IPO Preview | After four years of cumulative losses exceeding 2.6 billion yuan, Huizhi Holdings is going public in Hong Kong with the strategic backing of Tencent

China's largest data intelligence application software supplier, with Tencent as a steadfast strategic investor, Huizhi Holdings, which has incurred losses exceeding 2.6 billion yuan over four years, is set to go public in Hong Kong.

According to Zhito Finance APP, Huizhi Holdings recently submitted its listing application to the Hong Kong Stock Exchange, with China International Capital Corporation as its sole sponsor. According to Frost & Sullivan, the company is the largest data intelligence application software supplier in China by total revenue in 2023, holding a market share of 4.4%. Additionally, it is the only company in China recognized by the Ministry of Science and Technology as the leader in the construction of marketing intelligence.

Despite the halo of being a leader, Huizhi Holdings has seen a slowdown in revenue growth and has operated at a loss for consecutive years. From 2021 to 2023, the company's revenue compound annual growth rate was 18.35%, while it declined by 4.7% in the first half of 2024. In terms of profitability, it has consistently operated at a loss, accumulating an operational loss of 2.62 billion yuan since 2021, although there has been a noticeable improvement, with an operational loss of 85 million yuan in the first half of the year, narrowing by 51% year-on-year.

As a pioneer in applying big data technology to business scenarios in China, is the fundamental aspect of Huizhi Holdings worth a look?

Performance Slows, Accumulated Losses Exceed 2.6 Billion Yuan Over Four Years

Zhito Finance APP learned that Huizhi Holdings integrates large models, industry-specific knowledge, and multimodal data through artificial intelligence to provide enterprise users with marketing intelligence, operational intelligence, and industry AI solutions, adopting a top-down customer development strategy, initially targeting leading market participants in various industry verticals. As of June 2024, the company's client portfolio includes 135 Fortune 500 companies.

From a business perspective, marketing intelligence accounts for the majority of revenue, but performance revenue shows a declining trend year by year, with a compound annual growth rate of -4.2% from 2021 to 2023, continuing to decline in the first half of 2024, with its revenue share dropping from 78.7% in 2021 to 57.1%.

The main products of this business include the Miaozhen System, private domain tools based on the Tencent ecosystem, and Jin Data, with the core product being the Miaozhen System. As of June 30, 2024, the Miaozhen System has over 10,000 clients, with both the renewal rate and winning rate for major clients exceeding 90%. Additionally, the private domain tools benefit from Tencent's massive traffic support, boasting a large customer base, serving over 500,000 enterprise clients, and having more than 58,000 paying customers.

The decline in marketing intelligence revenue is attributed to the intense competitive environment in artificial intelligence applications and the impact of weak demand in the broader market. However, Huizhi Holdings has tapped into demand from the operational side of enterprises, compensating for the downturn in marketing intelligence. From 2021 to 2023, the operational intelligence business achieved a compound annual growth rate of 176.2%, with its revenue share increasing from 7.5% to 40.7%. In the first half of 2024, this business saw its revenue decline for the first time, maintaining a revenue share of 40.7% The company launched an intelligent store operation system, empowering the "people, goods, and environment" of stores, enhancing operational efficiency and customer sales conversion rates. In the "people" scenario, the company introduced conversational intelligence products, such as "LingTing"; in the "goods" scenario, it launched supply chain management products to improve procurement and supply chain efficiency and optimize costs; while in the "environment" scenario, intelligent venue management products assist customers in achieving seamless operations and enhancing customer experience. As of June 2024, over 15,000 restaurants and more than 40,000 offline retail stores have adopted the company's operational intelligence products and solutions.

Additionally, the revenue from HuiZhi Holdings' industry AI solutions has fluctuated significantly. This business revenue model is based on a one-time project fee structure, charging customers upon completion and acceptance of each signed project. In the second half of 2022, the company decided to gradually exit this business line, only renewing a few existing projects and no longer undertaking new projects. In the first half of 2024, the revenue share from this business was only 2.2%.

Although there have been adjustments in business revenue, the stability of the two core business clients is relatively high, and the risk of client dependency is low. In the first half of 2024, the largest client's revenue contribution was 20%, showing an upward trend, while the top five clients contributed 34.7%. The company also has a loyal large client base, with a retention rate of 84.4% for large clients in the first half of 2024. The company's clients include those in retail, consumer goods, food and beverage, automotive, 3C, cosmetics, and maternal and infant products industries.

It is worth noting that HuiZhi Holdings is still in a loss position. On one hand, its gross profit margin has shown a declining trend year by year; on the other hand, high operating expenses have led to an inability to achieve profitability in the long term.

In the first half of 2024, the company's gross profit margin was 50.6%, a decrease of 10.4 percentage points compared to 2021. The gross profit margin for marketing intelligence, supported by large clients, remained relatively stable at 70%, maintaining a high level, while operational intelligence showed a declining trend at 27.9%, down 8.1 percentage points compared to 2021, which aligns with the strategy of pursuing scale growth by exchanging price for volume.

In terms of expenses, the rates for sales, administrative, and R&D expenses are very high, totaling 66.6% in the first half of 2024, but the optimization has been significant, decreasing by 12.6 percentage points year-on-year and optimizing by 98.5 percentage points compared to 2021. The main contributor to this is R&D expenses, which have significantly reduced the R&D expense rate to 30.7% as R&D gradually yields results. The company has rich intellectual property, with 2,057 patents, 953 patent applications, 586 registered trademarks, 494 registered copyrights, and 134 registered domain names as of June 2024.

Moreover, since its establishment, HuiZhi Holdings has undergone multiple rounds of financing, and the fair value changes of investments through preferred shares and convertible bonds will fluctuate with valuation changes, leading to significant fluctuations in profits However, after removing this part and non-operating items such as share expenses, the company is still in a loss state, with an adjusted net loss of 48 million yuan in the first half of 2024, a year-on-year narrowing of 73%. Since 2021, the cumulative net loss has reached 2.35 billion yuan, with a cumulative net loss rate of 54.14%.

Optimistic Future for the Industry, Leading Companies Favored by Capital

From an industry perspective, the market size of China's data intelligent application software maintains double-digit growth. According to Frost & Sullivan, the industry market size in 2023 is 30.3 billion yuan, with a compound annual growth rate of 20.4% over the past five years. The compound growth rates for marketing intelligence and operational intelligence market sizes are 20.4% and 23.9%, respectively, accounting for 28% and 14.9%. It is expected that by 2028, the industry market size will reach 71.3 billion yuan, with a compound growth rate of 18.7%.

Artificial intelligence and policies are accelerating the expansion of industry demand. Under the direction of new productive forces, the Chinese government has introduced a series of policies and measures, including the "14th Five-Year Plan for Digital Economy Development," "Guiding Opinions on Strengthening Data Asset Management," and the "Three-Year Action Plan for Data Elements X (2024-2026)," to promote digital transformation across industries and expand the market size of China's data intelligent application software.

Industry participants are relatively dispersed, with the top five market shares below 10%. Huizhi Holdings is the industry leader and one of the first companies in China to adopt AIoT, AIOps, and service multimodal large language model technologies. Based on 2023 revenue, the company's market share is 4.4%, 2.3 percentage points higher than the second place, with a market share of 8.9% in marketing intelligence and 13.1% in operational intelligence, both significantly higher than the second place.

Under the halo of the industry leader, the company has obtained six rounds of series financing before its IPO, totaling 16 times. However, the valuation has fluctuated greatly, with the A-2 round in July 2010 having a per-share cost of only $1.18, while the E-2 round financing in September 2020 had a per-share cost of $23.97, representing a 19.3-fold increase in valuation, which then quickly fell back. The most recent round was in January 2024, with a pre-investment valuation of $1.5 billion and a per-share cost of $10.88, halving the valuation.

Tencent is a strategic investor in Huizhi Holdings and is very optimistic about the company's development. After participating in the company's 1 billion yuan C round financing in April 2018, Tencent also participated in the D, E, and E+ rounds of financing in 2019 and 2020, holding a stake of up to 26.96% through entities such as Yixiang Structure. In addition, the company has also received investments from Sequoia China and Temasek, holding stakes of 7.46% and 4.14%, respectively.

In summary, Huizhi Holdings has a decent fundamental outlook. Although the marketing intelligence business has seen a decline in revenue from sticky large clients, there has not been a significant overall change, and gross profit remains high. The operational intelligence business has seen high revenue growth at the expense of profit, and future volume growth will still need to pay attention to changes in profitability The company has been losing money for years, but the optimization of profits is quite evident, mainly due to the successful commercialization of R&D results and good cost control. The industry is developing optimistically, maintaining a high double-digit growth rate. The company holds a leading position in the industry and is expected to achieve scalable profits benefiting from industry growth.

However, Huizhi Holdings has gone through multiple rounds of financing, with a significant proportion of preferred shares and convertible bonds in total assets. The cost of each financing round varies, and overall profitability is still considerable compared to the most recent round. There may be significant selling pressure upon listing, but with well-known strategic investors such as Tencent and Sequoia China, this listing is still worth looking forward to