort on the part of the authorities to entice companies to establish their business operations in the area.
These factoring companies - which include Linklogis - were apparently part of a whitelist, whereby each of company was asked to sign a voluntary undertaking, indemnifying the Qianhai Tax Bureau of any future possible liability arising from tax evasion.
This whitelist mysteriously disappeared in early 2020 but Linklogis is still operating by the “net gain approach” as evidenced above.
Based on our sources, we understand that since June 2021, certain commercial factoring companies are already being investigated for tax compliance by the Tax Bureau of the Guangzhou Special Commissioner’s Office. The issue had also been escalated to the State Taxation Administration, potentially setting off another ticking time bomb.
Their un-competitive moats?
Below is a slide from Linklogis’ IPO roadshow - ironically summing up how un-competitive their moats are as explained in the report.
Let’s break it down.
1) “Leader and Pioneer in the thriving supply chain finance technology solution industry”: our analysis on their tech, it’s hurried IP/patent registrations/lack of actual users clearly indicated that this moat is nothing more than a simple online form to collect data
2) “Purpose-Built, End-to-end Technology solutions”: hmm… same thing?
3) “High-quality, diverse and loyal customer base”: how can a 80% customer concentration in real estate equate to being diverse? And honestly, it is actually a very low-quality customer base
4) “Scalable and Capital light business model with strong operating leverage”: with the dodgy warehousing and balance sheet financing activities, their business model is far from being “capital-light”
5) “Technology Know-How Integrated with Financial Insights”: probably can give some credit to the financial insights that the team has, but definitely not technology.
Conclusion
Everyone loves technology; everyone also loves a story. Linklogis is a wonderful, compelling story of an up-and-coming technology company that seems to have tackled one of the most difficult sectors in the economy. But the purported supply chain financing system is nothing more than a well-designed and elaborate pack of lies built using sophisticated deception tactics.
It is currently over-valued in the market with investors over-paying for a company that is nothing more than a glorified mortgage broker. The only winners in this elaborate scheme are the founders themselves, savvy bankers who know a thing or two about squeezing money from their clients.
With zero cutting-edge technological capabilities, an over-reliance on the real estate segment for its revenues, management team with questionable integrity, and an increasingly marginalized business model, Linklogis should be valued at no more than 10-12 times forward P/E based on the average peer multiples of a financial services company. Based on its normalized 2020 earnings of RMB 192 million, that would imply a value of roughly HKD 2.7 billion or a share price of HKD 1.19, representing a 90%+ downside.
Sources:
[1] Includes issuances for entities relating to China Resources (华润) which are primarily in the real estate segment
[2] Based on outstanding balance of warehoused accounts receivable in the securitization offerings enabled by ABS Cloud as at end 2020
[4] EUR 1.5bn against a EUR 2.8 bn corporate loan book as at 2019: https://www.ft.com/content/44c47737-5d8b-4aca-8ff3-dbcc8349bc04
[6] http://stock.eastmoney.com/a/202105261936536037.html , http://www.caishiv.com/insight/detail?id=27811
[7] “方保磊透露，大的核心企业切入供应链金融通常走三条路径：招人建设自营团队，外部采购第三方服务或者系统（产权自有），使用SaaS服务。从趋势和政策导向看，大型核心企业倾向自己去做。” Source: https://finance.sina.com.cn/roll/2021-01-16/doc-ikftssan6774174.shtml
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