Key Takeaways

Xunzhong has filed for a Hong Kong listing, reporting declining revenue and customers due to rampant competition in China's cloud services market

The company plans to use its IPO proceeds to expand in Southeast Asia through acquisitions - following many of its Chinese rivals who are already there

By Edith Terry

When cloud communications services provider Beijing Xunzhong Communication Technology Co. filed its Hong Kong IPO application late last month, it listed the sole sponsor as DBS Asia Capital, the investment banking arm of Singapore's largest bank. Then last week, it quietly notified the Hong Kong Stock Exchange of a second lead sponsor, China Securities (International) Corp., backed by domestic financial powerhouses Central Huijin and Citic.

So, what's so unusual about that? Normally, Hong Kong IPOs by Chinese companies have at least one domestic underwriter to sell to domestic investors. Thus, the addition of a well-connected player like China Securities is set to address that market, and hints that the offering could be relatively large.

Meantime, the choice of DBS is explicitly tied to Xunzhong's plans to expand in Southeast Asia, mostly likely through acquisitions. There, it would be following in the footsteps of market leaders, Alibaba Cloud, Huawei Cloud and Baidu AI Cloud, which also held almost 80% of the $30 billion cloud computing market in China last year, according to Daxue Consulting.

Southeast Asia is often a first major stop for Chinese tech companies expanding abroad, and Alibaba and Huawei have both invested heavily in the region's $13 billion cloud market - providing service at prices 20% to 40% lower than the globally dominant U.S. firms that are also active there. Alibaba Cloud set up its international headquarters in Singapore in January 2023, promising to invest $1 billion to support its global partners there over the next three years.

The global expansion is being partly driven by significant cost pressures at home. Alibaba Cloud initiated sharp price cuts in April 2023, followed by similar cuts from Tencent Cloud and China Telecom a month later. Alibaba Cloud further cut its prices this February, and the extreme competition could be partly responsible for the company's decision late last year to cancel its planned spinoff from its parent, e-commerce giant Alibaba.

That brings us back to Xunzhong, which is trying to sell investors on its potential despite its relatively small size, even as the competition rapidly erodes its revenue. On a more positive note, the company's focus on its most profitable customers has allowed it to maintain both its margins and profits.

Xunzhong, which uses the English name CommChina for its business, says it's the fourth largest cloud services market in a specific subsector for "full suite" cloud-based communications services, with a market share of 1.8%. That segment is quite fragmented, with 800 companies at the end of 2023, Xunzhong said. More importantly, the company says it had the highest net profit among the top five providers last year. It reported a profit of 76.6 million yuan ($10.6 million) in 2023 on revenue of 915.6 million yuan.

By comparison, Alibaba Cloud reported a much larger 106.3 billion yuan in revenue for its latest fiscal year through this March. Alibaba Cloud doesn't report whether it's profitable on a net basis because it isn't publicly listed. But it reported earnings before interest, tax and amortization (EBITA) of 6.1 billion for its latest fiscal year, up 49% over the fiscal year through March 2023.

Shrinking customer base

Intense price competition in the domestic market is also undermining Xunzhong. Its number of customers dropped from 3,515 in 2021 to just 2,437 by the end of last year. Its revenue has followed a similar trajectory, dropping from 993.5 million yuan to 915.6 million yuan over that period. In the first three months of this year, its revenue also dipped 20% to 151.6 million yuan from 188.6 million yuan a year earlier.

Its profit has held steadier over that period, rising slightly from 74.3 million yuan in 2021 to 76.6 million yuan last year, as it focuses on its most profitable customers.

Xunzhong's main revenue source is its communications platform as a service (CPaaS), which currently provides about 85% of its revenue. In this segment, it serves as a broker between telecommunications infrastructure providers and its own customers, which sometimes overlap.

It is also trying to build up its business in smart communications solutions, where it sets up private infrastructure for clients. But this area also seems troubled. The company's revenue from that segment is quite small and shrinking, declining from 22.7 million yuan in 2021 to just 13.7 million yuan last year.

All that said, we'll return to the Southeast Asia story we touched on earlier, which Xunzhong hopes will ease investor concerns about its shrinking revenue in China. Xunzhong said it plans to use its IPO proceeds to expand its CPaaS business to Southeast Asia, where it says the total market for such services was worth 8.4 billion yuan in 2023 and is expected to reach 11 billion yuan by 2028.

Xunzhong has similarly optimistic projections in Southeast Asia for one of its other main businesses in contact centers, where it operates messaging and voice centers for clients. It expects that market to grow by over 20% annually to 2 billion yuan by 2028.

"As part of our Southeast Asia development plan, we plan to seek targets in Southeast Asia in similar business areas as us to expand through acquiring minority equity shareholding" in CPaaS and contact center businesses, the prospectus said. It added ideal target companies would have over 100 employees and annual revenue of HK$50 million ($6.4 million) or more.

Xunzhong has yet to disclose any share issue or pricing plans, which is customary for Hong Kong listing candidates at this stage. The company has conducted five rounds of fundraising through March 2022, raising 252.8 million yuan.

In 2019, Tatwah Smartech Co. Ltd. (002512.SZ) offered to buy Xunzhong for 1.2 billion yuan, in a bid that was later cancelled. Of course, much has happened in China's cloud market since then, most notably the heating up of competition. Xunzhong's shares have been listed on the thinly traded National Equities Exchange and Quotations (NEEQ) in Beijing since 2015, where their latest closing price gives the company a market value of 600 million yuan - half the value at the time of the Tatwah bid.