Since my recommendation for LSE Aim listed DJI Holdings (Private:DJIH) two months ago, quite a lot more information has emerged from the company’s AGM on 28 July and from updated research by the company’s main broker, Mirabaud, on 4 August. In addition, on 22 August the company provided an illuminating update on its new JV with Xinhuatong Network Co. Ltd. (Xinhuatong), the exclusive provider of mobile payments, information and other key services to the Xinhua News Mobile App, owned by China’s national news agency.
As a reminder, DJI operates mass-transaction computer platforms in China in joint ventures with various major government entities there. This most-notably includes a new JV contract for processing all payments for the Xinhua News Mobile App, the main Chinese government smartphone app, operated by Xinhuatong. DJI will therefore soon be handling extremely large volumes of Chinese citizens paying their various utility bills, parking fines and the like via their smartphones. With both the official government app and smartphone usage experiencing rapid take-up, this is expected to be an ultra-high growth market from a standing start for DJI.
According to an update released on 22 August, progress on the Xinhuatong JV is running ahead of previous plans. Specifically according to the release:
“The Xinhuatong partnership has now signed 10 provinces from the 12 provinces initially targeted, demonstrating further progress from the seven provinces announced in April. The 10 provinces signed are the largest in terms of population and gross domestic product of the 12 provinces that are initially targeted. The partnership remains on track to sign the remaining two target provinces by the end of the year and expects the mobile app to be launched in all 10 signed provinces by the end of September 2016, significantly ahead of earlier expectations to launch in nine provinces by the end of 2016. This development underpins the confidence of the DJI board in the Xinhuatong partnership making a substantial contribution to revenues in the fourth quarter of this calendar year.
The 10 signed provinces account for approximately 70% of nationwide utilities billings, including car fines and mobile top-ups, with billings in the 10 provinces totaling in excess of £400bn annually. In all 12 target provinces, the large sectors of gas, water and electricity payments still collect less than 15% of payments online.”
The 22 August update also suggested some more agreements on new ventures in the pipeline expected to launch in September and generate revenues shortly thereafter, “…with a number of new channel partners, all of whom of major Chinese organizations to develop substantial revenue streams based on DJI’s robust and secure technology platform.”
At its 28 July AGM in London, DJI re-affirmed its plans to list soon on Nasdaq, effectively migrating its principal listing there. This makes sense as Nasdaq investors better understand both the technology and China exposure of DJI, where it expects a much higher valuation as this growth story unfolds. As such, buying the shares on Aim now (which are trading at around £1) represents a pre-IPO play for the Nasdaq listing.
Key takeaways from recent news flow and analysis are:
1) The company expects to list on Nasdaq in the fall, I believe in October. The stock is very much under-the-radar on Aim, with a market cap equivalent to less than $300m. However large institutional investors in London are quietly buying the story. DJI has raised £50m (US$65m) in three placements in the last few months.
As I predicted in my last note, two funds have now publicly disclosed new stakes in DJI: Fidelity and Hadron Capital, a London based equity fund that specializes in three to six month plays. I gather that Capital and Hendersons also have new significant positions in DJI, though behind nominees. The company aims to continue to build a blue-chip institutional share register once it is on Nasdaq. I understand that its most recent placement of £10m (US$13m) was opportunistic due to requests for exposure from a number of large institutional investors.
Darren Mercer, the CEO, confirmed that the Nasdaq listing is progressing well. A household-name broker will be appointed in the US within weeks. There will be detailed research reports from this house, and probably another US broker, followed by a fairly extensive road-show in the US.
I understand that the submission for Nasdaq is pretty much ready and they are just awaiting the formal appointment of the US broker. The 20-F application to the SEC then takes up to four weeks to process. The question and answer process with the SEC after that normally takes about two weeks. However, the whole process can be shorter or longer by a number weeks, so the Nasdaq listing date is a moving target. DJI appears to have a strong application and ought get through the regulatory process reasonably quickly. In its favor, DJI is already LSE Aim listed, will likely have a major broker sponsor in the US, has recently secured good quality institutional placements, has binding deals with Xinhua, and that it is also commencing its revue build-up from this month.
While the company will be able to raise funds on Nasdaq, the recent placements on Aim means that DJI is looking well funded. If it doesn’t raise funds on its Nasdaq IPO, this begs the question of where new US investors will be able to find stock? Mercer spoke of a number of “major” US institutions lining up to buy stock on Nasdaq. The shares will be fungible with those of Aim, so the London market-makers will be able to supply some equity, assuming there are decent-sized sell orders from legacy shareholders in London. However, a shortage of available DJI stock on Nasdaq could contribute to a relatively rapid re-valuation.
2) DJI’s business is ramping up faster than previously predicted in China. The Xinhua app is aiming for a whopping 300m subscribers by the end of next year (about the same number as Twitter or Skype globally). DJI has exclusive rights for payments processing on the app. The announced business model for the Xinhua app is for handling payments for utilities, lotteries, car fines, and phone top ups. DJI is a quasi-competitor to AliPay and Tencent, top pay platforms in China. With 90% of utility payments in China still off-line, there is a huge market to expand into mobile internet. Smartphone take-up in China is a mega-trend, where sophisticated devices cost as little as $30. The Chinese government is encouraging the shift to mobile internet, which will be especially beneficial to rolling services out to China’s vast rural hinterland. DJI will provide one of the few pure plays in western markets on rapid Chinese smartphone growth and mobile internet.
In its public statements, and during the AGM, the company has been clear that it expects to announce a significant expansion, and broadening, of its business agreements in China. The extra funding has allowed DJI to enter into accelerated negotiations, especially with the all-powerful Xinhua, which controls all state media in China. We got the impression that this expansion would be into other web related revenue streams, beyond payments.
There were a couple of questions at the AGM about how a relatively unknown UK company could have gained so much traction in the booming world of Chinese government smartphone payments, with exclusive contracts now signed up with nine Chinese provincial governments (which are often the size of large European countries). Mercer made the point that DJI is basically a Chinese company, with a small registered admin office in the UK to handle listings and funding. In China they have well over 300 people (vs a headcount of about eight in the UK). I know that there have been a number of independent due diligence visits to China. I’m told We Qi, the head of the company’s Chinese operations, has particularly impressed investors. As part of the build up to the Nasdaq listing, the company’s new Finance Director, Scott Kenny, has now started work at the company. Kenny previously held senior positions at HSBC. He was more recently Finance Director of Nasdaq-listed Willis Towers Watson, and so understands the Nasdaq market, its regulatory requirements, and has a good rapport with investors in the US.
3) On 4 August, DJI’s London broker, Mirabaud Securities, released a new research note. Mirabaud is forecasting 2017 profits of £43.7m, or an EPS of 13.7p. Mirabaud is valuing the stock on Aim at £1.75 (up from the previous £1.69 target) based on a PE of 13x. However technology stocks on Aim are not nearly as well-understood (or valued) as in the US. Further, China-related stocks on Aim have been tarnished by some recent scandals. It is likely that a technology growth story like DJI could command a PE of more like 30x on Nasdaq. Simply doubling the projected Mirabaud 2017 PE assumption to 26x would indicate a price target of £3.50, which is equivalent to an undemanding 13x revenue. If the company delivers on its promises, there should be good upside to this from new business developments and contracts which the company describes as having “significant potential to enhance shareholder value.”
In summary, I think the stock should have good support at its current price of around £1 on Aim ahead of the listing, especially given a very low forecast earnings multiple for 2017 (7.4x). There should be steady momentum in the stock over the next two months as the listing approaches, marked by new venture announcements and first revenues in August. There is, of course, always risk associated with exposure to Chinese government entities.
Once the shares are listed on Nasdaq, people around the company believe they should quickly re-rate to the £2-3 mark. It is worth bearing in mind that a £4 share price is equivalent to around a US$1.07bn market cap, which is really not a particularly demanding in the context of this kind of stock on Nasdaq. If the Chinese lift their suspension on state lotteries, as is hoped for in coming months, this would probably provide further uplift for DJI as it has a number of lucrative contracts on hold in this space.
Disclosure: I am/we are long DJIH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.