Putting Beijing on the Map: LongRuan Technologies Prices IPO at CNY 21.59
COVID-19 and China
They need more software than you think. Image credit: Bart van Dijk/Unsplash

An impressive IPO pipeline of several dozen companies is what can be observed in the Star Market-related section of the Shanghai Stock Exchange's official website. Meanwhile, 75 entities have already received approval from both the bourse and China Securities Regulatory Commission (CSRC), as of December 18. There are two industries rapidly enlarging their presence on the new Nasdaq-style experimental platform (download our report about it): biotech and software.

Talking about the former, EqualOcean has lately reported about public offerings undertaken by firms such as dual-listed Haohai (昊海生科, 6826:HK, 688366:SH), the IPO of which was underwritten by UBS (UBS:NYSE), home appliances giant Haier's biotech branch (688139:SH), animal vaccine company Shen Lian (申联生物, 688098:SH) and chemical intermediates producer Cathay (凯赛生物, A19433:SH), which filed a prospectus last week.

As for the code-writing challengers, we have done some work on two information security guards, DBAPPSecurity (安恒信息, 688023:SH) and Hillstone Networks (山石网科, 688030:SH), cloud computing company UCloud (优刻得, A19019:SH), its local nemesis Eazytec (卓易科技, 688258:SH) and software package developer Kingsoft Office (金山办公, 688111:SH), creator of WPS – China's answer to Microsoft’s office suite.

The 'new kid on the block' is, apparently, destined to join the second clique. LongRuan Technologies (龙软科技, 688078:SH) is running a purely digital business. Its product mix is built around Geographic Information System (GIS) technology, comprising four revenue streams: GIS software sales (accounted for 21.09% of operating income last year), professional application software (59.57%), technical services (16.66%) and system integration (2.67%).

So, what does this "professional application software" mean? While the Beijing-based enterprise intends (in Chinese) to be diverse, the vast majority of its clients (in Chinese, again) are doing quite similar things – they mine coal. There is an extensive list of diggers scattered across the country, and all of them need smart algorithms-driven companions that can help to prevent disasters like these from happening. It's an old story.

Although a bunch of new energy technologies are picking up steam, in China, coal is still the main thing people squeeze joules from. Despite multiple ecological concerns, the country's industry players continue to excavate more of it. According to Reuters, coal mining capacity increased by nearly 6% last year, reaching 3.53 billion tons. Which is definitely good news for LongRuan.

The firm made CNY 125.48 million (USD 17.91 million) in revenue in 2018, boosting this number from 2016’s CNY 79.33 million (USD 11.32 million). What's more, its net profit grew ten times over the same period: CNY 31.15 million (USD 4.45 million) is how much it gained from the Chinese 'coal El Dorado' last year. Accordingly, the net profit margin jumped up significantly, hitting 24.82%. 

It looks like LongRuan, in some respects, wasn't prepared for such a windfall. It's R&D spending-to-revenue ratio, for instance, has been recently declining, taking values of 12.72%, 9.77% and 9.23% in 2016, 2017 and 2018 respectively. An essential activity for any software company, it is a do-or-die issue for LongRuan: the GIS provider needs to expand its scope, breaking into new sectors. By comparison, the five program-building firms from one of the paragraphs above spent 23% of their operating income on average on innovation drives, in 2018.

In fact, some other figures show that the one-industry conundrum is well understood by the firm: its revenue structure used to be even more biased, with more than 80% of the money coming from customized applications in both 2016 and 2017. Later on, the company, perhaps, made a bunch of deals outside of its traditional scope, earning CNY 24.81 million (USD 3.54 million) from versatile GIS software products – up by 609% (six hundred and nine percent!) from the year before last.

However, this mini version of the Dutch disease is not the only reason for diversification – local competition in this lucrative segment is a huge factor as well: multiple companies are trying to take on LongRuan.

Among them, Shandong province-based Lionking Software (山东蓝光) is barely a little Simba – it is serving clients across a handful of industries, leveraging a Computer-Aided Design (CAD) platform as well as the broad arsenal of GIS and Management Information System (MIS) tools. Another challenger is Artificial Intelligence of Things (AIoT) company Jingying Shuzhi (精英数智) that spans several fields from insurance to logistics; it is also active in mining and quarrying.

Industry practice shows that GIS is, in many cases, eventually a global business. For the most ambitious startups with groundbreaking business models, domestic markets are often not enough to maintain continuous growth. If the almost-public LongRuan is such a firm, at a certain point, it will have no choice but to launch some products with international features. As usual, cross-border ventures are a double-edged sword: new opportunities come together with new risks on one’s personal terra incognita.

There are countless applications for geolocation technology. For one thing, the logistics market is something of a honey pot for GIS software companies. Those combining GIS with the Global Positioning System (GPS) are likely to be further empowered by the upcoming 5G revolution. Recent technological changes have stirred the GIS market growth. VynZ Research, for example, estimates that it will balloon at a 10.7% CAGR (11.9% in Asia-Pacific), reaching USD 12.7 billion by 2024. MarketsandMarkets made a more modest forecast, setting a 9.6% CAGR between 2017 and 2023.

If LongRuan intends to fill this nascent space, it needs to develop new capacities. The capital raised from the upcoming IPO will almost surely be allocated to R&D – which mostly refers to the engineers' salary. Besides, the company will be able to afford more in terms of talent-seeking. 

According to the prospectus (in Chinese), the number of employees grew significantly in 2017: from 219 people in the beginning to 302 in the end of the year. The next twelve months weren't that fruitful for the firm's HR department, which added only 16 new workers over this period. In the first half of 2019, the headcount even declined – a ceiling for a small-sized software enterprise?

Even if it is, there is something that apparently needs to be changed inside the firm's organizational structure. Less than 10% of people working for it are focused on innovative solution seeking – 31 employees, in absolute numbers. A relatively young (half of the workers are under 30) organization, LongRuan also has some room to increase the quality of labor – over 25% of its employees don't hold a college degree.

On the other hand, almost every fifth among them holds a Master's degree. However, the company trails the vast majority of the sci-tech board listing candidates by this indicator as well. Just one case: satellite software provider PIESAT (航天宏图, 688066:SH), which started its public life with a batch of 24 other stocks in July, possessed 324 Master's degree holders and 579 Bachelor's degrees among its 1,136 employees; only 15% of the labor pool had no degree at all, as of January 2019.

While educational background often affects an organization's status in the industry, the ability to create and invent is mirrored in the intellectual property realm. In this dimension, the firm is currently trailing almost any other code-writing entity on China's experimental trading venue, with only 13 patents, none of which are international – which, again, resembles the story about the inevitability of the global expansion.

Another interesting fact is that the top-management layer took home 13% of LongRuan's net profit last year, putting the company among the top 20% of the Star Market applicants by this metric. While this can be the result of the software developer's labor structure, we also think that it has something to do with the trend of power centralization: the number of high-ranking executives grew from 14 in 2016 to 19 last year.

If numbers don't lie, this is just another enterprise that might be considered subpar in many respects. Nonetheless, it is a fact of life that numbers aren't everything, and the market will decide its weight and place in China’s complex technological ecosystem.

Editor: Luke Sheehan
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