Yintech Investment Holdings Limited, formerly Win Yin Gold Investment Company Limited, is an online provider of spot commodity trading services in China. The Company facilitates the trading by individual customers of silver, gold and other precious metals, and commodities on approximately three exchanges in China, such as the Shanghai Gold Exchange, the Tianjin Precious Metals Exchange and the Guangdong Precious Metals Exchange. It provides various services, including investor education and market research. The Company's services are delivered online through its client software and call center. Its client software provides market information and analysis, as well as interactive functions, including live discussion boards and instant messaging with customer service representatives. It collects and analyzes customer behavior and communications data from its client software, customer relationship management system and the exchanges. Its brands include Yin Tian Xia and Rong Jin Hui Yin.
Last night BATS priced a greater than expected number of shares at the high end of their IPO price range - $19/share. After a very slow market so far in 2016 the ice has been broken by a fairly large at over $250M with six big banks running books and five co-managers bringing the deal.
Demand for the issue was said to be very strong which helped the deal price high and should translate into a strong open and maybe some trading follow through post-open. The key is how high they open it.
Where might BATS shares settle in terms of price? NASDAQ (NDAQ) is a direct comparable and the numbers are simple enough for some "back of the envelope" valuation work. First of all BATS did $384M in revenues last year, a good estimate for this year is probably $450M. EBITDA margins have been running at 60% and the company has articulated a planned dividend payout of 30%.
The valuation numbers for NDAQ are: 20x PE on NTM, 2% yield, 11x EV/EBITDA and 5x EV/Sales.
We can apply these ratios to BATS. We project about 100M shares outstanding after the all is said and done and the shoe is exercised. So here it is:
On EV/Sales - $22.50/share, on EV/EBITDA - $29.70/share, on PE - $25/share, on yield - $20/share.
However we need to point out that NASDAQ is much larger and not growing much. So we should expect higher multiples for BATS based on their 25% growth even if there's a minor haircut for immaturity.
What does it all mean? Within the filing range the shares were a "no brianer." As we contemplate what will be a strong opening I'd suggest that based on the numbers above a purchase up to $25/share seems like a strong idea. When the brokers initiate coverage there should be some good support for the stock. We've used conservative numbers so if you want to take on more risk you could buy above $25 and expect at least high 20's when they get coverage in a month or so.
We'll have more, including an IV model that pinpoints valuation better before the quiet period is over. That will help us be ready for coverage.
Square (NYSE: SQ) is coming public as a $1B revenue company with quite a few moving parts.
There's the negative margin Starbucks business which is going away, plus the "ratchet" provision whereby prior investors will have their number of shares adjusted based on the IPO price to preserve their prospective returns. We suspect it will take at least a quarter or two for analysts and investors to get a better understanding of how the long-term model will develop for Square. It helps to have a starting point so we're publishing our initial IV model which suggests a current price of just over $17/share. Interest in the PayPay (Nasdaq: PYPL) spin-off has been high and we expect Square will generate similar levels of activity.
Suffice it to say that the jury remains out on which players will be long-term winners in the payments game. In addition to Square itself, their strategy has implications for direct lending (Lending Club LC and OnDeck ONDK among others), marketing (Constant Contact CTCT, HubSpot HUBS, GroupOn GRPN) and possibly larger firms like** Intuit INTU**. The press has been guarded if not outright negative on Square for the last few years as speculation about their momentum and ultimate fate swirled around. Now that we have a concrete IPO we can sort through the facts as they stand. Here are the main points as we see them: Going beyond "just payments" and into data analysis, marketing and financial services seems like a good strategy for the SMB market that Square targets. Generally speaking small companies lack the resources and interest in decoding Google Places, AdWords and services like Constant Contact or Mailchimp. They are forced to invest in compliant POS services to run their business so additional benefits like financial services and marketing make sense. The cash advance business is another nice addition to services. PayPal has been pushing this too so it's not unique. Compared to the rates that OnDeck charges for short-term money this might not be good news for them. This business should grow nicely and ultimately cuts into the territory that American Express occupies with small business owners. Like PayPal it's easy to get going with Square. Since we don't have a physical POS IPO Candy and IPO IQ use Stripe which suits our online needs best. However at the beginning we did use gateways like Authorize.net and there were many forms to fill out, approvals to get and ongoing costs. No SMB should have to deal with that. PayPal has been smart in making acquisitions like BrainTree. That gives them much newer technology to compete with Square. Starbucks was a big early customer for Square. Unfortunately one with negative gross margins! The relationship is ending and will ramp down to zero in 2016. The revenue loss is negative but is more than made up for by improved gross margins. We're on the fence with respect to Jack Dorsey and the management team at Square. The next few quarters will be a real test for the team. Their aim to continue to be truly innovative in their experience, add more services and deliver "everything a company needs to grow" and improve margins will all be carefully evaluated. The two big questions about the long term model are 1) how high can transaction gross margins be and 2) how large can the software and data business be. Our initial estimates are in the model but they will be refined. In terms of execution it's not known how Square will approach acquisitions. Companies like HubSpot (HUBS) or Constant Contact (CTCT) seem to make a good deal of sense and there are many others. If they are aggressive and good at integration this could be the only viable path to get big enough, fast enough. Our preliminary IV Model:
In the spirit of full disclosure from 1995 to 2004 I was an equity analyst, research manager and director of equity research at two different “boutique” brokers. My experience there, particularly with the last one at Adams Harkness in Boston (which was acquired by Canaccord Genuity), greatly informs my analysis with this type of business.
First of all from an industry point of view Sidoti is well known and often summarized as “a place that still covers tons of microcap stocks with research that is a mile wide and an inch deep.” There is basically one senior analyst, Peter Sidoti, and a squadron of relatively young analysts applying some basic research methods to small public companies.
Coverage is concentrated mostly in industrials and consumer discretionary with a decent amount of information technology as shown in the chart here covering research volume during the last 180 days.
There are a handful of terminal problems in the structure of the small brokerage business which I’ll enumerate here. This isn’t about the noble aims and hard work of the people involved – it’s the structure.
- Clients won’t pay Sidoti more in commissions no matter what they do. They may hold on to what they have today but they will continue to run at $30M in revenues. They can add analysts, add coverage, upgrade their formats but clients will pay them the same amount. It might seem counterintuitive but it’s the way it is.
- Personnel costs eat up most of the potential for profit. In this case employee compensation and benefits is 73% of revenue. Everyone tries to keep this number down but the better research analysts, salesman and traders are, the more money they command. By going public Sidoti is trying to shift more of this compensation to equity which may then be perceived as worth something.
- Other costs, even when tightly managed, consume the rest. In the case of Sidoti they generated $825K of net income for 2013. Since revenues won’t grow and costs will be flat to up slightly this net income level more-or-less fixed.
- One misstep on the trading side could easily eliminate a year of profit and even potentially sink the firm. It’s happened more than a few times, often to small firms. We were working with one that disappeared overnight by getting a agency trade wrong – the resulting error costs exceeded their total equity.
- Internet-based approaches like Seeking Alpha are beginning to make an actual dent in coverage of smaller capitalization companies. Quality is highly variable but there is a growing portion of “institutional quality” material being generated there that institutions are increasingly paying for.
These types of businesses have historically sold at book value or slightly below. What is called “Member Equity” is $6M for Sidoti. It’s hard to picture this being a public company with a $6M market capitalization. Even if we give them the benefits of more equity-driven compensation getting income up to $1-2M a 10x multiple gets you to $10-20M. Maybe that will be good enough for the management team and the employees.
To make matters worse the IPO is being led by WR Hambrecht who has been fairly radio-silent since their last few deals done in 2007/8. They managed one small IPO in 2013 for a wine company called Truett-Hurst (NASDAQ: THST) where Bill Hambrecht is actually on the board of directors. WRH no longer has distribution or research coverage. [Again for the purposes of full disclosure we performed some paid advisory services for WRH back in 2007 and 2008. However we have had no business relationship with the company since then.]
Since we suspect Sidoti will try and go public off a strong Q4 and full-year 2014 numbers they have some time to add a co-manager or two. However the ones that will be willing to “go to the right” of WRH are few and far between. Sidoti is on the cover as well which is typical but there are usually other co-managers to provide some remote semblance of independent research coverage.
So what could they do? Sidoti has built a substantial asset. The trick is to leverage it into business that offer more growth and better economics. This requires some fundamental change which is hard but not impossible. Some potential paths:
- Go deeper with industry research partnerships. As a firm Sidoti only has resources to be an inch deep if they are going to cover many industries and companies. For example an alliance with a research group like Yole in microelectronics, or Forrester in IT, and others could create a much richer source of industry insights that are grounded in substantial information flow and working knowledge.
- Build quantitative research tools and a business around them. These can be raw data that can be used to track markets in the industrial sector and also survey-driven products in consumer areas. Economically these products offer the increasing returns to scale that traditional research doesn’t provide in a brokerage model. It’s a proven model.
- So far the firm as missed the asset management boat but it’s not too late. It would delay the IPO but Sidoti should shift 30-50% of their existing resources into asset management at a stroke. Redefine incentives and compensation across the board to drive the asset management business while continuing to crank out the basic stuff they have long been (and will still largely get paid for). They could double the net income level in the first year and be a credible growth strategy which would lead to a higher valuation.
There’s still time in crafting the roadshow slides and story to figure out how to make the deal seem as attractive as possible. And maybe a $6M market value is all they will seek. If so the deal might get done but it seems like there’s far more opportunity in financial technology and asset management to go after.
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